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https://www.investopedia.com/best-18-month-cd-rates-5272348
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Best 18-Month CD Rates for May 2024 (Up to 5.40%)
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The best 18-month CD rate is 5.40% APY from NASA Federal Credit Union. The minimum deposit requirement to open this top 18-month CD is $10,000. CD rates are near historic highs, with the top 18-month CD rates ranging from 5.00% to 5.40% APY. To find you the best CD rates nationwide, we review CD rates from hundreds of banks and credit unions every weekday morning. The top CD rates in our rankings typically pay three to five times as much as the national average—or even more. Below are the top CD rates available from our partners, followed by the best 18-month CD rates we've found from <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">our research</a> that are available to U.S. customers everywhere.
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In the News</h3><!-- end: comp mntl-sc-block-callout-heading mntl-text-block -->
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<p>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 for a sixth consecutive time</a> at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.4% over the year in April. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.<span class="ql-inline-citation" data-cite="84"></span><span class="ql-inline-citation" data-cite="85"></span></p>
<p>CD yields closely follow the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">fed funds rate</a>. Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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Where more than one institution pays the same top rate, our rankings prioritize CDs by the shortest term, then the CD requiring the smallest minimum deposit. If there is still a tie, we then rank alphabetically by institution name.
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<span class="heading-toc" id="toc-best-18-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0-4"> <span class="mntl-sc-block-heading__text"> Best 18-Month CD Rates </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">NASA Federal Credit Union</a> – <strong>5.40% APY</strong><br/></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">DR Bank</a> – <strong>5.25% APY</strong><br/></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Credit Human</a> – <strong>5.25% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">State Department Federal Credit Union</a> – <strong>5.20% APY</strong><br/></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">FedChoice Federal Credit Union</a> – <strong>5.15% APY</strong><br/></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">MYSB Direct</a> – <strong>5.10% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Grow Financial Federal Credit Union</a> – <strong>5.01% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="8" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Northern Bank Direct</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="9" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Technology Credit Union</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="10" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Limelight Bank</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="11" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Seattle Bank</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="12" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">TAB Bank</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="13" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Banesco USA</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="14" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Newtek Bank</a> – <strong>5.00% APY</strong></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="15" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">LendingClub</a> – <strong>5.00% APY</strong><br/></li>
<li><a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="16" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">My eBanc</a> – <strong>5.00% APY</strong></li>
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<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/plIgr/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Top 18-Month CD Rate - October 2021 to Present"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
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<p>The <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> is the interest rate earned on an investment in one year, including <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a> interest. A higher APY is better as your return will be higher.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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Detailed information on these top-paying nationally available 18-month CDs is provided below, including specifics about minimum deposits and early withdrawal penalties. For credit union CDs, information is also provided on how to easily join the credit unions offering them.
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<span class="heading-toc" id="toc-why-you-can-trust-our-expert-recommendations-for-the-best-18-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0-9"> <span class="mntl-sc-block-heading__text"> Why You Can Trust Our Expert Recommendations for the Best 18-Month CD Rates </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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Investopedia collects thousands of CD rates from hundreds of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">banks</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit unions</a> every weekday. When <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816">ranking CD rates</a>, we look at factors like term, early withdrawal penalty, and minimum opening deposit. We also research banks and credit unions to provide unbiased, comprehensive reviews to ensure our readers make the right decisions for their needs. Investopedia launched in 1999 and has been helping readers find the best CD rates since 2019.
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The CDs we recommend must be available nationwide and these certificates typically pay three to five times as much as the national average—or even more. To be eligible for our rankings, each CD's minimum opening deposit requirement cannot exceed $25,000 and must be offered by an <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-insured</a> bank or <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-insured</a> credit union (which covers up to $250,000 per depositor).
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<span class="heading-toc" id="toc-nasa-federal-credit-union--540-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">NASA Federal Credit Union – 5.40% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
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<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $10,000</li><li><strong>Early-withdrawal penalty:</strong> All earned interest up to 6 months</li><li><strong>Overview: </strong>Anyone can join NASA FCU by signing up for a free membership in the National Space Society and holding $5 or more in a savings account. NASA FCU was founded in 1949 and is headquartered in Maryland.<span class="ql-inline-citation" data-cite="23"></span></li>
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<span class="heading-toc" id="toc-dr-bank--525-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-2"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">DR Bank – 5.25% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
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<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> DR Bank was founded in 2006 in Connecticut, where it still operates two branches. Accounts are available nationally through digital banking.<span class="ql-inline-citation" data-cite="82"></span></li>
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</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-2">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-2">
<span class="heading-toc" id="toc-credit-human--525-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-4"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="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" rel="noopener nofollow nocaes" target="_blank">Credit Human – 5.25% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-5">
<li><strong>Term (months)</strong>: 18–23</li><li><strong>Minimum deposit</strong>: $500</li><li><strong>Early-withdrawal penalty</strong>: 9 months of interest ($50 minimum)</li><li><strong>Overview</strong>:<strong> </strong>Anyone can join Credit Human by agreeing to a complimentary membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. The credit union is headquartered in San Antonio and dates back to 1935.<span class="ql-inline-citation" data-cite="52"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-3">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-3">
<span class="heading-toc" id="toc-state-department-federal-credit-union--520-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-6"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">State Department Federal Credit Union – 5.20% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-7">
<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> All earned interest up to 6 months' worth</li><li><strong>Overview:</strong> Anyone is eligible for membership with SDFCU by joining the nonprofit American Consumer Council. SDFCU was chartered in 1935 and is headquartered in Alexandria, Virginia.<span class="ql-inline-citation" data-cite="55"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-4">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-4">
<span class="heading-toc" id="toc-fedchoice-federal-credit-union--515-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-8"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">FedChoice Federal Credit Union – 5.15% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-9">
<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> Anyone is eligible for membership by allowing FedChoice to make a donation on their behalf to the FedChoice Charitable Foundation and keeping a minimum balance of $5 in a savings account. Headquartered in Lanham, Maryland, FedChoice originally was established in 1935 to serve employees of the IRS.<span class="ql-inline-citation" data-cite="56"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-5">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-5">
<span class="heading-toc" id="toc-mysb-direct--510-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-10"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">MYSB Direct – 5.10% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-11">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early-withdrawal penalty:</strong> All earned interest (3 months minimum)</li><li><strong>About:</strong> MYSB Direct is the online banking arm of M.Y. Safra Bank, which is headquartered in New York City and operates a single branch there.<span class="ql-inline-citation" data-cite="58"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-6">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-6">
<span class="heading-toc" id="toc-grow-financial-federal-credit-union--501--apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-12"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Grow Financial Federal Credit Union – 5.01 % APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-13">
<li><strong>Term (months):</strong> 12–17 months</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interest</li><li><strong>Overview:</strong> Membership is available to anyone nationwide. Grow Financial was chartered in 1955 and is headquartered in Tampa, Florida.<span class="ql-inline-citation" data-cite="65"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-7">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-7">
<span class="heading-toc" id="toc-northern-bank-direct--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-14"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Northern Bank Direct – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-15">
<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $500</li><li><strong>Early withdrawal penalty:</strong> 12 months of interest</li><li><strong>Overview:</strong> Northern Bank Direct is the online division of Northern Bank. FDIC-insured since 1960, Northern Bank is headquartered in Woburn, Massachusetts.<span class="ql-inline-citation" data-cite="88"></span><span class="ql-inline-citation" data-cite="89"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-8">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-8">
<span class="heading-toc" id="toc-technology-credit-union--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-16"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Technology Credit Union – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-17">
<li><strong>Term (months):</strong> 15</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early-withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Membership in the credit union is available to anyone who joins the Financial Fitness Association for $8, or one of several other affiliated organizations. Chartered in 1960, Technology Credit Union is headquartered in San Jose, California.<span class="ql-inline-citation" data-cite="40"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-9">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-9">
<span class="heading-toc" id="toc-limelight-bank--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-18"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Limelight Bank – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-19">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 3 months of interest</li><li><strong>Overview:</strong> Limelight is an internet-only division of Capital Community Bank, which was established in 1993 and operates five branches in Utah.<span class="ql-inline-citation" data-cite="83"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-10">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-10">
<span class="heading-toc" id="toc-seattle-bank--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-20"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Seattle Bank – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-21">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Seattle Bank began as a mortgage company in the 1940s. It serves online customers across the country and operates a branch in downtown Seattle, Washington.<span class="ql-inline-citation" data-cite="69"></span><span class="ql-inline-citation" data-cite="70"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-11">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-11">
<span class="heading-toc" id="toc-tab-bank--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-22"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">TAB Bank – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-23">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $1,000</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Established in 1998 with a sole location in Ogden, Utah, TAB Bank offers its line of banking products exclusively online.<span class="ql-inline-citation" data-cite="71"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-12">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-12">
<span class="heading-toc" id="toc-banesco-usa--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-24"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">Banesco USA – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-25">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $1,500</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> Established in 2006, Banesco USA is a brick-and-mortar bank operating in Florida and Puerto Rico, with some of its products available online.<span class="ql-inline-citation" data-cite="81"></span></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
</div><!-- end: comp article-content__description article-container list-sc-item__container mntl-block -->
</div><!-- end: comp mntl-sc-list-item list-sc-item mntl-block -->
<div class="comp mntl-sc-list-item list-sc-item mntl-block" id="list-sc-item_1-0-13">
<div class="comp article-content__description article-container list-sc-item__container mntl-block" id="list-sc-item__container_1-0-13">
<span class="heading-toc" id="toc-newtek-bank--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-26"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="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" rel="noopener nofollow nocaes" target="_blank">Newtek Bank – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-27">
<li><strong>Term (months):</strong> 18</li>
<li><strong>Minimum deposit:</strong> $2,500</li>
<li><strong>Early withdrawal penalty:</strong> 6 months of interest</li>
<li><strong>Overview:</strong> Newtek Bank is a subsidiary of Newtek One (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NEWT">NASDAQ: NEWT</a>), a financial company that dates back to 2000. Newtek Bank is headquartered in Miami.<span class="ql-inline-citation" data-cite="74"></span><span class="ql-inline-citation" data-cite="75"></span><span class="ql-inline-citation" data-cite="73"></span></li>
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<span class="heading-toc" id="toc-lendingclub--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-28"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">LendingClub – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-29">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $2,500</li><li><strong>Early withdrawal penalty:</strong> All interest earned on amount withdrawn</li><li><strong>Overview:</strong> LendingClub began operations as an online full-spectrum bank in 2007, with the parent company, LendingClub Bank, being an FDIC member since 1987. It is headquartered in San Francisco.<span class="ql-inline-citation" data-cite="72"></span></li>
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<span class="heading-toc" id="toc-my-ebanc--500-apy"></span> <h2 class="comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading" id="mntl-sc-block_2-0-30"> <a class="mntl-sc-block-heading__link" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener nofollow nocaes" target="_blank">My eBanc – 5.00% APY</a><!-- end: mntl-sc-block-heading__link --> </h2><!-- end: comp mntl-sc-list-item-title finance-sc-block-heading mntl-sc-block mntl-sc-block-heading -->
<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_2-0-31">
<li><strong>Term (months):</strong> 18</li><li><strong>Minimum deposit:</strong> $5,000</li><li><strong>Early withdrawal penalty:</strong> 6 months of interest</li><li><strong>Overview:</strong> My eBanc is an online banking arm of the brick-and-mortar institution BAC Florida Bank, established in 1973.<span class="ql-inline-citation" data-cite="76"></span></li>
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<span class="heading-toc" id="toc-what-is-an-18-month-cd-and-how-does-it-work"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0"> <span class="mntl-sc-block-heading__text"> What Is an 18-Month CD and How Does It Work?<br> </br></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_3-0-1">
Certificates of deposit (CDs) are bank or credit union accounts in which you agree to hold your funds on deposit without withdrawals for a prearranged period. Thus, an 18-month CD requires you to keep the funds untouched for about a year and a half. For our rankings, we consider 18-month CDs to be anything with a term of 15 to 20 months.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-2">
In exchange for giving up access to your funds, you'll generally be rewarded with a higher interest rate than the bank pays on savings and money market accounts that allow flexible withdrawals.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-3">
When opening a CD, you deposit a lump sum of funds into the account at or above the minimum required deposit for that CD. The funds will then sit in the account for 18 months, earning interest along the way. When the CD hits its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity date</a>, you can take the funds plus their earned interest out of the account with no penalty.
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<div class="comp theme-note 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_3-0-4">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-2">
Fast Fact</h3><!-- 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_1-0-2">
<p>When asked in late April what they would invest in if they had an extra $10,000, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investors-aren-t-worried-right-now-but-they-re-not-buying-either-8642075">12% of Investopedia readers</a> said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<div class="comp sc-block-iframe--datawrapper mntl-sc-block prm-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_3-0-5">
<iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp lazyload mntl-sc-block-iframe__uri mntl-block" data-src="https://datawrapper.dwcdn.net/rEleD/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0-1" title="12% of Readers Would Open a CD if They Had an Extra $10,000"></iframe><!-- end: comp lazyload mntl-sc-block-iframe__uri mntl-block -->
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<span class="heading-toc" id="toc-pros-and-cons-of-18-month-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-6"> <span class="mntl-sc-block-heading__text"> Pros and Cons of 18-Month CDs<br> </br></span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-7"> <span class="mntl-sc-block-subheading__text"> Pros<br> </br></span> </h3><!-- end: comp finance-sc-block-subheading 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_3-0-8">
<li><strong>Offers a guaranteed rate for 18 months</strong>: No matter what happens with the Federal Reserve and interest rates, the bank cannot change the APY you secure when you sign your CD agreement and make your deposit.</li><li><strong>May pay a higher APY than other terms</strong>: Shopping around is critical, as rates can vary widely across institutions and also across different CD lengths.</li><li><strong>Pays reliable and predictable earnings</strong>:<strong> </strong>Because your CD rate is fixed and your term is known, you can calculate exactly how much your earnings will amount to once the CD matures.</li><li><strong>Is safe and virtually risk-free</strong>: CDs opened at an FDIC bank or NCUA credit union are federally insured, protecting up to $250,000 of your deposits in the unlikely event that the institution fails.</li><li><strong>Can deter the temptation to spend since funds are tied up</strong>:<strong> </strong>Withdrawing your funds before the CD matures will trigger an early withdrawal penalty, which may be enough to stop you from pulling the funds out for unplanned spending.</li>
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<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-9"> <span class="mntl-sc-block-subheading__text"> Cons<br> </br></span> </h3><!-- end: comp finance-sc-block-subheading 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_3-0-10">
<li><strong>Incurs a penalty if you withdraw early</strong>: Every bank and credit union specifies their policy on how they'll calculate your penalty if you don't keep your CD funds deposited until maturity. Typically, the penalty is a number of months' interest that you'll forfeit.</li><li><strong>Allows only one deposit amount</strong>: With most CDs, you get one chance to decide how much you want to invest in the certificate. Additional deposits are generally not allowed.</li><li><strong>If rates fall, you may wish you'd opted for a longer term</strong>: Investing in a longer CD would have allowed you to retain a good rate for a longer period of time</li><li><strong>If rates rise, you'll be locked at a lower rate until maturity</strong>: If you lock into an 18-month CD and then rates rise, you'll be stuck with your current rate until you can withdraw your funds.</li>
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<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-3">
Important</h3><!-- 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_1-0-3">
<p>Though consumers tend to think about CD maturity terms in nice round numbers, be sure to consider odd-term CDs, such as 15-month, 18-month, or 21-month certificates. It's not uncommon for promotional rate CDs to have unusual durations, so don't limit yourself to only the conventional terms.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<span class="heading-toc" id="toc-factors-to-consider-when-choosing-a-cd"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-12"> <span class="mntl-sc-block-heading__text"> Factors to Consider When Choosing a CD<br> </br></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_3-0-13">
When choosing a CD, consider the following factors:
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<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-14">
<li><strong>Your goals</strong>: Both short-term financial goals and long-term financial goals are important.</li><li><strong>How much money you can deposit</strong>: CDs have minimums, so if you only have $500 to deposit, you'll need to find a CD with that minimum balance requirement.</li><li><strong>How long you can leave that money in the CD without touching it</strong>: This will help you determine the right term—whether that's a 1-year CD or a 3-year CD.</li><li><strong>Interest rates offered for your term and minimum deposit</strong>: The higher the rate, the more you will earn on your deposit during the CD term.</li><li><strong>CD type</strong>: Is it a bump-up CD or a regular CD? This will ensure you're choosing one that meets your needs and goals.</li>
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-15">
Once you choose a CD, open the account, and deposit your money to start earning interest.
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<div class="comp theme-pullquote 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_3-0-16">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-4">
Hilarey Gould, Senior Editorial Director for Financial Products and Services at Investopedia</h3><!-- 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_1-0-4">
<p>When choosing an 18-month CD, be sure to review the early withdrawal penalty. If you think you might need to withdraw your money before the CD matures, look for a CD with a lower penalty so that you end up with the most money possible when you withdraw. If you are positive that you won't touch the money in the CD until maturity, you may feel comfortable opening a CD with a more expensive penalty.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<span class="heading-toc" id="toc-18-month-cd-penalties-and-fees"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-17"> <span class="mntl-sc-block-heading__text"> 18-Month CD Penalties and Fees<br/> </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_3-0-18">
Almost all CDs—not just 18-month CDs—come with an early withdrawal penalty. That means that if you decide to take your money out of the CD before the date the CD matures, you have to pay some sort of fee. The fee is typically in the form of interest you have earned, such as three or six months' worth of interest.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-19">
For example, let's say you deposited $1,000 in an 18-month CD with a 5.00% APY. The total interest you would earn by keeping it in the CD for 18 months is $75.93. If the CD comes with an early withdrawal penalty worth six months of interest, then you would have to pay $25.31 if you decided to take your money out early.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-20">
Other than the early withdrawal penalty, CDs don't typically come with any other fees (though the banking institution may require some).
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<span class="heading-toc" id="toc-how-to-find-the-best-18-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-21"> <span class="mntl-sc-block-heading__text"> How to Find the Best 18-Month CD Rates<br/> </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_3-0-22">
This list includes the best 18-month CD rates, meaning that they are the highest 18-month CD rates nationwide. To find you the top 18-month CD rates, we look at hundreds of banks, credit unions, and other financial institutions every day and gather the CDs with the highest rates that are available nationwide, including CDs with terms of 15 to 20 months.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-23">
When looking for an 18-month CD, consider the amount of money you want to deposit, the interest rate on the CD, and the early withdrawal penalty. For example, if a 20-month CD offers a 5.00% interest rate on a $25,000 deposit, but a 12-month withdrawal penalty, you may want to compare it with a 15-month CD with the same deposit but a six-month withdrawal penalty.
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-24">
This comparison is important to think about because if you need that money back sooner than maturity, you need to know what amount of interest you'll lose by withdrawing early. With that in mind, you'll need to first compare your options based on your deposit amount, then look at the rate and early withdrawal penalty.
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<div class="comp theme-note 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_3-0-25">
<h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0-5">
Note</h3><!-- 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_1-0-5">
<p>CD rates are the same for everyone who applies to open a CD. Your credit score and other financial history and experience are not determining factors like they are with credit cards or loans. So even if you have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bad-credit.asp">bad credit</a>, you can earn a high interest rate on your savings by locking it up in a CD for a period of time.</p></div><!-- end: comp mntl-sc-block-callout-body mntl-text-block -->
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<span class="heading-toc" id="toc-how-to-open-an-18-month-cd"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-26"> <span class="mntl-sc-block-heading__text"> How to Open an 18-Month CD<br/> </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_3-0-27">
After you find the right CD for you, you'll need to apply to open the account. This may be easy if you're already a member of the bank or credit union. If you're not, you may need to open another savings account first, or apply to be a member of the credit union by joining another free or low-cost organization (the American Consumer Council is a popular one).
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-28">
To open an 18-month CD, follow these steps:
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<ol class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-29">
<li>Find the CD you want to open, whether online or in-person at the bank or credit union.</li>
<li>Have a current membership or relationship with the bank or credit union via an open account like a savings or a checking account, and/or through a non-profit organization (typically only applies to credit unions).</li>
<li>Fill out the application with your name, deposit amount, and other personal info.</li>
<li>Wait for approval.</li>
<li>Fund the CD and let your money earn interest. You may be able to send a check, wire the money, or electronically transfer it, depending on the institution.</li>
<li>Read the CD's terms. This fine print info will tell you the interest rate you'll be paid, the date of the CD's maturity, how often your interest will be paid and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compounded</a>, and the early withdrawal penalty (if any) that you need to pay if you request to withdraw your money before maturity.</li>
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<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-30">
Once your 18-month CD is opened, it's a set-it-and-forget-it process to earn your interest. There are just two times when you may need to take action:
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<ul class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-31">
<li><strong>When you need your money back before maturity</strong>: You'll likely pay an early withdrawal penalty and will need to withdraw the funds before transferring them into another account. Then the CD will be closed.</li><li><strong>When your CD matures</strong>: You may need to indicate if you want the CD to roll over into another CD at the institution or if you want the money withdrawn and deposited back into your other account.<br/></li>
</ul><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-compare-the-best-18-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-32"> <span class="mntl-sc-block-heading__text"> Compare the Best 18-Month CD Rates<br/> </span> </h2><!-- end: comp finance-sc-block-heading 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_3-0-33">
<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>Institution</th>
<th>Rate (APY)</th>
<th>Term</th>
<th>Minimum Deposit</th>
<th>Early Withdrawal Penalty</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">NASA Federal Credit Union</a></td>
<td>5.40%</td>
<td>15 months</td>
<td>$10,000</td>
<td>All earned interest up to 6 months</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">DR Bank</a></td>
<td>5.25%</td>
<td>15 months</td>
<td>$500</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td>
<td>5.25%</td>
<td>18–23 months</td>
<td>$500</td>
<td>9 months of interest ($50 minimum)</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">State Department Federal Credit Union</a></td>
<td>5.20%</td>
<td>15 months</td>
<td>$500</td>
<td>All earned interest up to 6 months' worth</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">FedChoice Federal Credit Union</a></td>
<td>5.15%</td>
<td>15 months</td>
<td>$500</td>
<td>4 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">MYSB Direct</a></td>
<td>5.10%</td>
<td>18 months</td>
<td>$500</td>
<td>All earned interest (3 months minimum)</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Grow Financial Federal Credit Union</a></td>
<td>5.01%</td>
<td>12–17 months</td>
<td>$500</td>
<td>12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Northern Bank Direct</a></td>
<td>5.00%</td>
<td>15 months</td>
<td>$500</td>
<td>12 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Technology Credit Union</a></td>
<td>5.00%</td>
<td>15 months</td>
<td>$1,000</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Limelight Bank</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$1,000</td>
<td>3 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Seattle Bank</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$1,000</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">TAB Bank</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$1,000</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Banesco USA</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$1,500</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Newtek Bank</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$2,500</td>
<td>6 months of interest</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">LendingClub</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$2,500</td>
<td>All interest earned on amount withdrawn</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">My eBanc</a></td>
<td>5.00%</td>
<td>18 months</td>
<td>$5,000</td>
<td>6 months of interest</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-alternatives-to-18-month-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-34"> <span class="mntl-sc-block-heading__text"> Alternatives to 18-Month CDs<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
<h3 class="comp finance-sc-block-subheading mntl-sc-block prm-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_3-0-35"> <span class="mntl-sc-block-subheading__text"> 18-Month CDs vs. Other CD Terms<br/> </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_3-0-36">
Anytime you're choosing a CD, a decision on the length of term is one of the most critical considerations. You'll want to select a term that you feel reasonably confident you can stick with so that you won't incur a penalty for withdrawing early.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-37">
Instead of an 18-month CD, you could choose a shorter certificate to limit the amount of time your funds are tied up, but you may have to settle for a slightly lower rate. The same is true if you go with a longer-term CD: rates could be lower than what you can earn on 18 months. It all depends on the current rate environment, so it's important that you shop around.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-38">
For example, if rates are higher now than you think they will be in the future, locking in one of today's rates for as long as possible can be a smart move, so that you'll retain your APY for a longer period than if you chose a shorter-term CD.
</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_3-0-39"> <span class="mntl-sc-block-subheading__text"> CDs vs. Savings and Money Market Accounts<br/> </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_3-0-40">
Instead of locking up your money in an 18-month CD, you can instead keep it in one of several types of liquid accounts. Keeping it in a checking account is one option, providing ultimate convenience and flexibility. But since checking accounts generally pay zero interest, it's a poor choice for your savings.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-41">
Opening 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">top-paying high-yield savings account</a> or a <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> is a better option, enabling you to earn a competitive return on your funds. The downside compared to a CD, however, is that savings and money market accounts pay a variable rate, which means that if interest rates go down in the future, so will the rate you're earning in these accounts.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-42">
The same is true for cash reserve and money market funds at brokerage firms. Many of these pay much lower rates than you can earn with a high-yield savings account at a top-paying bank. But even when the APY on a brokerage cash account is competitive, it too is a variable rate that you can't lock in like you can with a CD.
</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_3-0-43"> <span class="mntl-sc-block-subheading__text"> CDs vs. US Savings Bonds & Treasuries<br/> </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_3-0-44">
You could alternatively put your funds in U.S. savings bonds or Treasuries. The U.S. government offers two types of savings bonds: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/serieseebond.asp">EE bonds</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seriesibond.asp">I bonds</a>. EE bonds offer a fixed interest rate that you'll know at the time of making your deposit decision, while I bonds offer a rate that changes every six months based on current inflation levels (hence, the name I bonds). These investments are exceptionally safe, but they do not allow a withdrawal within the first 12 months for any reason.<br/>
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-45">
You can also lend money to the U.S. government by purchasing Treasury bonds. These are called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">T-bills</a> for durations of four weeks to one year, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurynote.asp">Treasury notes</a> for durations of two to 10 years. Treasuries are considered one of the safest investments in the world, but their rates are not always as high as the best CDs or high-yield savings accounts.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<span class="heading-toc" id="toc-where-are-cd-rates-headed-in-2024"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-46"> <span class="mntl-sc-block-heading__text"> Where Are CD Rates Headed in 2024?<br> </br></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_3-0-47">
CD rates closely follow the fed funds rate, which the Federal Reserve held steady at its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-todays-fed-news-tells-us-about-2024-savings-cd-rates-8641966">most recent meeting</a> on April 30 and May 1. With the fed funds rate stagnant, CD rates are also marching in place. There is very little chance that the Fed will raise rates in 2024. If anything, the Fed will be more likely to lower rates, but that may only happen if and when inflation is under control. In April, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-today-s-inflation-news-could-mean-for-cd-rates-8649152">the inflation rate was 3.4%</a>, down 1 basis point from March.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<p class="comp mntl-sc-block mntl-sc-block-html" id="mntl-sc-block_3-0-48">
The Fed's next rate policy meeting is in June, but it's unlikely much will happen at that time.<span class="ql-inline-citation" data-cite="87"></span> Fed funds futures traders are continually placing bets, which you can see with the CME Group’s FedWatch Tool. On May 17, the CME showed that a majority of traders predicted the first rate cut happen until September—three meetings away.<span class="ql-inline-citation" data-cite="86"></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_3-0-49">
There's a chance the Fed could cut interest rates this year, but no one can know for sure. Rather than waiting to see if the Fed cuts rates, lock in a high CD rate now.
</p><!-- end: comp mntl-sc-block mntl-sc-block-html -->
<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_3-0-50">
<span class="heading-toc" id="toc-frequently-asked-questions-583beec3-dc35-4110-a0e9-480cae441a52"></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">What Are the Best CD Rates for 18 Months?</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>The best CD rates for an 18-month term will be anything over 5.00%. The best 18-month CD will come with a high rate, low early withdrawal penalty, and low minimum deposit required. Most of the top 18-month CDs have an early withdrawal penalty of three to six months and a minimum deposit of $500 or more.<br/></p>
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<h3 class="accordion__title">How Long Should You Keep Money in a CD?</h3>
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<p>You should aim to keep your money in a CD for as long as the CD term. Taking your money out before the term ends could result in paying an early withdrawal penalty, which means you'd lose out on some of the interest you earned. Since a CD is a fixed interest rate account, you know what you'll earn before you sign up and deposit money. You should calculate the early withdrawal penalty and what it would cost you if needed before you lock yourself into a CD. Additionally, after the CD term ends, you may want to roll the CD over into another CD, especially if rates are high and you don't need the money for something else.<br/></p>
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<h3 class="accordion__title">Do 18-Month CDs Beat Inflation?</h3>
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<p>An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/4-savings-strategies-to-combat-inflation-8646027">18-month CD can help you hedge against high inflation</a> because the rate you can earn may be more than the inflation rate. For example, in April 2024, the inflation rate was 3.4%. At that same time, 18-month CD rates paid over 5.00%. You can earn more on your savings with an 18-month CD to help combat the additional costs you'll incur thanks to inflation.</p>
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<h3 class="accordion__title">When Is an 18-Month CD a Good Choice?</h3>
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<p>An 18-month CD is a suitable option for money you won't need in the coming year or longer. For those with a specific plan for the money, such as a down payment on a house or paying college tuition bills for a child, an 18-month CD might provide just the time frame you need to keep funds safe and reliably earning interest.</p><p>Another appeal of 18-month CDs is to provide one rung of a shortened <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>. A CD ladder is a strategy for investing your funds in five CDs of differing terms rather than all at once. For a yearly ladder, you would own a 1-year, 2-year, 3-year, 4-year, and 5-year CD. But you can also create a shorter ladder, with six-month increments between the CDs (e.g., 6-month, 12-month, 18-month, etc.).</p>
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<h3 class="accordion__title">Are Online Bank CDs Safe?</h3>
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<p>Many of the highest deposit rates, whether for CDs, savings accounts, or money market accounts, are offered by <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">online banks</a>. Some of these are online-only banks, meaning they operate solely on the Internet, while others are brick-and-mortar banks with a separate online banking arm. Sometimes the online operations of physical banks even have an entirely different name and brand identity.</p><p>Though you may feel nervous depositing your funds into an Internet bank instead of at a physical branch, online accounts and institutions are just as safe as their more traditional counterparts. That's because FDIC insurance doesn't discriminate—the $250,000 in deposit insurance it provides consumers in case of bank failure applies equally to online and brick-and-mortar banks.<span class="ql-inline-citation" data-cite="14"></span><br/></p>
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<h3 class="accordion__title">Why Do Shorter CDs Sometimes Pay More Than Longer CDs?</h3>
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<p>Generally speaking, the shorter the CD term, the lower the interest rate paid by the bank, and vice versa. That's because the bank recognizes you need to be rewarded more substantially the longer you're being asked to leave the money on deposit.</p><p>However, not all institutions use a perfectly linear scale of interest rates that increase with the CD terms. A common strategy is offering one or more promotional CDs that pay a significantly higher interest rate to entice customers to the institution. To limit how long the bank is paying the boosted rate, promotional CDs are often shorter in duration, such as less than two years.</p><p>Another factor is that banks and credit unions decide their CD yields based on where they think the federal funds rate will be <em>in the future</em>. So when it's expected that future interest rates will be lower than today's rates, it's common to see short- or mid-term CDs paying the best rates.</p>
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<h3 class="accordion__title">How Do You Build a CD Ladder?</h3>
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<p>A CD ladder enables you to access the higher rates typically offered on 5-year CDs, but with the twist that a portion of your money becomes available every year, rather than every five years. Here's how to do it.</p><ol><li>Take the amount of money you want to invest in CDs and divide it by five.</li><li>Put one-fifth of the funds into a top-earning 1-year CD, another fifth into a top 2-year CD, another into a 3-year CD, and so forth through a 5-year CD. Let’s say you have $25,000 available. That would give you five CDs of varying lengths, each with a value of $5,000.</li><li>When the first CD matures in a year, you take the resulting funds and open a top-rate 5-year CD.</li><li>One year later, your initial 2-year CD will mature, and you'll invest those funds into another 5-year CD.</li><li>Continue doing this every year with whichever CD is maturing until you end up with a portfolio of five CDs all earning 5-year APYs, but with one of them maturing every 12 months, keeping your money a bit more accessible than if all of it were locked up for a full five years.<br/></li></ol>
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<h3 class="accordion__title">Can You Lose Money in a CD?</h3>
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<p>You can't lose your principal when you deposit it in a CD. But you can lose out on interest in the CD if you withdraw it early. Most CDs come with an early withdrawal penalty (<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">but not all CDs have penalties</a>) so if you take your money out of the account before the term is up, you may pay a price. CDs are federally insured though, so if you're worried about losing money in a CD due to a bank failure, you can rest assured that your money is backed by the FDIC or NCUA up to $250,000 per institution.<span class="ql-inline-citation" data-cite="14"></span></p>
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<h3 class="accordion__title">Financial Institutions We Reviewed</h3>
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<p>We researched and reviewed over 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:</p><p>1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ally-bank-cd-rates-7483690">Ally Bank</a>, Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/barclays-bank-cd-rates-7481049">Barclays</a>, BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bmo-bank-cd-rates-7500022">BMO</a>, BMO Alto, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/briodirect-bank-review-5069892">BrioDirect</a>, Cadets Federal Credit Union, California Coast Credit Union, <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/capital-one-cd-rates-7480645">Capital One</a>, Capitol Federal Savings Bank, CD Bank, CFG Bank, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-cd-rates-7480360">Chase Bank</a>, Chevron Federal Credit Union, CIBC (Agility Banking), <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cit-bank-cd-rates-7480633">CIT Bank</a>, <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/citibank-cd-rates-7482684">Citibank</a>, Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bread-savings-cd-rates-7488944">Bread Savings</a>, Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, <a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/discover-bank-review-5069129">Discover Bank</a>, DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, <a data-component="link" data-ordinal="11" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fidelity-cd-rates-7496602">Fidelity Investments</a>, Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by <a data-component="link" data-ordinal="12" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/axos-bank-review-4802090">Axos Bank</a>, <a data-component="link" data-ordinal="13" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/navy-federal-cd-rates-7499476">Navy Federal Credit Union</a>, nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, <a data-component="link" data-ordinal="14" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/penfed-cd-rates-7497239">PenFed Credit Union</a>, People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, <a data-component="link" data-ordinal="15" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/popular-direct-bank-review-5072550">Popular Direct</a>, Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, <a data-component="link" data-ordinal="16" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sallie-mae-bank-cd-rates-7485414">Sallie Mae Bank</a>, Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, <a data-component="link" data-ordinal="17" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/synchrony-bank-cd-rates-7482657">Synchrony Bank</a>, TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, <a data-component="link" data-ordinal="18" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/third-federal-cd-rates-7498126">Third Federal Savings & Loan</a>, <a data-component="link" data-ordinal="19" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/everbank-cd-rates-7483667">EverBank</a>, TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, <a data-component="link" data-ordinal="20" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-bank-cd-rates-7497336">US Bank</a>, USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, <a data-component="link" data-ordinal="21" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/vio-bank-review-4842261">Vio Bank</a>, Virtual Bank, WebBank, Webster Bank, <a data-component="link" data-ordinal="22" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wells-fargo-cd-rates-7483593">Wells Fargo</a>, Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, Umbrella Bank, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, <a data-component="link" data-ordinal="23" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-of-america-cd-rates-7498115">Bank of America</a>, Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, <a data-component="link" data-ordinal="24" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/usaa-bank-cd-rates-7483875">USAA</a>, Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, <a data-component="link" data-ordinal="25" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingclub-banking-review-5071446">LendingClub</a>, Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, <a data-component="link" data-ordinal="26" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/vanguard-cd-rates-7496300">Vanguard</a>, All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank.<br/></p>
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<span class="heading-toc" id="toc-how-we-find-the-best-18-month-cd-rates"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-51"> <span class="mntl-sc-block-heading__text"> How We Find the Best 18-Month CD Rates<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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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.
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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>.
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<span class="heading-toc" id="toc-your-guide-to-cds"></span> <h2 class="comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_3-0-54"> <span class="mntl-sc-block-heading__text"> Your Guide to CDs<br/> </span> </h2><!-- end: comp finance-sc-block-heading mntl-sc-block prm-sc-block-heading mntl-sc-block-heading -->
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<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">What Is a Certificate of Deposit (CD)?</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokered-cd.asp">What Is a Brokered CD?</a></li>
<li><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cd-ladder.asp">What Is a CD Ladder?</a></li>
<li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pros-and-cons-of-cds-5223947">Pros and Cons of CDs</a></li>
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The best 18-month CD rate is 5.40% APY from NASA Federal Credit Union. The minimum deposit requirement to open this top 18-month CD is $10,000. CD rates are near historic highs, with the top 18-month CD rates ranging from 5.00% to 5.40% APY. To find you the best CD rates nationwide, we review CD rates from hundreds of banks and credit unions every weekday morning. The top CD rates in our rankings typically pay three to five times as much as the national average—or even more. Below are the top CD rates available from our partners, followed by the best 18-month CD rates we've found from [our research](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816) that are available to U.S. customers everywhere.
### In the News
The Fed [held rates steady for a sixth consecutive time](https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952) at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.4% over the year in April. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.
CD yields closely follow the [fed funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp). Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.
Where more than one institution pays the same top rate, our rankings prioritize CDs by the shortest term, then the CD requiring the smallest minimum deposit. If there is still a tie, we then rank alphabetically by institution name.
## Best 18-Month CD Rates
* [NASA Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.40% APY**
* [DR Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.25% APY**
* [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) – **5.25% APY**
* [State Department Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.20% APY**
* [FedChoice Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.15% APY**
* [MYSB Direct](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.10% APY**
* [Grow Financial Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.01% APY**
* [Northern Bank Direct](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [Technology Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [Limelight Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [Seattle Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [TAB Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [Banesco USA](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [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) – **5.00% APY**
* [LendingClub](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
* [My eBanc](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) – **5.00% APY**
### Tip
The [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp) is the interest rate earned on an investment in one year, including [compounding](https://www.investopedia.com/terms/c/compounding.asp) interest. A higher APY is better as your return will be higher.
Detailed information on these top-paying nationally available 18-month CDs is provided below, including specifics about minimum deposits and early withdrawal penalties. For credit union CDs, information is also provided on how to easily join the credit unions offering them.
## Why You Can Trust Our Expert Recommendations for the Best 18-Month CD Rates
Investopedia collects thousands of CD rates from hundreds of [banks](https://www.investopedia.com/terms/b/bank.asp) and [credit unions](https://www.investopedia.com/terms/c/creditunion.asp) every weekday. When [ranking CD rates](https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816), we look at factors like term, early withdrawal penalty, and minimum opening deposit. We also research banks and credit unions to provide unbiased, comprehensive reviews to ensure our readers make the right decisions for their needs. Investopedia launched in 1999 and has been helping readers find the best CD rates since 2019.
The CDs we recommend must be available nationwide and these certificates typically pay three to five times as much as the national average—or even more. To be eligible for our rankings, each CD's minimum opening deposit requirement cannot exceed $25,000 and must be offered by an [FDIC-insured](https://www.investopedia.com/terms/f/fdic-insured-account.asp) bank or [NCUA-insured](https://www.investopedia.com/terms/n/ncua-insured-institution.asp) credit union (which covers up to $250,000 per depositor).
## [NASA Federal Credit Union – 5.40% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $10,000
* **Early-withdrawal penalty:** All earned interest up to 6 months
* **Overview:** Anyone can join NASA FCU by signing up for a free membership in the National Space Society and holding $5 or more in a savings account. NASA FCU was founded in 1949 and is headquartered in Maryland.
## [DR Bank – 5.25% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** DR Bank was founded in 2006 in Connecticut, where it still operates two branches. Accounts are available nationally through digital banking.
## [Credit Human – 5.25% APY](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)
* **Term (months)**: 18–23
* **Minimum deposit**: $500
* **Early-withdrawal penalty**: 9 months of interest ($50 minimum)
* **Overview**:Anyone can join Credit Human by agreeing to a complimentary membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. The credit union is headquartered in San Antonio and dates back to 1935.
## [State Department Federal Credit Union – 5.20% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $500
* **Early withdrawal penalty:** All earned interest up to 6 months' worth
* **Overview:** Anyone is eligible for membership with SDFCU by joining the nonprofit American Consumer Council. SDFCU was chartered in 1935 and is headquartered in Alexandria, Virginia.
## [FedChoice Federal Credit Union – 5.15% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** Anyone is eligible for membership by allowing FedChoice to make a donation on their behalf to the FedChoice Charitable Foundation and keeping a minimum balance of $5 in a savings account. Headquartered in Lanham, Maryland, FedChoice originally was established in 1935 to serve employees of the IRS.
## [MYSB Direct – 5.10% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $500
* **Early-withdrawal penalty:** All earned interest (3 months minimum)
* **About:** MYSB Direct is the online banking arm of M.Y. Safra Bank, which is headquartered in New York City and operates a single branch there.
## [Grow Financial Federal Credit Union – 5.01 % APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 12–17 months
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interest
* **Overview:** Membership is available to anyone nationwide. Grow Financial was chartered in 1955 and is headquartered in Tampa, Florida.
## [Northern Bank Direct – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $500
* **Early withdrawal penalty:** 12 months of interest
* **Overview:** Northern Bank Direct is the online division of Northern Bank. FDIC-insured since 1960, Northern Bank is headquartered in Woburn, Massachusetts.
## [Technology Credit Union – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 15
* **Minimum deposit:** $1,000
* **Early-withdrawal penalty:** 6 months of interest
* **Overview:** Membership in the credit union is available to anyone who joins the Financial Fitness Association for $8, or one of several other affiliated organizations. Chartered in 1960, Technology Credit Union is headquartered in San Jose, California.
## [Limelight Bank – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 3 months of interest
* **Overview:** Limelight is an internet-only division of Capital Community Bank, which was established in 1993 and operates five branches in Utah.
## [Seattle Bank – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Seattle Bank began as a mortgage company in the 1940s. It serves online customers across the country and operates a branch in downtown Seattle, Washington.
## [TAB Bank – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $1,000
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Established in 1998 with a sole location in Ogden, Utah, TAB Bank offers its line of banking products exclusively online.
## [Banesco USA – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $1,500
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Established in 2006, Banesco USA is a brick-and-mortar bank operating in Florida and Puerto Rico, with some of its products available online.
## [Newtek Bank – 5.00% APY](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)
* **Term (months):** 18
* **Minimum deposit:** $2,500
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** Newtek Bank is a subsidiary of Newtek One ([NASDAQ: NEWT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NEWT)), a financial company that dates back to 2000. Newtek Bank is headquartered in Miami.
## [LendingClub – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $2,500
* **Early withdrawal penalty:** All interest earned on amount withdrawn
* **Overview:** LendingClub began operations as an online full-spectrum bank in 2007, with the parent company, LendingClub Bank, being an FDIC member since 1987. It is headquartered in San Francisco.
## [My eBanc – 5.00% APY](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ)
* **Term (months):** 18
* **Minimum deposit:** $5,000
* **Early withdrawal penalty:** 6 months of interest
* **Overview:** My eBanc is an online banking arm of the brick-and-mortar institution BAC Florida Bank, established in 1973.
## What Is an 18-Month CD and How Does It Work?
Certificates of deposit (CDs) are bank or credit union accounts in which you agree to hold your funds on deposit without withdrawals for a prearranged period. Thus, an 18-month CD requires you to keep the funds untouched for about a year and a half. For our rankings, we consider 18-month CDs to be anything with a term of 15 to 20 months.
In exchange for giving up access to your funds, you'll generally be rewarded with a higher interest rate than the bank pays on savings and money market accounts that allow flexible withdrawals.
When opening a CD, you deposit a lump sum of funds into the account at or above the minimum required deposit for that CD. The funds will then sit in the account for 18 months, earning interest along the way. When the CD hits its [maturity date](https://www.investopedia.com/terms/m/maturity.asp), you can take the funds plus their earned interest out of the account with no penalty.
### Fast Fact
When asked in late April what they would invest in if they had an extra $10,000, [12% of Investopedia readers](https://www.investopedia.com/investors-aren-t-worried-right-now-but-they-re-not-buying-either-8642075) said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.
## Pros and Cons of 18-Month CDs
### Pros
* **Offers a guaranteed rate for 18 months**: No matter what happens with the Federal Reserve and interest rates, the bank cannot change the APY you secure when you sign your CD agreement and make your deposit.
* **May pay a higher APY than other terms**: Shopping around is critical, as rates can vary widely across institutions and also across different CD lengths.
* **Pays reliable and predictable earnings**:Because your CD rate is fixed and your term is known, you can calculate exactly how much your earnings will amount to once the CD matures.
* **Is safe and virtually risk-free**: CDs opened at an FDIC bank or NCUA credit union are federally insured, protecting up to $250,000 of your deposits in the unlikely event that the institution fails.
* **Can deter the temptation to spend since funds are tied up**:Withdrawing your funds before the CD matures will trigger an early withdrawal penalty, which may be enough to stop you from pulling the funds out for unplanned spending.
### Cons
* **Incurs a penalty if you withdraw early**: Every bank and credit union specifies their policy on how they'll calculate your penalty if you don't keep your CD funds deposited until maturity. Typically, the penalty is a number of months' interest that you'll forfeit.
* **Allows only one deposit amount**: With most CDs, you get one chance to decide how much you want to invest in the certificate. Additional deposits are generally not allowed.
* **If rates fall, you may wish you'd opted for a longer term**: Investing in a longer CD would have allowed you to retain a good rate for a longer period of time
* **If rates rise, you'll be locked at a lower rate until maturity**: If you lock into an 18-month CD and then rates rise, you'll be stuck with your current rate until you can withdraw your funds.
### Important
Though consumers tend to think about CD maturity terms in nice round numbers, be sure to consider odd-term CDs, such as 15-month, 18-month, or 21-month certificates. It's not uncommon for promotional rate CDs to have unusual durations, so don't limit yourself to only the conventional terms.
## Factors to Consider When Choosing a CD
When choosing a CD, consider the following factors:
* **Your goals**: Both short-term financial goals and long-term financial goals are important.
* **How much money you can deposit**: CDs have minimums, so if you only have $500 to deposit, you'll need to find a CD with that minimum balance requirement.
* **How long you can leave that money in the CD without touching it**: This will help you determine the right term—whether that's a 1-year CD or a 3-year CD.
* **Interest rates offered for your term and minimum deposit**: The higher the rate, the more you will earn on your deposit during the CD term.
* **CD type**: Is it a bump-up CD or a regular CD? This will ensure you're choosing one that meets your needs and goals.
Once you choose a CD, open the account, and deposit your money to start earning interest.
### Hilarey Gould, Senior Editorial Director for Financial Products and Services at Investopedia
When choosing an 18-month CD, be sure to review the early withdrawal penalty. If you think you might need to withdraw your money before the CD matures, look for a CD with a lower penalty so that you end up with the most money possible when you withdraw. If you are positive that you won't touch the money in the CD until maturity, you may feel comfortable opening a CD with a more expensive penalty.
## 18-Month CD Penalties and Fees
Almost all CDs—not just 18-month CDs—come with an early withdrawal penalty. That means that if you decide to take your money out of the CD before the date the CD matures, you have to pay some sort of fee. The fee is typically in the form of interest you have earned, such as three or six months' worth of interest.
For example, let's say you deposited $1,000 in an 18-month CD with a 5.00% APY. The total interest you would earn by keeping it in the CD for 18 months is $75.93. If the CD comes with an early withdrawal penalty worth six months of interest, then you would have to pay $25.31 if you decided to take your money out early.
Other than the early withdrawal penalty, CDs don't typically come with any other fees (though the banking institution may require some).
## How to Find the Best 18-Month CD Rates
This list includes the best 18-month CD rates, meaning that they are the highest 18-month CD rates nationwide. To find you the top 18-month CD rates, we look at hundreds of banks, credit unions, and other financial institutions every day and gather the CDs with the highest rates that are available nationwide, including CDs with terms of 15 to 20 months.
When looking for an 18-month CD, consider the amount of money you want to deposit, the interest rate on the CD, and the early withdrawal penalty. For example, if a 20-month CD offers a 5.00% interest rate on a $25,000 deposit, but a 12-month withdrawal penalty, you may want to compare it with a 15-month CD with the same deposit but a six-month withdrawal penalty.
This comparison is important to think about because if you need that money back sooner than maturity, you need to know what amount of interest you'll lose by withdrawing early. With that in mind, you'll need to first compare your options based on your deposit amount, then look at the rate and early withdrawal penalty.
### Note
CD rates are the same for everyone who applies to open a CD. Your credit score and other financial history and experience are not determining factors like they are with credit cards or loans. So even if you have [bad credit](https://www.investopedia.com/terms/b/bad-credit.asp), you can earn a high interest rate on your savings by locking it up in a CD for a period of time.
## How to Open an 18-Month CD
After you find the right CD for you, you'll need to apply to open the account. This may be easy if you're already a member of the bank or credit union. If you're not, you may need to open another savings account first, or apply to be a member of the credit union by joining another free or low-cost organization (the American Consumer Council is a popular one).
To open an 18-month CD, follow these steps:
1. Find the CD you want to open, whether online or in-person at the bank or credit union.
2. Have a current membership or relationship with the bank or credit union via an open account like a savings or a checking account, and/or through a non-profit organization (typically only applies to credit unions).
3. Fill out the application with your name, deposit amount, and other personal info.
4. Wait for approval.
5. Fund the CD and let your money earn interest. You may be able to send a check, wire the money, or electronically transfer it, depending on the institution.
6. Read the CD's terms. This fine print info will tell you the interest rate you'll be paid, the date of the CD's maturity, how often your interest will be paid and [compounded](https://www.investopedia.com/terms/c/compoundinterest.asp), and the early withdrawal penalty (if any) that you need to pay if you request to withdraw your money before maturity.
Once your 18-month CD is opened, it's a set-it-and-forget-it process to earn your interest. There are just two times when you may need to take action:
* **When you need your money back before maturity**: You'll likely pay an early withdrawal penalty and will need to withdraw the funds before transferring them into another account. Then the CD will be closed.
* **When your CD matures**: You may need to indicate if you want the CD to roll over into another CD at the institution or if you want the money withdrawn and deposited back into your other account.
## Compare the Best 18-Month CD Rates
| Institution | Rate (APY) | Term | Minimum Deposit | Early Withdrawal Penalty |
| --- | --- | --- | --- | --- |
| [NASA Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.40% | 15 months | $10,000 | All earned interest up to 6 months |
| [DR Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://drbank.com/rates/&lender=DR%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.25% | 15 months | $500 | 6 months of interest |
| [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) | 5.25% | 18–23 months | $500 | 9 months of interest ($50 minimum) |
| [State Department Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.20% | 15 months | $500 | All earned interest up to 6 months' worth |
| [FedChoice Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.fedchoice.org/checking-savings/share-certificates/&lender=FedChoice%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.15% | 15 months | $500 | 4 months of interest |
| [MYSB Direct](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mysafra.com/MYSB-Online-Offers&lender=MYSB%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.10% | 18 months | $500 | All earned interest (3 months minimum) |
| [Grow Financial Federal Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.01% | 12–17 months | $500 | 12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interest |
| [Northern Bank Direct](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://northernbankdirect.com/cds-all-rates&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 15 months | $500 | 12 months of interest |
| [Technology Credit Union](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 15 months | $1,000 | 6 months of interest |
| [Limelight Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://limelightbank.com/Certificates-of-Deposit/&lender=Limelight%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $1,000 | 3 months of interest |
| [Seattle Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $1,000 | 6 months of interest |
| [TAB Bank](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.tabbank.com/cd-rates-terms/&lender=TAB%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $1,000 | 6 months of interest |
| [Banesco USA](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $1,500 | 6 months of interest |
| [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) | 5.00% | 18 months | $2,500 | 6 months of interest |
| [LendingClub](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $2,500 | All interest earned on amount withdrawn |
| [My eBanc](https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ) | 5.00% | 18 months | $5,000 | 6 months of interest |
## Alternatives to 18-Month CDs
### 18-Month CDs vs. Other CD Terms
Anytime you're choosing a CD, a decision on the length of term is one of the most critical considerations. You'll want to select a term that you feel reasonably confident you can stick with so that you won't incur a penalty for withdrawing early.
Instead of an 18-month CD, you could choose a shorter certificate to limit the amount of time your funds are tied up, but you may have to settle for a slightly lower rate. The same is true if you go with a longer-term CD: rates could be lower than what you can earn on 18 months. It all depends on the current rate environment, so it's important that you shop around.
For example, if rates are higher now than you think they will be in the future, locking in one of today's rates for as long as possible can be a smart move, so that you'll retain your APY for a longer period than if you chose a shorter-term CD.
### CDs vs. Savings and Money Market Accounts
Instead of locking up your money in an 18-month CD, you can instead keep it in one of several types of liquid accounts. Keeping it in a checking account is one option, providing ultimate convenience and flexibility. But since checking accounts generally pay zero interest, it's a poor choice for your savings.
Opening a [top-paying high-yield savings account](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) or a [money market account](https://www.investopedia.com/best-money-market-accounts-5096917) is a better option, enabling you to earn a competitive return on your funds. The downside compared to a CD, however, is that savings and money market accounts pay a variable rate, which means that if interest rates go down in the future, so will the rate you're earning in these accounts.
The same is true for cash reserve and money market funds at brokerage firms. Many of these pay much lower rates than you can earn with a high-yield savings account at a top-paying bank. But even when the APY on a brokerage cash account is competitive, it too is a variable rate that you can't lock in like you can with a CD.
### CDs vs. US Savings Bonds & Treasuries
You could alternatively put your funds in U.S. savings bonds or Treasuries. The U.S. government offers two types of savings bonds: [EE bonds](https://www.investopedia.com/terms/s/serieseebond.asp) and [I bonds](https://www.investopedia.com/terms/s/seriesibond.asp). EE bonds offer a fixed interest rate that you'll know at the time of making your deposit decision, while I bonds offer a rate that changes every six months based on current inflation levels (hence, the name I bonds). These investments are exceptionally safe, but they do not allow a withdrawal within the first 12 months for any reason.
You can also lend money to the U.S. government by purchasing Treasury bonds. These are called [T-bills](https://www.investopedia.com/terms/t/treasurybill.asp) for durations of four weeks to one year, and [Treasury notes](https://www.investopedia.com/terms/t/treasurynote.asp) for durations of two to 10 years. Treasuries are considered one of the safest investments in the world, but their rates are not always as high as the best CDs or high-yield savings accounts.
## Where Are CD Rates Headed in 2024?
CD rates closely follow the fed funds rate, which the Federal Reserve held steady at its [most recent meeting](https://www.investopedia.com/what-todays-fed-news-tells-us-about-2024-savings-cd-rates-8641966) on April 30 and May 1. With the fed funds rate stagnant, CD rates are also marching in place. There is very little chance that the Fed will raise rates in 2024. If anything, the Fed will be more likely to lower rates, but that may only happen if and when inflation is under control. In April, [the inflation rate was 3.4%](https://www.investopedia.com/what-today-s-inflation-news-could-mean-for-cd-rates-8649152), down 1 basis point from March.
The Fed's next rate policy meeting is in June, but it's unlikely much will happen at that time. Fed funds futures traders are continually placing bets, which you can see with the CME Group’s FedWatch Tool. On May 17, the CME showed that a majority of traders predicted the first rate cut happen until September—three meetings away.
There's a chance the Fed could cut interest rates this year, but no one can know for sure. Rather than waiting to see if the Fed cuts rates, lock in a high CD rate now.
## Frequently Asked Questions
* ### What Are the Best CD Rates for 18 Months?
The best CD rates for an 18-month term will be anything over 5.00%. The best 18-month CD will come with a high rate, low early withdrawal penalty, and low minimum deposit required. Most of the top 18-month CDs have an early withdrawal penalty of three to six months and a minimum deposit of $500 or more.
* ### How Long Should You Keep Money in a CD?
You should aim to keep your money in a CD for as long as the CD term. Taking your money out before the term ends could result in paying an early withdrawal penalty, which means you'd lose out on some of the interest you earned. Since a CD is a fixed interest rate account, you know what you'll earn before you sign up and deposit money. You should calculate the early withdrawal penalty and what it would cost you if needed before you lock yourself into a CD. Additionally, after the CD term ends, you may want to roll the CD over into another CD, especially if rates are high and you don't need the money for something else.
* ### Do 18-Month CDs Beat Inflation?
An [18-month CD can help you hedge against high inflation](https://www.investopedia.com/4-savings-strategies-to-combat-inflation-8646027) because the rate you can earn may be more than the inflation rate. For example, in April 2024, the inflation rate was 3.4%. At that same time, 18-month CD rates paid over 5.00%. You can earn more on your savings with an 18-month CD to help combat the additional costs you'll incur thanks to inflation.
* ### When Is an 18-Month CD a Good Choice?
An 18-month CD is a suitable option for money you won't need in the coming year or longer. For those with a specific plan for the money, such as a down payment on a house or paying college tuition bills for a child, an 18-month CD might provide just the time frame you need to keep funds safe and reliably earning interest.
Another appeal of 18-month CDs is to provide one rung of a shortened [CD ladder](https://www.investopedia.com/terms/c/cd-ladder.asp). A CD ladder is a strategy for investing your funds in five CDs of differing terms rather than all at once. For a yearly ladder, you would own a 1-year, 2-year, 3-year, 4-year, and 5-year CD. But you can also create a shorter ladder, with six-month increments between the CDs (e.g., 6-month, 12-month, 18-month, etc.).
* ### Are Online Bank CDs Safe?
Many of the highest deposit rates, whether for CDs, savings accounts, or money market accounts, are offered by [online banks](https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp). Some of these are online-only banks, meaning they operate solely on the Internet, while others are brick-and-mortar banks with a separate online banking arm. Sometimes the online operations of physical banks even have an entirely different name and brand identity.
Though you may feel nervous depositing your funds into an Internet bank instead of at a physical branch, online accounts and institutions are just as safe as their more traditional counterparts. That's because FDIC insurance doesn't discriminate—the $250,000 in deposit insurance it provides consumers in case of bank failure applies equally to online and brick-and-mortar banks.
* ### Why Do Shorter CDs Sometimes Pay More Than Longer CDs?
Generally speaking, the shorter the CD term, the lower the interest rate paid by the bank, and vice versa. That's because the bank recognizes you need to be rewarded more substantially the longer you're being asked to leave the money on deposit.
However, not all institutions use a perfectly linear scale of interest rates that increase with the CD terms. A common strategy is offering one or more promotional CDs that pay a significantly higher interest rate to entice customers to the institution. To limit how long the bank is paying the boosted rate, promotional CDs are often shorter in duration, such as less than two years.
Another factor is that banks and credit unions decide their CD yields based on where they think the federal funds rate will be *in the future*. So when it's expected that future interest rates will be lower than today's rates, it's common to see short- or mid-term CDs paying the best rates.
* ### How Do You Build a CD Ladder?
A CD ladder enables you to access the higher rates typically offered on 5-year CDs, but with the twist that a portion of your money becomes available every year, rather than every five years. Here's how to do it.
1. Take the amount of money you want to invest in CDs and divide it by five.
2. Put one-fifth of the funds into a top-earning 1-year CD, another fifth into a top 2-year CD, another into a 3-year CD, and so forth through a 5-year CD. Let’s say you have $25,000 available. That would give you five CDs of varying lengths, each with a value of $5,000.
3. When the first CD matures in a year, you take the resulting funds and open a top-rate 5-year CD.
4. One year later, your initial 2-year CD will mature, and you'll invest those funds into another 5-year CD.
5. Continue doing this every year with whichever CD is maturing until you end up with a portfolio of five CDs all earning 5-year APYs, but with one of them maturing every 12 months, keeping your money a bit more accessible than if all of it were locked up for a full five years.
* ### Can You Lose Money in a CD?
You can't lose your principal when you deposit it in a CD. But you can lose out on interest in the CD if you withdraw it early. Most CDs come with an early withdrawal penalty ([but not all CDs have penalties](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp)) so if you take your money out of the account before the term is up, you may pay a price. CDs are federally insured though, so if you're worried about losing money in a CD due to a bank failure, you can rest assured that your money is backed by the FDIC or NCUA up to $250,000 per institution.
* ### Financial Institutions We Reviewed
We researched and reviewed over 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:
1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, [Ally Bank](https://www.investopedia.com/ally-bank-cd-rates-7483690), Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, [Barclays](https://www.investopedia.com/barclays-bank-cd-rates-7481049), BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, [BMO](https://www.investopedia.com/bmo-bank-cd-rates-7500022), BMO Alto, [BrioDirect](https://www.investopedia.com/briodirect-bank-review-5069892), Cadets Federal Credit Union, California Coast Credit Union, [Capital One](https://www.investopedia.com/capital-one-cd-rates-7480645), Capitol Federal Savings Bank, CD Bank, CFG Bank, [Chase Bank](https://www.investopedia.com/chase-cd-rates-7480360), Chevron Federal Credit Union, CIBC (Agility Banking), [CIT Bank](https://www.investopedia.com/cit-bank-cd-rates-7480633), [Citibank](https://www.investopedia.com/citibank-cd-rates-7482684), Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, [Bread Savings](https://www.investopedia.com/bread-savings-cd-rates-7488944), Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, [Discover Bank](https://www.investopedia.com/discover-bank-review-5069129), DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, [Fidelity Investments](https://www.investopedia.com/fidelity-cd-rates-7496602), Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by [Axos Bank](https://www.investopedia.com/axos-bank-review-4802090), [Navy Federal Credit Union](https://www.investopedia.com/navy-federal-cd-rates-7499476), nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, [PenFed Credit Union](https://www.investopedia.com/penfed-cd-rates-7497239), People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, [Popular Direct](https://www.investopedia.com/popular-direct-bank-review-5072550), Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, [Sallie Mae Bank](https://www.investopedia.com/sallie-mae-bank-cd-rates-7485414), Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, [Synchrony Bank](https://www.investopedia.com/synchrony-bank-cd-rates-7482657), TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, [Third Federal Savings & Loan](https://www.investopedia.com/third-federal-cd-rates-7498126), [EverBank](https://www.investopedia.com/everbank-cd-rates-7483667), TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, [US Bank](https://www.investopedia.com/us-bank-cd-rates-7497336), USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, [Vio Bank](https://www.investopedia.com/vio-bank-review-4842261), Virtual Bank, WebBank, Webster Bank, [Wells Fargo](https://www.investopedia.com/wells-fargo-cd-rates-7483593), Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, Umbrella Bank, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, [Bank of America](https://www.investopedia.com/bank-of-america-cd-rates-7498115), Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, [USAA](https://www.investopedia.com/usaa-bank-cd-rates-7483875), Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, [LendingClub](https://www.investopedia.com/lendingclub-banking-review-5071446), Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, [Vanguard](https://www.investopedia.com/vanguard-cd-rates-7496300), All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank.
## How We Find the Best 18-Month 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).
## Your Guide to CDs
* [What Is a Certificate of Deposit (CD)?](https://www.investopedia.com/terms/c/certificateofdeposit.asp)
* [What Is a Brokered CD?](https://www.investopedia.com/terms/b/brokered-cd.asp)
* [What Is a CD Ladder?](https://www.investopedia.com/terms/c/cd-ladder.asp)
* [Pros and Cons of CDs](https://www.investopedia.com/pros-and-cons-of-cds-5223947)
* [How to Invest With CDs](https://www.investopedia.com/how-to-invest-with-cds-4795661)
* [How to Open a CD](https://www.investopedia.com/how-to-open-a-cd-5225191)
* [How to Close a CD](https://www.investopedia.com/how-to-close-a-cd-5225194)
* [CDs vs. Annuities](https://www.investopedia.com/cds-vs-annuities-5235446)
* [CDs vs. Stocks](https://www.investopedia.com/cds-vs-stocks-5225343)
* [CDs vs. Mutual Funds](https://www.investopedia.com/cds-vs-mutual-funds-5225344)
* [CDs for ETFs](https://www.investopedia.com/cds-vs-etfs-5235444)
* [CDs vs. Savings Accounts](https://www.investopedia.com/cds-vs-savings-accounts-5270287)
* [Short-Term vs. Long-Term CDs](https://www.investopedia.com/short-term-vs-long-term-cd-terms-5270644)
* [CD Rates News](https://www.investopedia.com/certificates-deposit-news-7111770)
* [Best 1-Year CD Rates](https://www.investopedia.com/best-1-year-cd-rates-4796650)
* [Best Jumbo CD Rates](https://www.investopedia.com/best-jumbo-cd-rates-4797766)
* [Best 6-Month CD Rates](https://www.investopedia.com/best-6-month-cd-rates-4783267)
* [Best 3-Month CD Rates](https://www.investopedia.com/best-3-month-cd-rates-5272288)
* [Best Bank CD Rates](https://www.investopedia.com/best-bank-cd-rates-4801462)
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Investopedia / Alice Morgan
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. Federal Reserve. "[Federal Reserve Issues FOMC Statement](https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm)."
2. Bureau of Labor Statistics. "[Consumer Price Index](https://www.bls.gov/news.release/cpi.nr0.htm)."
3. NASA FCU. "[About Us](https://www.nasafcu.com/about-us)."
4. DR Bank. "[About Us](https://drbank.com/about/)."
5. Credit Human. "[About Us](https://www.credithuman.com/about-us/about-us)."
6. State Department Federal Credit Union. "[About Us](https://www.sdfcu.org/about-us)."
7. FedChoice Federal Credit Union. "[About FedChoice Federal Credit Union](https://www.fedchoice.org/about/)."
8. M.Y. Safra Bank. "[MYSB Direct Products](https://www.mysafra.com/MYSB-Online-Offers)."
9. National Credit Union Administration. "[Credit Union Details](https://mapping.ncua.gov/CreditUnionDetails/9976)."
10. Northern Bank Direct. "[Over 60 Years Helping Customers Meet Their Savings Goals](https://www.northernbankdirect.com/about)."
11. Northern Bank. "[Branch Locator](https://www.nbtc.com/locations)."
12. National Credit Union Administration. "[Credit Union Details](https://mapping.ncua.gov/CreditUnionDetails/68383)."
13. Limelight Bank. "[About](https://limelightbank.com/about/)."
14. Seattle Bank. "[Our Story](https://www.seattlebank.com/about/our-story.html)."
15. Seattle Bank. "[Location & Hours](https://www.seattlebank.com/about/location-hours.html)."
16. TAB Bank. "[About TAB Bank](https://www.tabbank.com/about-us/)."
17. Banesco USA. "[About Banesco USA](https://banescousa.com/about/)."
18. Newtek Bank. "[Newtek Bank FAQ](https://www.newtekbank.com/faq/)."
19. NewtekOne. "[About](https://www.newtekone.com/about/)."
20. NewtekOne. "[Get in Touch](https://www.newtekone.com/contact/)."
21. LendingClub. "[Contact Us](https://www.lendingclub.com/company/contact/corporate-headquarters)."
22. My eBanc. "[An Online Savings Bank](https://www.myebanc.com/about-us/)."
23. Federal Reserve. "[Monetary Policy](https://www.federalreserve.gov/monetarypolicy.htm)."
24. CME Group. "[CME FedWatch Tool](https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html)."
25. FDIC. "[Deposit Insurance](https://www.fdic.gov/resources/deposit-insurance/)."
Related Terms
[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)
[Add-On CDs: Meaning, Pros and Cons, Example](https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169)
Add-on CDs are specialty CDs that allow you to add more funds to your CD after the initial deposit. Learn whether an add-on or standard CD is a better choice for you.
[more](https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169)
[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)
[No-Penalty Certificate of Deposit (CD): What It Is, How It Works](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp)
A no-penalty certificate of deposit, also known as a liquid CD, allows investors to make early withdrawals without paying a penalty. But it also pays lower interest rates.
[more](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp)
[Variable-Rate Certificate of Deposit (CD): Meaning, Example, FAQs](https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp)
A variable-rate certificate of deposit is an investment product with relatively low risk, but its interest rate can fluctuate, unlike most standard CD, which have fixed rates.
[more](https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp)
[CD Ladder: How to Make One, Benefits, FAQ](https://www.investopedia.com/terms/c/cd-ladder.asp)
A CD ladder is a strategy in which an investor divides a sum of money into equal amounts and invests them in certificates of deposit (CDs) with different maturity dates.
[more](https://www.investopedia.com/terms/c/cd-ladder.asp)
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The best 18-month CD rate is 5.40% APY from NASA Federal Credit Union. The minimum deposit requirement to open this top 18-month CD is $10,000. CD rates are near historic highs, with the top 18-month CD rates ranging from 5.00% to 5.40% APY. To find you the best CD rates nationwide, we review CD rates from hundreds of banks and credit unions every weekday morning. The top CD rates in our rankings typically pay three to five times as much as the national average—or even more. Below are the top CD rates available from our partners, followed by the best 18-month CD rates we've found from our research that are available to U.S. customers everywhere.
In the News
The Fed held rates steady for a sixth consecutive time at its meeting ending on May 1. The 5.25% to 5.50% range is the highest it has been since 2001, and Fed officials noted in a statement that there has been a lack of recent progress toward the committee's goal of lowering inflation. Consumer prices rose 3.4% over the year in April. Officials don't foresee reducing the target range until they are confident inflation is moving toward 2%.
CD yields closely follow the fed funds rate. Back in October, CD rates reached peaks not seen in more than 20 years. But now, the Fed’s holding pattern has caused CD rates to plateau. Once it appears the Fed is ready to make a rate cut, rates on new CDs will fall.
Where more than one institution pays the same top rate, our rankings prioritize CDs by the shortest term, then the CD requiring the smallest minimum deposit. If there is still a tie, we then rank alphabetically by institution name.
Best 18-Month CD Rates
NASA Federal Credit Union – 5.40% APY
DR Bank – 5.25% APY
Credit Human – 5.25% APY
State Department Federal Credit Union – 5.20% APY
FedChoice Federal Credit Union – 5.15% APY
MYSB Direct – 5.10% APY
Grow Financial Federal Credit Union – 5.01% APY
Northern Bank Direct – 5.00% APY
Technology Credit Union – 5.00% APY
Limelight Bank – 5.00% APY
Seattle Bank – 5.00% APY
TAB Bank – 5.00% APY
Banesco USA – 5.00% APY
Newtek Bank – 5.00% APY
LendingClub – 5.00% APY
My eBanc – 5.00% APY
Tip
The annual percentage yield (APY) is the interest rate earned on an investment in one year, including compounding interest. A higher APY is better as your return will be higher.
Detailed information on these top-paying nationally available 18-month CDs is provided below, including specifics about minimum deposits and early withdrawal penalties. For credit union CDs, information is also provided on how to easily join the credit unions offering them.
Why You Can Trust Our Expert Recommendations for the Best 18-Month CD Rates
Investopedia collects thousands of CD rates from hundreds of banks and credit unions every weekday. When ranking CD rates, we look at factors like term, early withdrawal penalty, and minimum opening deposit. We also research banks and credit unions to provide unbiased, comprehensive reviews to ensure our readers make the right decisions for their needs. Investopedia launched in 1999 and has been helping readers find the best CD rates since 2019.
The CDs we recommend must be available nationwide and these certificates typically pay three to five times as much as the national average—or even more. To be eligible for our rankings, each CD's minimum opening deposit requirement cannot exceed $25,000 and must be offered by an FDIC-insured bank or NCUA-insured credit union (which covers up to $250,000 per depositor).
NASA Federal Credit Union – 5.40% APY
Term (months): 15Minimum deposit: $10,000Early-withdrawal penalty: All earned interest up to 6 monthsOverview: Anyone can join NASA FCU by signing up for a free membership in the National Space Society and holding $5 or more in a savings account. NASA FCU was founded in 1949 and is headquartered in Maryland.
DR Bank – 5.25% APY
Term (months): 15Minimum deposit: $500Early withdrawal penalty: 6 months of interestOverview: DR Bank was founded in 2006 in Connecticut, where it still operates two branches. Accounts are available nationally through digital banking.
Credit Human – 5.25% APY
Term (months): 18–23Minimum deposit: $500Early-withdrawal penalty: 9 months of interest ($50 minimum)Overview: Anyone can join Credit Human by agreeing to a complimentary membership in the nonprofit American Consumer Council and keeping at least $5 in a member savings account. The credit union is headquartered in San Antonio and dates back to 1935.
State Department Federal Credit Union – 5.20% APY
Term (months): 15Minimum deposit: $500Early withdrawal penalty: All earned interest up to 6 months' worthOverview: Anyone is eligible for membership with SDFCU by joining the nonprofit American Consumer Council. SDFCU was chartered in 1935 and is headquartered in Alexandria, Virginia.
FedChoice Federal Credit Union – 5.15% APY
Term (months): 15Minimum deposit: $500Early withdrawal penalty: 3 months of interestOverview: Anyone is eligible for membership by allowing FedChoice to make a donation on their behalf to the FedChoice Charitable Foundation and keeping a minimum balance of $5 in a savings account. Headquartered in Lanham, Maryland, FedChoice originally was established in 1935 to serve employees of the IRS.
MYSB Direct – 5.10% APY
Term (months): 18Minimum deposit: $500Early-withdrawal penalty: All earned interest (3 months minimum)About: MYSB Direct is the online banking arm of M.Y. Safra Bank, which is headquartered in New York City and operates a single branch there.
Grow Financial Federal Credit Union – 5.01 % APY
Term (months): 12–17 monthsMinimum deposit: $500Early withdrawal penalty: 12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interestOverview: Membership is available to anyone nationwide. Grow Financial was chartered in 1955 and is headquartered in Tampa, Florida.
Northern Bank Direct – 5.00% APY
Term (months): 15Minimum deposit: $500Early withdrawal penalty: 12 months of interestOverview: Northern Bank Direct is the online division of Northern Bank. FDIC-insured since 1960, Northern Bank is headquartered in Woburn, Massachusetts.
Technology Credit Union – 5.00% APY
Term (months): 15Minimum deposit: $1,000Early-withdrawal penalty: 6 months of interestOverview: Membership in the credit union is available to anyone who joins the Financial Fitness Association for $8, or one of several other affiliated organizations. Chartered in 1960, Technology Credit Union is headquartered in San Jose, California.
Limelight Bank – 5.00% APY
Term (months): 18Minimum deposit: $1,000Early withdrawal penalty: 3 months of interestOverview: Limelight is an internet-only division of Capital Community Bank, which was established in 1993 and operates five branches in Utah.
Seattle Bank – 5.00% APY
Term (months): 18Minimum deposit: $1,000Early withdrawal penalty: 6 months of interestOverview: Seattle Bank began as a mortgage company in the 1940s. It serves online customers across the country and operates a branch in downtown Seattle, Washington.
TAB Bank – 5.00% APY
Term (months): 18Minimum deposit: $1,000Early withdrawal penalty: 6 months of interestOverview: Established in 1998 with a sole location in Ogden, Utah, TAB Bank offers its line of banking products exclusively online.
Banesco USA – 5.00% APY
Term (months): 18Minimum deposit: $1,500Early withdrawal penalty: 6 months of interestOverview: Established in 2006, Banesco USA is a brick-and-mortar bank operating in Florida and Puerto Rico, with some of its products available online.
Newtek Bank – 5.00% APY
Term (months): 18
Minimum deposit: $2,500
Early withdrawal penalty: 6 months of interest
Overview: Newtek Bank is a subsidiary of Newtek One (NASDAQ: NEWT), a financial company that dates back to 2000. Newtek Bank is headquartered in Miami.
LendingClub – 5.00% APY
Term (months): 18Minimum deposit: $2,500Early withdrawal penalty: All interest earned on amount withdrawnOverview: LendingClub began operations as an online full-spectrum bank in 2007, with the parent company, LendingClub Bank, being an FDIC member since 1987. It is headquartered in San Francisco.
My eBanc – 5.00% APY
Term (months): 18Minimum deposit: $5,000Early withdrawal penalty: 6 months of interestOverview: My eBanc is an online banking arm of the brick-and-mortar institution BAC Florida Bank, established in 1973.
What Is an 18-Month CD and How Does It Work?
Certificates of deposit (CDs) are bank or credit union accounts in which you agree to hold your funds on deposit without withdrawals for a prearranged period. Thus, an 18-month CD requires you to keep the funds untouched for about a year and a half. For our rankings, we consider 18-month CDs to be anything with a term of 15 to 20 months.
In exchange for giving up access to your funds, you'll generally be rewarded with a higher interest rate than the bank pays on savings and money market accounts that allow flexible withdrawals.
When opening a CD, you deposit a lump sum of funds into the account at or above the minimum required deposit for that CD. The funds will then sit in the account for 18 months, earning interest along the way. When the CD hits its maturity date, you can take the funds plus their earned interest out of the account with no penalty.
Fast Fact
When asked in late April what they would invest in if they had an extra $10,000, 12% of Investopedia readers said they would open a CD. Back in December and January, 11% and 9% of readers (respectively) said they’d invest extra funds in CDs, with that share dipping even further to 8% in March. While CDs sit below individual stocks as the top response (at 19%), CDs are always a good option for those looking for safer investments.
Pros and Cons of 18-Month CDs
Pros
Offers a guaranteed rate for 18 months: No matter what happens with the Federal Reserve and interest rates, the bank cannot change the APY you secure when you sign your CD agreement and make your deposit.May pay a higher APY than other terms: Shopping around is critical, as rates can vary widely across institutions and also across different CD lengths.Pays reliable and predictable earnings: Because your CD rate is fixed and your term is known, you can calculate exactly how much your earnings will amount to once the CD matures.Is safe and virtually risk-free: CDs opened at an FDIC bank or NCUA credit union are federally insured, protecting up to $250,000 of your deposits in the unlikely event that the institution fails.Can deter the temptation to spend since funds are tied up: Withdrawing your funds before the CD matures will trigger an early withdrawal penalty, which may be enough to stop you from pulling the funds out for unplanned spending.
Cons
Incurs a penalty if you withdraw early: Every bank and credit union specifies their policy on how they'll calculate your penalty if you don't keep your CD funds deposited until maturity. Typically, the penalty is a number of months' interest that you'll forfeit.Allows only one deposit amount: With most CDs, you get one chance to decide how much you want to invest in the certificate. Additional deposits are generally not allowed.If rates fall, you may wish you'd opted for a longer term: Investing in a longer CD would have allowed you to retain a good rate for a longer period of timeIf rates rise, you'll be locked at a lower rate until maturity: If you lock into an 18-month CD and then rates rise, you'll be stuck with your current rate until you can withdraw your funds.
Important
Though consumers tend to think about CD maturity terms in nice round numbers, be sure to consider odd-term CDs, such as 15-month, 18-month, or 21-month certificates. It's not uncommon for promotional rate CDs to have unusual durations, so don't limit yourself to only the conventional terms.
Factors to Consider When Choosing a CD
When choosing a CD, consider the following factors:
Your goals: Both short-term financial goals and long-term financial goals are important.How much money you can deposit: CDs have minimums, so if you only have $500 to deposit, you'll need to find a CD with that minimum balance requirement.How long you can leave that money in the CD without touching it: This will help you determine the right term—whether that's a 1-year CD or a 3-year CD.Interest rates offered for your term and minimum deposit: The higher the rate, the more you will earn on your deposit during the CD term.CD type: Is it a bump-up CD or a regular CD? This will ensure you're choosing one that meets your needs and goals.
Once you choose a CD, open the account, and deposit your money to start earning interest.
Hilarey Gould, Senior Editorial Director for Financial Products and Services at Investopedia
When choosing an 18-month CD, be sure to review the early withdrawal penalty. If you think you might need to withdraw your money before the CD matures, look for a CD with a lower penalty so that you end up with the most money possible when you withdraw. If you are positive that you won't touch the money in the CD until maturity, you may feel comfortable opening a CD with a more expensive penalty.
18-Month CD Penalties and Fees
Almost all CDs—not just 18-month CDs—come with an early withdrawal penalty. That means that if you decide to take your money out of the CD before the date the CD matures, you have to pay some sort of fee. The fee is typically in the form of interest you have earned, such as three or six months' worth of interest.
For example, let's say you deposited $1,000 in an 18-month CD with a 5.00% APY. The total interest you would earn by keeping it in the CD for 18 months is $75.93. If the CD comes with an early withdrawal penalty worth six months of interest, then you would have to pay $25.31 if you decided to take your money out early.
Other than the early withdrawal penalty, CDs don't typically come with any other fees (though the banking institution may require some).
How to Find the Best 18-Month CD Rates
This list includes the best 18-month CD rates, meaning that they are the highest 18-month CD rates nationwide. To find you the top 18-month CD rates, we look at hundreds of banks, credit unions, and other financial institutions every day and gather the CDs with the highest rates that are available nationwide, including CDs with terms of 15 to 20 months.
When looking for an 18-month CD, consider the amount of money you want to deposit, the interest rate on the CD, and the early withdrawal penalty. For example, if a 20-month CD offers a 5.00% interest rate on a $25,000 deposit, but a 12-month withdrawal penalty, you may want to compare it with a 15-month CD with the same deposit but a six-month withdrawal penalty.
This comparison is important to think about because if you need that money back sooner than maturity, you need to know what amount of interest you'll lose by withdrawing early. With that in mind, you'll need to first compare your options based on your deposit amount, then look at the rate and early withdrawal penalty.
Note
CD rates are the same for everyone who applies to open a CD. Your credit score and other financial history and experience are not determining factors like they are with credit cards or loans. So even if you have bad credit, you can earn a high interest rate on your savings by locking it up in a CD for a period of time.
How to Open an 18-Month CD
After you find the right CD for you, you'll need to apply to open the account. This may be easy if you're already a member of the bank or credit union. If you're not, you may need to open another savings account first, or apply to be a member of the credit union by joining another free or low-cost organization (the American Consumer Council is a popular one).
To open an 18-month CD, follow these steps:
Find the CD you want to open, whether online or in-person at the bank or credit union.
Have a current membership or relationship with the bank or credit union via an open account like a savings or a checking account, and/or through a non-profit organization (typically only applies to credit unions).
Fill out the application with your name, deposit amount, and other personal info.
Wait for approval.
Fund the CD and let your money earn interest. You may be able to send a check, wire the money, or electronically transfer it, depending on the institution.
Read the CD's terms. This fine print info will tell you the interest rate you'll be paid, the date of the CD's maturity, how often your interest will be paid and compounded, and the early withdrawal penalty (if any) that you need to pay if you request to withdraw your money before maturity.
Once your 18-month CD is opened, it's a set-it-and-forget-it process to earn your interest. There are just two times when you may need to take action:
When you need your money back before maturity: You'll likely pay an early withdrawal penalty and will need to withdraw the funds before transferring them into another account. Then the CD will be closed.When your CD matures: You may need to indicate if you want the CD to roll over into another CD at the institution or if you want the money withdrawn and deposited back into your other account.
Compare the Best 18-Month CD Rates
Institution
Rate (APY)
Term
Minimum Deposit
Early Withdrawal Penalty
NASA Federal Credit Union
5.40%
15 months
$10,000
All earned interest up to 6 months
DR Bank
5.25%
15 months
$500
6 months of interest
Credit Human
5.25%
18–23 months
$500
9 months of interest ($50 minimum)
State Department Federal Credit Union
5.20%
15 months
$500
All earned interest up to 6 months' worth
FedChoice Federal Credit Union
5.15%
15 months
$500
4 months of interest
MYSB Direct
5.10%
18 months
$500
All earned interest (3 months minimum)
Grow Financial Federal Credit Union
5.01%
12–17 months
$500
12-month term is 3 months of interest; 13- to 17-month terms are 6 months of interest
Northern Bank Direct
5.00%
15 months
$500
12 months of interest
Technology Credit Union
5.00%
15 months
$1,000
6 months of interest
Limelight Bank
5.00%
18 months
$1,000
3 months of interest
Seattle Bank
5.00%
18 months
$1,000
6 months of interest
TAB Bank
5.00%
18 months
$1,000
6 months of interest
Banesco USA
5.00%
18 months
$1,500
6 months of interest
Newtek Bank
5.00%
18 months
$2,500
6 months of interest
LendingClub
5.00%
18 months
$2,500
All interest earned on amount withdrawn
My eBanc
5.00%
18 months
$5,000
6 months of interest
Alternatives to 18-Month CDs
18-Month CDs vs. Other CD Terms
Anytime you're choosing a CD, a decision on the length of term is one of the most critical considerations. You'll want to select a term that you feel reasonably confident you can stick with so that you won't incur a penalty for withdrawing early.
Instead of an 18-month CD, you could choose a shorter certificate to limit the amount of time your funds are tied up, but you may have to settle for a slightly lower rate. The same is true if you go with a longer-term CD: rates could be lower than what you can earn on 18 months. It all depends on the current rate environment, so it's important that you shop around.
For example, if rates are higher now than you think they will be in the future, locking in one of today's rates for as long as possible can be a smart move, so that you'll retain your APY for a longer period than if you chose a shorter-term CD.
CDs vs. Savings and Money Market Accounts
Instead of locking up your money in an 18-month CD, you can instead keep it in one of several types of liquid accounts. Keeping it in a checking account is one option, providing ultimate convenience and flexibility. But since checking accounts generally pay zero interest, it's a poor choice for your savings.
Opening a top-paying high-yield savings account or a money market account is a better option, enabling you to earn a competitive return on your funds. The downside compared to a CD, however, is that savings and money market accounts pay a variable rate, which means that if interest rates go down in the future, so will the rate you're earning in these accounts.
The same is true for cash reserve and money market funds at brokerage firms. Many of these pay much lower rates than you can earn with a high-yield savings account at a top-paying bank. But even when the APY on a brokerage cash account is competitive, it too is a variable rate that you can't lock in like you can with a CD.
CDs vs. US Savings Bonds & Treasuries
You could alternatively put your funds in U.S. savings bonds or Treasuries. The U.S. government offers two types of savings bonds: EE bonds and I bonds. EE bonds offer a fixed interest rate that you'll know at the time of making your deposit decision, while I bonds offer a rate that changes every six months based on current inflation levels (hence, the name I bonds). These investments are exceptionally safe, but they do not allow a withdrawal within the first 12 months for any reason.
You can also lend money to the U.S. government by purchasing Treasury bonds. These are called T-bills for durations of four weeks to one year, and Treasury notes for durations of two to 10 years. Treasuries are considered one of the safest investments in the world, but their rates are not always as high as the best CDs or high-yield savings accounts.
Where Are CD Rates Headed in 2024?
CD rates closely follow the fed funds rate, which the Federal Reserve held steady at its most recent meeting on April 30 and May 1. With the fed funds rate stagnant, CD rates are also marching in place. There is very little chance that the Fed will raise rates in 2024. If anything, the Fed will be more likely to lower rates, but that may only happen if and when inflation is under control. In April, the inflation rate was 3.4%, down 1 basis point from March.
The Fed's next rate policy meeting is in June, but it's unlikely much will happen at that time. Fed funds futures traders are continually placing bets, which you can see with the CME Group’s FedWatch Tool. On May 17, the CME showed that a majority of traders predicted the first rate cut happen until September—three meetings away.
There's a chance the Fed could cut interest rates this year, but no one can know for sure. Rather than waiting to see if the Fed cuts rates, lock in a high CD rate now.
Frequently Asked Questions
What Are the Best CD Rates for 18 Months?
The best CD rates for an 18-month term will be anything over 5.00%. The best 18-month CD will come with a high rate, low early withdrawal penalty, and low minimum deposit required. Most of the top 18-month CDs have an early withdrawal penalty of three to six months and a minimum deposit of $500 or more.
How Long Should You Keep Money in a CD?
You should aim to keep your money in a CD for as long as the CD term. Taking your money out before the term ends could result in paying an early withdrawal penalty, which means you'd lose out on some of the interest you earned. Since a CD is a fixed interest rate account, you know what you'll earn before you sign up and deposit money. You should calculate the early withdrawal penalty and what it would cost you if needed before you lock yourself into a CD. Additionally, after the CD term ends, you may want to roll the CD over into another CD, especially if rates are high and you don't need the money for something else.
Do 18-Month CDs Beat Inflation?
An 18-month CD can help you hedge against high inflation because the rate you can earn may be more than the inflation rate. For example, in April 2024, the inflation rate was 3.4%. At that same time, 18-month CD rates paid over 5.00%. You can earn more on your savings with an 18-month CD to help combat the additional costs you'll incur thanks to inflation.
When Is an 18-Month CD a Good Choice?
An 18-month CD is a suitable option for money you won't need in the coming year or longer. For those with a specific plan for the money, such as a down payment on a house or paying college tuition bills for a child, an 18-month CD might provide just the time frame you need to keep funds safe and reliably earning interest.Another appeal of 18-month CDs is to provide one rung of a shortened CD ladder. A CD ladder is a strategy for investing your funds in five CDs of differing terms rather than all at once. For a yearly ladder, you would own a 1-year, 2-year, 3-year, 4-year, and 5-year CD. But you can also create a shorter ladder, with six-month increments between the CDs (e.g., 6-month, 12-month, 18-month, etc.).
Are Online Bank CDs Safe?
Many of the highest deposit rates, whether for CDs, savings accounts, or money market accounts, are offered by online banks. Some of these are online-only banks, meaning they operate solely on the Internet, while others are brick-and-mortar banks with a separate online banking arm. Sometimes the online operations of physical banks even have an entirely different name and brand identity.Though you may feel nervous depositing your funds into an Internet bank instead of at a physical branch, online accounts and institutions are just as safe as their more traditional counterparts. That's because FDIC insurance doesn't discriminate—the $250,000 in deposit insurance it provides consumers in case of bank failure applies equally to online and brick-and-mortar banks.
Why Do Shorter CDs Sometimes Pay More Than Longer CDs?
Generally speaking, the shorter the CD term, the lower the interest rate paid by the bank, and vice versa. That's because the bank recognizes you need to be rewarded more substantially the longer you're being asked to leave the money on deposit.However, not all institutions use a perfectly linear scale of interest rates that increase with the CD terms. A common strategy is offering one or more promotional CDs that pay a significantly higher interest rate to entice customers to the institution. To limit how long the bank is paying the boosted rate, promotional CDs are often shorter in duration, such as less than two years.Another factor is that banks and credit unions decide their CD yields based on where they think the federal funds rate will be in the future. So when it's expected that future interest rates will be lower than today's rates, it's common to see short- or mid-term CDs paying the best rates.
How Do You Build a CD Ladder?
A CD ladder enables you to access the higher rates typically offered on 5-year CDs, but with the twist that a portion of your money becomes available every year, rather than every five years. Here's how to do it.Take the amount of money you want to invest in CDs and divide it by five.Put one-fifth of the funds into a top-earning 1-year CD, another fifth into a top 2-year CD, another into a 3-year CD, and so forth through a 5-year CD. Let’s say you have $25,000 available. That would give you five CDs of varying lengths, each with a value of $5,000.When the first CD matures in a year, you take the resulting funds and open a top-rate 5-year CD.One year later, your initial 2-year CD will mature, and you'll invest those funds into another 5-year CD.Continue doing this every year with whichever CD is maturing until you end up with a portfolio of five CDs all earning 5-year APYs, but with one of them maturing every 12 months, keeping your money a bit more accessible than if all of it were locked up for a full five years.
Can You Lose Money in a CD?
You can't lose your principal when you deposit it in a CD. But you can lose out on interest in the CD if you withdraw it early. Most CDs come with an early withdrawal penalty (but not all CDs have penalties) so if you take your money out of the account before the term is up, you may pay a price. CDs are federally insured though, so if you're worried about losing money in a CD due to a bank failure, you can rest assured that your money is backed by the FDIC or NCUA up to $250,000 per institution.
Financial Institutions We Reviewed
We researched and reviewed over 250 banks, credit unions, and financial institutions to find the best CD rates you see above on this list. While we write individual reviews for most, we do not always write reviews for those we would not recommend. Below are the banks, credit unions, and financial institutions we researched along with links to individual company reviews to help you learn more before making a decision:1st Source Bank, 5star Bank, ableBanking, Abound Credit Union, Achieva Credit Union, Affinity Federal Credit Union, Affinity Plus Federal Credit Union, Air Force Federal Credit Union, Alabama Credit Union, Allegacy Federal Credit Union, Alliant Credit Union, Ally Bank, Amerant Bank, American 1 Credit Union, American Express, American Heritage Credit Union, Andrews Federal Credit Union, Apple Federal Credit Union, Banco do Brasil Americas, Banesco USA, Bank of Baroda, Bank5 Connect, Bank7, Texas Capital Bank, bankESB (Easthampton Savings Bank), BankUnitedDirect, Barclays, BBVA Bank, Bellco Credit Union, Blue Federal Credit Union, BMO, BMO Alto, BrioDirect, Cadets Federal Credit Union, California Coast Credit Union, Capital One, Capitol Federal Savings Bank, CD Bank, CFG Bank, Chase Bank, Chevron Federal Credit Union, CIBC (Agility Banking), CIT Bank, Citibank, Citizens Access, Citizens Trust Bank, Colorado Federal Savings Bank, Bread Savings, Communitywide Federal Credit Union, ConnectOne Bank, Connexus Credit Union, Consumers Credit Union, Corporate America Federal Credit Union (CAFCU), Credit Union of Denver, Credit Union of the Rockies, Digital, Federal Credit Union, Discover Bank, DollarSavingsDirect, Dover Federal Credit Union, Dow Credit Union, Evergreen Bank Group, RocklandTrust Bank, Elements Financial, EmigrantDirect.com, Liberty Federal Credit Union, Fidelity Investments, Financial Partners Credit Union, Financial Resources Federal Credit Union, First Financial Credit Union, First Financial Northwest Bank, First Internet Bank, First National Bank of America, First Technology Federal Credit Union, Fort Bragg Federal Credit Union, Garden Savings Federal Credit Union, Georgia Banking Company, Georgia's Own Credit Union, GreenState Credit Union, Greenwood Credit Union, Grow Financial Federal Credit Union, GTE Financial, Gulf Coast Bank & Trust Company, Hanscom Federal Credit Union, Heritage Bank, Hiway Federal Credit Union, Home Loan Investment Bank, Home Savings Bank, Hope Credit Union, HSBC Direct, Hughes Federal Credit Union, Hyperion Bank, Ideal Credit Union, iGObanking, Interior Federal Credit Union, Justice Federal Credit Union, Kinecta Federal Credit Union, KS State Bank, La Capitol Federal Credit Union, Lafayette Federal Credit Union, Lake Michigan Credit Union, Langley Federal Credit Union, Latino Community Credit Union, Limelight Bank, Live Oak Bank, Luther Burbank Savings, MYSB Direct, MAC Federal Credit Union, Main Street Bank, MainStreet Bank, MapleMark Bank, Marcus by Goldman Sachs, Market USA Federal Credit Union, Matadors Community Credit Union, MECU Credit Union, Merrick Bank, Michigan State University Federal Credit Union, Mills42 Federal Credit Union, Mountain America Credit Union, MTC Federal Credit Union, MutualOne Bank, My Banking Direct, My eBanc, My Savings Direct, NASA Federal Credit Union, Nationwide by Axos Bank, Navy Federal Credit Union, nbkc, NexBank, North Country Savings Bank, Northern Bank Direct, Northfield Bank, Northpointe Bank, Nuvision Federal Credit Union, Oklahoma Central Credit Union, One American Bank, OneUnited Bank, Pacific National Bank, Paramount Bank, PARDA Federal Credit Union, Partner Colorado Credit Union, Patelco Credit Union, Pen Air Federal Credit Union, PenFed Credit Union, People's Credit Union, First Service Credit Union, Pinnacle Federal Credit Union, Popular Direct, Premier America Credit Union, Presidential Bank, FSB, Prime Alliance Bank, PSECU (Pennsylvania State Employees Credit Union), Quontic Bank, Quorum Federal Credit Union, Rising Bank, Merrimack Valley Credit Union, Salal Credit Union, Sallie Mae Bank, Santa Clara County Federal Credit Union, Signature Federal Credit Union, Spectrum Credit Union, SRP Federal Credit Union, State Bank of India Chicago, State Bank of India New York, State Bank of Texas, State Department Federal Credit Union, Summit Credit Union, Sun East Federal Credit Union, Superior Choice Credit Union, Synchrony Bank, TAB Bank, Teachers Federal Credit Union, Technology Credit Union, The Federal Savings Bank, Third Federal Savings & Loan, EverBank, TotalDirectBank, Transportation Federal Credit Union, TruStone Financial Credit Union, UNIFY Financial Credit Union, Expedition Credit Union, United States Senate Federal Credit Union, United Texas Bank, University Federal Credit Union, US Bank, USAlliance Financial, USPS Federal Credit Union, Velocity Credit Union, VeraBank, Vio Bank, Virtual Bank, WebBank, Webster Bank, Wells Fargo, Western Vista Credit Union, Wings Financial Credit Union, XCEL Federal Credit Union, BankPurely, Umbrella Bank, giantbank.com, CapEd Credit Union, Zeal Credit Union, Finworth, Coastal1 Credit Union, Service Credit Union, National Cooperative Bank, Premier Members Credit Union, Bank of America, Flagstar Bank, 1st MidAmerica Credit Union, INOVA Federal Credit Union, Genisys Credit Union, Ivy Bank, Heartland Credit Union, Luana Savings Bank, Spectra Credit Union, Workers Credit Union, Credit Human, EFCU Financial, Poppy Bank, Credit One Bank, Vibrant Credit Union, CFBank, Department of Commerce Federal Credit Union, Seattle Bank, Crescent Bank, Pima Federal Credit Union, Cross River Bank, USAA, Great River Federal Credit Union, Brilliant Bank, Merchants Bank of Indiana, LendingClub, Chartway Credit Union, First Central Savings Bank, AgFed Credit Union, North American Savings Bank, Pelican State Credit Union, First Community Credit Union, Bask Bank, Skyla Credit Union, SkyOne Federal Credit Union, 3Rivers Federal Credit Union, Utah First Credit Union, Pasadena Federal Credit Union, Magnifi Financial, AloStar, Primis Bank, Farmers Insurance Federal Credit Union, Tampa Bay Federal Credit Union, Veridian Credit Union, Republic Bank, Salem Five Direct, All In Credit Union, Bethpage Federal Credit Union, Self-Help Federal Credit Union, Forbright Bank, Jovia Financial Credit Union, Sun Canyon Bank, Fortera Credit Union, Partners 1st Federal Credit Union, SouthEast Bank, American Bank, Newtek Bank, CBC Federal Credit Union, Vanguard, All America Bank, Amalgamated Bank, Citizens State Bank, AmBoy Direct, Republic Bank of Chicago, Oklahoma Community Credit Union, BluPeak Credit Union, Valley Direct, Bayer Heritage Federal Credit Union, First Harvest Credit Union, Orion Federal Credit Union, Wellby Financial, FedChoice Federal Credit Union, CoVantage Credit Union, Choice First Bank, Sandia Area Federal Credit Union, OMB Bank, Minnequa Works Credit Union, Securityplus Federal Credit Union, Bank of South Texas, T Bank.
How We Find the Best 18-Month 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.
Your Guide to CDs
What Is a Certificate of Deposit (CD)?
What Is a Brokered CD?
What Is a CD Ladder?
Pros and Cons of CDs
How to Invest With CDs
How to Open a CD
How to Close a CD
CDs vs. Annuities
CDs vs. Stocks
CDs vs. Mutual Funds
CDs for ETFs
CDs vs. Savings Accounts
Short-Term vs. Long-Term CDs
CD Rates News
Best 1-Year CD Rates
Best Jumbo CD Rates
Best 6-Month CD Rates
Best 3-Month CD Rates
Best Bank CD Rates
Investopedia / Alice Morgan
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.
Federal Reserve. "Federal Reserve Issues FOMC Statement."
Bureau of Labor Statistics. "Consumer Price Index."
NASA FCU. "About Us."
DR Bank. "About Us."
Credit Human. "About Us."
State Department Federal Credit Union. "About Us."
FedChoice Federal Credit Union. "About FedChoice Federal Credit Union."
M.Y. Safra Bank. "MYSB Direct Products."
National Credit Union Administration. "Credit Union Details."
Northern Bank Direct. "Over 60 Years Helping Customers Meet Their Savings Goals."
Northern Bank. "Branch Locator."
National Credit Union Administration. "Credit Union Details."
Limelight Bank. "About."
Seattle Bank. "Our Story."
Seattle Bank. "Location & Hours."
TAB Bank. "About TAB Bank."
Banesco USA. "About Banesco USA."
Newtek Bank. "Newtek Bank FAQ."
NewtekOne. "About."
NewtekOne. "Get in Touch."
LendingClub. "Contact Us."
My eBanc. "An Online Savings Bank."
Federal Reserve. "Monetary Policy."
CME Group. "CME FedWatch Tool."
FDIC. "Deposit Insurance."
Related Terms
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
Add-On CDs: Meaning, Pros and Cons, Example
Add-on CDs are specialty CDs that allow you to add more funds to your CD after the initial deposit. Learn whether an add-on or standard CD is a better choice for you.
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
No-Penalty Certificate of Deposit (CD): What It Is, How It Works
A no-penalty certificate of deposit, also known as a liquid CD, allows investors to make early withdrawals without paying a penalty. But it also pays lower interest rates.
more
Variable-Rate Certificate of Deposit (CD): Meaning, Example, FAQs
A variable-rate certificate of deposit is an investment product with relatively low risk, but its interest rate can fluctuate, unlike most standard CD, which have fixed rates.
more
CD Ladder: How to Make One, Benefits, FAQ
A CD ladder is a strategy in which an investor divides a sum of money into equal amounts and invests them in certificates of deposit (CDs) with different maturity dates.
more
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"My eBanc – 5.00% APY",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
],
[
"maturity date",
"https://www.investopedia.com/terms/m/maturity.asp"
],
[
"12% of Investopedia readers",
"https://www.investopedia.com/investors-aren-t-worried-right-now-but-they-re-not-buying-either-8642075"
],
[
"bad credit",
"https://www.investopedia.com/terms/b/bad-credit.asp"
],
[
"compounded",
"https://www.investopedia.com/terms/c/compoundinterest.asp"
],
[
"NASA Federal Credit Union",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nasafcu.com/personal/checking-savings/certificates/certificates---rates&lender=NASA%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
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[
"Credit Human",
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[
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"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.sdfcu.org/share-certificates&lender=State%20Department%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
"FedChoice Federal Credit Union",
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[
"MYSB Direct",
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[
"Grow Financial Federal Credit Union",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.growfinancial.org/membership/way-better-rates/&lender=Grow%20Financial%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
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[
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"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.techcu.com/Personal/Accounts/Savings/Certificates/&lender=Technology%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
"Seattle Bank",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.seattlebank.com/deposit-rates.html&lender=Seattle%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
"TAB Bank",
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[
"Banesco USA",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://banescousa.com/personal/products/banesmart-certificates-of-deposit/&lender=Banesco%20USA&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
],
[
"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"
],
[
"LendingClub",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lendingclub.com/personal/certificate-of-deposit&lender=LendingClub&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
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[
"My eBanc",
"https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.myebanc.com/online-products/online-time-deposits/&lender=My%20eBanc&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ"
],
[
"top-paying high-yield savings account",
"https://www.investopedia.com/best-high-yield-savings-accounts-4770633"
],
[
"money market account",
"https://www.investopedia.com/best-money-market-accounts-5096917"
],
[
"EE bonds",
"https://www.investopedia.com/terms/s/serieseebond.asp"
],
[
"I bonds",
"https://www.investopedia.com/terms/s/seriesibond.asp"
],
[
"T-bills",
"https://www.investopedia.com/terms/t/treasurybill.asp"
],
[
"Treasury notes",
"https://www.investopedia.com/terms/t/treasurynote.asp"
],
[
"most recent meeting",
"https://www.investopedia.com/what-todays-fed-news-tells-us-about-2024-savings-cd-rates-8641966"
],
[
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"https://www.investopedia.com/what-today-s-inflation-news-could-mean-for-cd-rates-8649152"
],
[
"18-month CD can help you hedge against high inflation",
"https://www.investopedia.com/4-savings-strategies-to-combat-inflation-8646027"
],
[
"CD ladder",
"https://www.investopedia.com/terms/c/cd-ladder.asp"
],
[
"online banks",
"https://www.investopedia.com/articles/pf/11/benefits-and-drawbacks-of-internet-banks.asp"
],
[
"but not all CDs have penalties",
"https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp"
],
[
"Ally Bank",
"https://www.investopedia.com/ally-bank-cd-rates-7483690"
],
[
"Barclays",
"https://www.investopedia.com/barclays-bank-cd-rates-7481049"
],
[
"BMO",
"https://www.investopedia.com/bmo-bank-cd-rates-7500022"
],
[
"BrioDirect",
"https://www.investopedia.com/briodirect-bank-review-5069892"
],
[
"Capital One",
"https://www.investopedia.com/capital-one-cd-rates-7480645"
],
[
"Chase Bank",
"https://www.investopedia.com/chase-cd-rates-7480360"
],
[
"CIT Bank",
"https://www.investopedia.com/cit-bank-cd-rates-7480633"
],
[
"Citibank",
"https://www.investopedia.com/citibank-cd-rates-7482684"
],
[
"Bread Savings",
"https://www.investopedia.com/bread-savings-cd-rates-7488944"
],
[
"Discover Bank",
"https://www.investopedia.com/discover-bank-review-5069129"
],
[
"Fidelity Investments",
"https://www.investopedia.com/fidelity-cd-rates-7496602"
],
[
"Axos Bank",
"https://www.investopedia.com/axos-bank-review-4802090"
],
[
"Navy Federal Credit Union",
"https://www.investopedia.com/navy-federal-cd-rates-7499476"
],
[
"PenFed Credit Union",
"https://www.investopedia.com/penfed-cd-rates-7497239"
],
[
"Popular Direct",
"https://www.investopedia.com/popular-direct-bank-review-5072550"
],
[
"Sallie Mae Bank",
"https://www.investopedia.com/sallie-mae-bank-cd-rates-7485414"
],
[
"Synchrony Bank",
"https://www.investopedia.com/synchrony-bank-cd-rates-7482657"
],
[
"Third Federal Savings & Loan",
"https://www.investopedia.com/third-federal-cd-rates-7498126"
],
[
"EverBank",
"https://www.investopedia.com/everbank-cd-rates-7483667"
],
[
"US Bank",
"https://www.investopedia.com/us-bank-cd-rates-7497336"
],
[
"Vio Bank",
"https://www.investopedia.com/vio-bank-review-4842261"
],
[
"Wells Fargo",
"https://www.investopedia.com/wells-fargo-cd-rates-7483593"
],
[
"Bank of America",
"https://www.investopedia.com/bank-of-america-cd-rates-7498115"
],
[
"USAA",
"https://www.investopedia.com/usaa-bank-cd-rates-7483875"
],
[
"LendingClub",
"https://www.investopedia.com/lendingclub-banking-review-5071446"
],
[
"Vanguard",
"https://www.investopedia.com/vanguard-cd-rates-7496300"
],
[
"FDIC",
"https://www.investopedia.com/terms/f/fdic-insured-account.asp"
],
[
"NCUA",
"https://www.investopedia.com/terms/n/ncua-insured-institution.asp"
],
[
"read our full methodology",
"https://www.investopedia.com/methodology-for-savings-accounts-and-certificates-of-deposit-rankings-7255816"
],
[
"What Is a Certificate of Deposit (CD)?",
"https://www.investopedia.com/terms/c/certificateofdeposit.asp"
],
[
"What Is a Brokered CD?",
"https://www.investopedia.com/terms/b/brokered-cd.asp"
],
[
"What Is a CD Ladder?",
"https://www.investopedia.com/terms/c/cd-ladder.asp"
],
[
"Pros and Cons of CDs",
"https://www.investopedia.com/pros-and-cons-of-cds-5223947"
],
[
"How to Invest With CDs",
"https://www.investopedia.com/how-to-invest-with-cds-4795661"
],
[
"How to Open a CD",
"https://www.investopedia.com/how-to-open-a-cd-5225191"
],
[
"How to Close a CD",
"https://www.investopedia.com/how-to-close-a-cd-5225194"
],
[
"CDs vs. Annuities",
"https://www.investopedia.com/cds-vs-annuities-5235446"
],
[
"CDs vs. Stocks",
"https://www.investopedia.com/cds-vs-stocks-5225343"
],
[
"CDs vs. Mutual Funds",
"https://www.investopedia.com/cds-vs-mutual-funds-5225344"
],
[
"CDs for ETFs",
"https://www.investopedia.com/cds-vs-etfs-5235444"
],
[
"CDs vs. Savings Accounts",
"https://www.investopedia.com/cds-vs-savings-accounts-5270287"
],
[
"Short-Term vs. Long-Term CDs",
"https://www.investopedia.com/short-term-vs-long-term-cd-terms-5270644"
],
[
"CD Rates News",
"https://www.investopedia.com/certificates-deposit-news-7111770"
],
[
"Best 1-Year CD Rates",
"https://www.investopedia.com/best-1-year-cd-rates-4796650"
],
[
"Best Jumbo CD Rates",
"https://www.investopedia.com/best-jumbo-cd-rates-4797766"
],
[
"Best 6-Month CD Rates",
"https://www.investopedia.com/best-6-month-cd-rates-4783267"
],
[
"Best 3-Month CD Rates",
"https://www.investopedia.com/best-3-month-cd-rates-5272288"
],
[
"Best Bank CD Rates",
"https://www.investopedia.com/best-bank-cd-rates-4801462"
],
[
"Investopedia custom visual asset shows a change jar with the title Best 18-month CD Rates",
"https://www.investopedia.com/thmb/m1Z6LqrcV8LJaLkamn_-0SRA-fc=/1500x0/filters:no_upscale("
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[
"Investopedia custom visual asset shows a change jar with the title Best 18-month CD Rates",
"https://www.investopedia.com/thmb/m1Z6LqrcV8LJaLkamn_-0SRA-fc=/1500x0/filters:no_upscale("
],
[
"editorial policy.",
"https://www.investopedia.com/legal-4768893#EditorialPolicy"
],
[
"Federal Reserve Issues FOMC Statement",
"https://www.federalreserve.gov/newsevents/pressreleases/monetary20240501a.htm"
],
[
"Consumer Price Index",
"https://www.bls.gov/news.release/cpi.nr0.htm"
],
[
"About Us",
"https://www.nasafcu.com/about-us"
],
[
"About Us",
"https://drbank.com/about/"
],
[
"About Us",
"https://www.credithuman.com/about-us/about-us"
],
[
"About Us",
"https://www.sdfcu.org/about-us"
],
[
"About FedChoice Federal Credit Union",
"https://www.fedchoice.org/about/"
],
[
"MYSB Direct Products",
"https://www.mysafra.com/MYSB-Online-Offers"
],
[
"Credit Union Details",
"https://mapping.ncua.gov/CreditUnionDetails/9976"
],
[
"Over 60 Years Helping Customers Meet Their Savings Goals",
"https://www.northernbankdirect.com/about"
],
[
"Branch Locator",
"https://www.nbtc.com/locations"
],
[
"Credit Union Details",
"https://mapping.ncua.gov/CreditUnionDetails/68383"
],
[
"About",
"https://limelightbank.com/about/"
],
[
"Our Story",
"https://www.seattlebank.com/about/our-story.html"
],
[
"Location & Hours",
"https://www.seattlebank.com/about/location-hours.html"
],
[
"About TAB Bank",
"https://www.tabbank.com/about-us/"
],
[
"About Banesco USA",
"https://banescousa.com/about/"
],
[
"Newtek Bank FAQ",
"https://www.newtekbank.com/faq/"
],
[
"About",
"https://www.newtekone.com/about/"
],
[
"Get in Touch",
"https://www.newtekone.com/contact/"
],
[
"Contact Us",
"https://www.lendingclub.com/company/contact/corporate-headquarters"
],
[
"An Online Savings Bank",
"https://www.myebanc.com/about-us/"
],
[
"Monetary Policy",
"https://www.federalreserve.gov/monetarypolicy.htm"
],
[
"CME FedWatch Tool",
"https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html"
],
[
"Deposit Insurance",
"https://www.fdic.gov/resources/deposit-insurance/"
],
[
"What Is a Certificate of Deposit (CD) and What Can It Do for You?",
"https://www.investopedia.com/terms/c/certificateofdeposit.asp"
],
[
"more",
"https://www.investopedia.com/terms/c/certificateofdeposit.asp"
],
[
"Add-On CDs: Meaning, Pros and Cons, Example",
"https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169"
],
[
"more",
"https://www.investopedia.com/adding-money-to-a-cd-add-on-cds-5184169"
],
[
"Types of Specialty Certificates of Deposit (CDs) Explained",
"https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646"
],
[
"more",
"https://www.investopedia.com/what-are-the-different-types-of-specialty-certificates-of-deposit-cd-5525646"
],
[
"No-Penalty Certificate of Deposit (CD): What It Is, How It Works",
"https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp"
],
[
"more",
"https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp"
],
[
"Variable-Rate Certificate of Deposit (CD): Meaning, Example, FAQs",
"https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp"
],
[
"more",
"https://www.investopedia.com/terms/v/variable-rate-certificate-of-deposit.asp"
],
[
"CD Ladder: How to Make One, Benefits, FAQ",
"https://www.investopedia.com/terms/c/cd-ladder.asp"
],
[
"more",
"https://www.investopedia.com/terms/c/cd-ladder.asp"
]
] |
https://www.investopedia.com/terms/i/ian.asp
|
Index Amortizing Note (IAN)
|
<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-index-amortizing-note-ian"></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 Index Amortizing Note (IAN)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An index amortizing note (IAN) is a type of structured note or debt obligation. The amount of the principal repayment will increase or decrease following an amortization schedule which has a basis of an index such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp" rel="noopener noreferrer">London Interbank Offered Rate</a> (LIBOR), the CMT (Constant Maturity Treasury), or the mortgage interest rate.
</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-understanding-index-amortizing-notes-ian"></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"> Understanding Index Amortizing Notes (IAN) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Index amortizing notes are structured to reduce the holder's interest rate risk. The IAN's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp" rel="noopener noreferrer">maturity</a> phase extends when interest rates increase. Conversely, as interest rates decline, the maturity period shortens. Amortization refers to paying off a debt over time in regular installments following an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/amortization.asp" rel="noopener noreferrer">amortization schedule</a>, which includes both interest and principal payments. With IANs, the debt payment timeframe depends on the market interest rates.
</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"> Despite the ability to alter a note’s maturity period, the index amortizing note also has a specified maximum maturity date. This maturity term is the date by which any remaining principal must be paid.
</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 maturities of index amortizing notes often act like those of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cmo.asp" rel="noopener noreferrer">collateralized mortgage obligations</a> (CMOs) which have embedded prepayment options. As mortgage prepayment rates decline, in response to increasing market interest rates, the maturity of an IAN will lengthen. With an increase in mortgage prepayment rates, in response to decreasing market interest rates, the IAN maturity will shorten. As with other mortgage-backed instruments, an Index Amortizing Note's connection to interest rates creates a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negative_convexity.asp" rel="noopener noreferrer">negative convexity</a> exposure.
</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-using-indexes-for-an-index-amortizing-note"></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"> Using Indexes for an Index Amortizing Note </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest-rate-index.asp" rel="noopener noreferrer">interest rate index</a> is an index based on the interest rate of a financial instrument or basket of financial instruments. The index serves as a benchmark to calculate the rate of interest to charge on mortgages and other debt products.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> One example of an index schedule used for an index amortizing note is the LIBOR. This LIBOR index is the benchmark rate which several of the top banks in the world charge one another for short-term loans. The LIBOR sets rates for seven different maturity periods and serves as the reference rate used by many financial institutions to set rates for loans such as mortgages, student loans, and corporate bonds. Lenders will adjust the interest rates on these loans according to the index as market factors change.
</p>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The Intercontinental Exchange, the authority responsible for LIBOR, will stop publishing one-week and two-month USD LIBOR after Dec. 31, 2021. All other LIBOR will be discontinued after June 30, 2023.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-comparing-ians-with-non-amortizing-loans"></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"> Comparing IANs with Non-Amortizing Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Unlike an Index Amortizing Note, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nonamortizing.asp" rel="noopener noreferrer">non-amortizing loans</a> have no amortization schedules. Also, they do not require the payment of the principal during the life of the loan. Instead, these loans demand lower payments of interest followed by a lump-sum amount to pay off the remaining loan balance. A balloon payment loan is an example of a non-amortizing loan. These loans are riskier for lenders because of the deferred payments and thus are usually short-term vehicles. Borrowers will often refinance, or seek another loan when the balloon payment is due.
</p></div>
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## What Is an Index Amortizing Note (IAN)?
An index amortizing note (IAN) is a type of structured note or debt obligation. The amount of the principal repayment will increase or decrease following an amortization schedule which has a basis of an index such as the [London Interbank Offered Rate](https://www.investopedia.com/terms/l/libor.asp) (LIBOR), the CMT (Constant Maturity Treasury), or the mortgage interest rate.
## Understanding Index Amortizing Notes (IAN)
Index amortizing notes are structured to reduce the holder's interest rate risk. The IAN's [maturity](https://www.investopedia.com/terms/m/maturity.asp) phase extends when interest rates increase. Conversely, as interest rates decline, the maturity period shortens. Amortization refers to paying off a debt over time in regular installments following an [amortization schedule](https://www.investopedia.com/terms/a/amortization.asp), which includes both interest and principal payments. With IANs, the debt payment timeframe depends on the market interest rates.
Despite the ability to alter a note’s maturity period, the index amortizing note also has a specified maximum maturity date. This maturity term is the date by which any remaining principal must be paid.
The maturities of index amortizing notes often act like those of [collateralized mortgage obligations](https://www.investopedia.com/terms/c/cmo.asp) (CMOs) which have embedded prepayment options. As mortgage prepayment rates decline, in response to increasing market interest rates, the maturity of an IAN will lengthen. With an increase in mortgage prepayment rates, in response to decreasing market interest rates, the IAN maturity will shorten. As with other mortgage-backed instruments, an Index Amortizing Note's connection to interest rates creates a [negative convexity](https://www.investopedia.com/terms/n/negative_convexity.asp) exposure.
## Using Indexes for an Index Amortizing Note
An [interest rate index](https://www.investopedia.com/terms/i/interest-rate-index.asp) is an index based on the interest rate of a financial instrument or basket of financial instruments. The index serves as a benchmark to calculate the rate of interest to charge on mortgages and other debt products.
One example of an index schedule used for an index amortizing note is the LIBOR. This LIBOR index is the benchmark rate which several of the top banks in the world charge one another for short-term loans. The LIBOR sets rates for seven different maturity periods and serves as the reference rate used by many financial institutions to set rates for loans such as mortgages, student loans, and corporate bonds. Lenders will adjust the interest rates on these loans according to the index as market factors change.
###
The Intercontinental Exchange, the authority responsible for LIBOR, will stop publishing one-week and two-month USD LIBOR after Dec. 31, 2021. All other LIBOR will be discontinued after June 30, 2023.
## Comparing IANs with Non-Amortizing Loans
Unlike an Index Amortizing Note, [non-amortizing loans](https://www.investopedia.com/terms/n/nonamortizing.asp) have no amortization schedules. Also, they do not require the payment of the principal during the life of the loan. Instead, these loans demand lower payments of interest followed by a lump-sum amount to pay off the remaining loan balance. A balloon payment loan is an example of a non-amortizing loan. These loans are riskier for lenders because of the deferred payments and thus are usually short-term vehicles. Borrowers will often refinance, or seek another loan when the balloon payment is due.
|
What Is an Index Amortizing Note (IAN)?
An index amortizing note (IAN) is a type of structured note or debt obligation. The amount of the principal repayment will increase or decrease following an amortization schedule which has a basis of an index such as the London Interbank Offered Rate (LIBOR), the CMT (Constant Maturity Treasury), or the mortgage interest rate.
Understanding Index Amortizing Notes (IAN)
Index amortizing notes are structured to reduce the holder's interest rate risk. The IAN's maturity phase extends when interest rates increase. Conversely, as interest rates decline, the maturity period shortens. Amortization refers to paying off a debt over time in regular installments following an amortization schedule, which includes both interest and principal payments. With IANs, the debt payment timeframe depends on the market interest rates.
Despite the ability to alter a note’s maturity period, the index amortizing note also has a specified maximum maturity date. This maturity term is the date by which any remaining principal must be paid.
The maturities of index amortizing notes often act like those of collateralized mortgage obligations (CMOs) which have embedded prepayment options. As mortgage prepayment rates decline, in response to increasing market interest rates, the maturity of an IAN will lengthen. With an increase in mortgage prepayment rates, in response to decreasing market interest rates, the IAN maturity will shorten. As with other mortgage-backed instruments, an Index Amortizing Note's connection to interest rates creates a negative convexity exposure.
Using Indexes for an Index Amortizing Note
An interest rate index is an index based on the interest rate of a financial instrument or basket of financial instruments. The index serves as a benchmark to calculate the rate of interest to charge on mortgages and other debt products.
One example of an index schedule used for an index amortizing note is the LIBOR. This LIBOR index is the benchmark rate which several of the top banks in the world charge one another for short-term loans. The LIBOR sets rates for seven different maturity periods and serves as the reference rate used by many financial institutions to set rates for loans such as mortgages, student loans, and corporate bonds. Lenders will adjust the interest rates on these loans according to the index as market factors change.
The Intercontinental Exchange, the authority responsible for LIBOR, will stop publishing one-week and two-month USD LIBOR after Dec. 31, 2021. All other LIBOR will be discontinued after June 30, 2023.
Comparing IANs with Non-Amortizing Loans
Unlike an Index Amortizing Note, non-amortizing loans have no amortization schedules. Also, they do not require the payment of the principal during the life of the loan. Instead, these loans demand lower payments of interest followed by a lump-sum amount to pay off the remaining loan balance. A balloon payment loan is an example of a non-amortizing loan. These loans are riskier for lenders because of the deferred payments and thus are usually short-term vehicles. Borrowers will often refinance, or seek another loan when the balloon payment is due.
|
[
[
"London Interbank Offered Rate",
"https://www.investopedia.com/terms/l/libor.asp"
],
[
"maturity",
"https://www.investopedia.com/terms/m/maturity.asp"
],
[
"amortization schedule",
"https://www.investopedia.com/terms/a/amortization.asp"
],
[
"collateralized mortgage obligations",
"https://www.investopedia.com/terms/c/cmo.asp"
],
[
"negative convexity",
"https://www.investopedia.com/terms/n/negative_convexity.asp"
],
[
"interest rate index",
"https://www.investopedia.com/terms/i/interest-rate-index.asp"
],
[
"non-amortizing loans",
"https://www.investopedia.com/terms/n/nonamortizing.asp"
]
] |
https://www.investopedia.com/ask/answers/101915/do-beneficiaries-trust-pay-taxes.asp
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Do Trust Beneficiaries Pay Taxes?
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<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"> Beneficiaries of a trust typically pay taxes on the distributions they receive from a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp">trust's</a> income rather than the trust paying the tax. However, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary-of-trust.asp">beneficiaries</a> aren't subject to taxes on distributions from the trust's principal, the original sum of money put into the trust.<span class="ql-inline-citation" data-cite="13"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> When a trust makes a distribution, it deducts the income distributed on its tax return and issues the beneficiary a tax form called a Schedule <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/schedule-k-1.asp">K-1</a>. The K-1 indicates how much of the beneficiary's distribution is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/net-interest-income.asp">interest income</a> versus principal and how much the beneficiary can claim as taxable income when filing taxes.<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>Funds received from a trust are subject to different taxation than funds from ordinary investment accounts.</li><li>Trust beneficiaries must pay taxes on income and other distributions from a trust.</li><li>Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets.</li><li>IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-trusts-and-beneficiaries"></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 Trusts and Beneficiaries </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A trust is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiduciary.asp">fiduciary</a> relationship whereby the trustor or grantor gives another party, the trustee, the right to hold <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust-property.asp">property or assets</a> for the benefit of a beneficiary. Trusts are established to provide legal protection and safeguard assets, usually as part of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a>. Trusts can ensure assets are properly distributed according to the grantor's intentions. Trusts also can help to reduce estate and inheritance taxes and avoid <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probate.asp">probate</a>.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Trusts include the <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> that can be changed or closed during the grantor's lifetime. An <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irrevocabletrust.asp">irrevocable trust</a> can't be amended or closed after it has been opened, including those trusts that become irrevocable upon the grantor's death.<span class="ql-inline-citation" data-cite="14"></span> Varying tax rules apply to beneficiaries, depending on whether the trust is revocable or irrevocable and the type of income the trust receives.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The trust must pay taxes on any interest income it holds and doesn't distribute past year-end. The interest income the trust distributes is taxable for the beneficiary who receives it.<span class="ql-inline-citation" data-cite="18"></span></p></div></div></div>
<span class="heading-toc" id="toc-interest-vs-principal-distributions"></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"> Interest vs. Principal Distributions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> When trust beneficiaries receive distributions from the trust's principal balance, they don't have to pay taxes on this disbursement. 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> assumes this money was taxed before being placed into the trust. Gains on the trust are taxable as income to the beneficiary or the trust.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The amount distributed to the beneficiary is considered from current-year income first, then accumulated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a>. The principal is the original contribution plus subsequent deposits. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp">Capital gains</a> may be taxable to either the trust or the beneficiary.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If the income or deduction is part of a change in the principal or part of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estate.asp">estate's</a> distributable income, income tax is paid by the trust and not passed on to the beneficiary.<span class="ql-inline-citation" data-cite="6"></span> As of Dec. 2023, an irrevocable trust with distributions and earnings pays a trust tax on the taxable income per the following:<span class="ql-inline-citation" data-cite="11"></span>
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<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>
<tbody data-check="-1">
<tr>
<td>Taxable Income</td>
<td>Tax Imposed</td>
</tr>
<tr>
<td>Less than or equal to $1,500</td>
<td>15% of taxable income</td>
</tr>
<tr>
<td>$1,500 to $3,500</td>
<td>$225 plus 28% of the excess over $1,500</td>
</tr>
<tr>
<td>$3,501 to $5,500</td>
<td>$785 plus 31% of the excess over $3,500</td>
</tr>
<tr>
<td>$5,501 to $7,500</td>
<td>$1,405 plus 36% of the excess over $5,500</td>
</tr>
<tr>
<td>Over $7,500</td>
<td>$2,125 plus 39.6% of the excess over $7,500</td>
</tr>
</tbody>
</table>
<figcaption>House.gov: 26 USC 1</figcaption>
</div></figure>
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<span class="heading-toc" id="toc-tax-forms"></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"> Tax Forms </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The two tax forms for trusts are Form <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/section-1041.asp">1041</a> and K-1. Form 1041 is similar to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/1040.asp">Form 1040</a>. On this form, the trust deducts from its taxable income any interest it distributes to beneficiaries. At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the money came from principal versus interest. The K-1 is the form that lets the beneficiary know their <a data-component="link" data-ordinal="3" 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="13"></span><span class="ql-inline-citation" data-cite="15"></span>
</p>
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<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/ask/answers/09/k-1-tax-form.asp">The K-1 schedule</a> for taxing distributed amounts is generated by the trust and provided to the IRS. The IRS delivers the document to the beneficiary to pay the tax. The trust then completes Form 1041 to determine the income distribution <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">deduction</a> according to the distributed amount.<span class="ql-inline-citation" data-cite="16"></span>
</p>
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<span class="heading-toc" id="toc-trust-legislation"></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"> Trust Legislation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> President Biden's Build Back Better Act, proposed in 2021, would have made sweeping changes to tax implications for trusts and beneficiaries. The estate tax exemption would have been significantly reduced, for example. In addition, the law would have treated the transfer of property between a grantor and trust as a taxable event.<span class="ql-inline-citation" data-cite="3"></span> However, the final legislative product, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-reduction-act-of-2022-6362263">Inflation Reduction Act of 2022</a>, eliminated all provisions related to trust taxation of this kind.<span class="ql-inline-citation" data-cite="4"></span>
</p>
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<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-is-a-trust-beneficiary"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Trust Beneficiary?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trust beneficiary is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cestui-que-vie.asp">a person for whom—or for whose benefit—the trust is created</a>; they stand to inherit at least some portion of its holdings. A beneficiary can be any recipient of a trust's largesse. Though individuals are the most typical, beneficiaries can also be groups of people or even entities—such as a charity.</p></div>
</div>
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<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-how-does-a-beneficiary-get-money-from-a-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Beneficiary Get Money From a Trust?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Beneficiaries get money—officially known as distributions–from a trust in one of three basic ways:</p><ul><li>Outright distributions: Receive the funds in a lump payment or two, with no restrictions.</li><li>Staggered distributions: Receive the funds over a certain period or at periodic intervals, often in a set sum each time; or after a specific event, such as graduation from college, reaching the age of majority, or becoming a parent.</li><li>Discretionary distributions: Receive the funds in amounts and at times determined by the trustee often by the grantor's instructions and stated wishes.<span class="ql-inline-citation" data-cite="17"></span><br/></li></ul></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-can-a-trustee-remove-a-beneficiary-from-a-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Trustee Remove a Beneficiary From a Trust?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It depends. A grantor of a revocable trust can remove a beneficiary if they have explicitly retained authority to amend a revocable trust. Thus, if the trust is a revocable <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>, and the trustee is also the grantor (the person who set the trust up), then the trustee can amend the trust at any time. Generally, the only way a trustee could remove a beneficiary is if the grantor (or creator) of the trust gave them a power of appointment—a special provision in the trust agreement that explicitly allows them to make such a change. If the trust is irrevocable, neither the grantor nor the trustee can remove a beneficiary unless the terms of the trust allow that to be done.<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_36-0"></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_37-0"> <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_38-0"> Whether beneficiaries pay tax on money received from a trust depends on how the distribution is classified. If the funds are deemed as coming from the trust's income—that is, earnings on its assets—the beneficiary does owe income tax on them. Whether it's taxed as regular income or capital gains depends on the nature of the funds (cash, dividends, etc.). If the funds are considered part of the trust's principal, the beneficiary doesn't owe tax because the funds are considered a return of money already taxed before it went into the trust.
</p></div>
|
Beneficiaries of a trust typically pay taxes on the distributions they receive from a [trust's](https://www.investopedia.com/terms/t/trust.asp) income rather than the trust paying the tax. However, [beneficiaries](https://www.investopedia.com/terms/b/beneficiary-of-trust.asp) aren't subject to taxes on distributions from the trust's principal, the original sum of money put into the trust.
When a trust makes a distribution, it deducts the income distributed on its tax return and issues the beneficiary a tax form called a Schedule [K-1](https://www.investopedia.com/terms/s/schedule-k-1.asp). The K-1 indicates how much of the beneficiary's distribution is [interest income](https://www.investopedia.com/terms/n/net-interest-income.asp) versus principal and how much the beneficiary can claim as taxable income when filing taxes.
### Key Takeaways
* Funds received from a trust are subject to different taxation than funds from ordinary investment accounts.
* Trust beneficiaries must pay taxes on income and other distributions from a trust.
* Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets.
* IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.
## Understanding Trusts and Beneficiaries
A trust is a [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) relationship whereby the trustor or grantor gives another party, the trustee, the right to hold [property or assets](https://www.investopedia.com/terms/t/trust-property.asp) for the benefit of a beneficiary. Trusts are established to provide legal protection and safeguard assets, usually as part of [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp). Trusts can ensure assets are properly distributed according to the grantor's intentions. Trusts also can help to reduce estate and inheritance taxes and avoid [probate](https://www.investopedia.com/terms/p/probate.asp).
Trusts include the [revocable trust](https://www.investopedia.com/terms/r/revocabletrust.asp) that can be changed or closed during the grantor's lifetime. An [irrevocable trust](https://www.investopedia.com/terms/i/irrevocabletrust.asp) can't be amended or closed after it has been opened, including those trusts that become irrevocable upon the grantor's death. Varying tax rules apply to beneficiaries, depending on whether the trust is revocable or irrevocable and the type of income the trust receives.
###
The trust must pay taxes on any interest income it holds and doesn't distribute past year-end. The interest income the trust distributes is taxable for the beneficiary who receives it.
## Interest vs. Principal Distributions
When trust beneficiaries receive distributions from the trust's principal balance, they don't have to pay taxes on this disbursement. The [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) assumes this money was taxed before being placed into the trust. Gains on the trust are taxable as income to the beneficiary or the trust.
The amount distributed to the beneficiary is considered from current-year income first, then accumulated [principal](https://www.investopedia.com/terms/p/principal.asp). The principal is the original contribution plus subsequent deposits. [Capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) may be taxable to either the trust or the beneficiary.
If the income or deduction is part of a change in the principal or part of the [estate's](https://www.investopedia.com/terms/e/estate.asp) distributable income, income tax is paid by the trust and not passed on to the beneficiary. As of Dec. 2023, an irrevocable trust with distributions and earnings pays a trust tax on the taxable income per the following:
| Taxable Income | Tax Imposed |
| --- | --- |
| Less than or equal to $1,500 | 15% of taxable income |
| $1,500 to $3,500 | $225 plus 28% of the excess over $1,500 |
| $3,501 to $5,500 | $785 plus 31% of the excess over $3,500 |
| $5,501 to $7,500 | $1,405 plus 36% of the excess over $5,500 |
| Over $7,500 | $2,125 plus 39.6% of the excess over $7,500 |
House.gov: 26 USC 1
## Tax Forms
The two tax forms for trusts are Form [1041](https://www.investopedia.com/terms/s/section-1041.asp) and K-1. Form 1041 is similar to [Form 1040](https://www.investopedia.com/terms/1/1040.asp). On this form, the trust deducts from its taxable income any interest it distributes to beneficiaries. At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the money came from principal versus interest. The K-1 is the form that lets the beneficiary know their [tax liability](https://www.investopedia.com/terms/t/taxliability.asp).
[The K-1 schedule](https://www.investopedia.com/ask/answers/09/k-1-tax-form.asp) for taxing distributed amounts is generated by the trust and provided to the IRS. The IRS delivers the document to the beneficiary to pay the tax. The trust then completes Form 1041 to determine the income distribution [deduction](https://www.investopedia.com/terms/t/tax-deduction.asp) according to the distributed amount.
## Trust Legislation
President Biden's Build Back Better Act, proposed in 2021, would have made sweeping changes to tax implications for trusts and beneficiaries. The estate tax exemption would have been significantly reduced, for example. In addition, the law would have treated the transfer of property between a grantor and trust as a taxable event. However, the final legislative product, the [Inflation Reduction Act of 2022](https://www.investopedia.com/inflation-reduction-act-of-2022-6362263), eliminated all provisions related to trust taxation of this kind.
## What Is a Trust Beneficiary?
A trust beneficiary is [a person for whom—or for whose benefit—the trust is created](https://www.investopedia.com/terms/c/cestui-que-vie.asp); they stand to inherit at least some portion of its holdings. A beneficiary can be any recipient of a trust's largesse. Though individuals are the most typical, beneficiaries can also be groups of people or even entities—such as a charity.
## How Does a Beneficiary Get Money From a Trust?
Beneficiaries get money—officially known as distributions–from a trust in one of three basic ways:
* Outright distributions: Receive the funds in a lump payment or two, with no restrictions.
* Staggered distributions: Receive the funds over a certain period or at periodic intervals, often in a set sum each time; or after a specific event, such as graduation from college, reaching the age of majority, or becoming a parent.
* Discretionary distributions: Receive the funds in amounts and at times determined by the trustee often by the grantor's instructions and stated wishes.
## Can a Trustee Remove a Beneficiary From a Trust?
It depends. A grantor of a revocable trust can remove a beneficiary if they have explicitly retained authority to amend a revocable trust. Thus, if the trust is a revocable [living trust](https://www.investopedia.com/terms/l/living-trust.asp), and the trustee is also the grantor (the person who set the trust up), then the trustee can amend the trust at any time. Generally, the only way a trustee could remove a beneficiary is if the grantor (or creator) of the trust gave them a power of appointment—a special provision in the trust agreement that explicitly allows them to make such a change. If the trust is irrevocable, neither the grantor nor the trustee can remove a beneficiary unless the terms of the trust allow that to be done.
## The Bottom Line
Whether beneficiaries pay tax on money received from a trust depends on how the distribution is classified. If the funds are deemed as coming from the trust's income—that is, earnings on its assets—the beneficiary does owe income tax on them. Whether it's taxed as regular income or capital gains depends on the nature of the funds (cash, dividends, etc.). If the funds are considered part of the trust's principal, the beneficiary doesn't owe tax because the funds are considered a return of money already taxed before it went into the trust.
|
Beneficiaries of a trust typically pay taxes on the distributions they receive from a trust's income rather than the trust paying the tax. However, beneficiaries aren't subject to taxes on distributions from the trust's principal, the original sum of money put into the trust.
When a trust makes a distribution, it deducts the income distributed on its tax return and issues the beneficiary a tax form called a Schedule K-1. The K-1 indicates how much of the beneficiary's distribution is interest income versus principal and how much the beneficiary can claim as taxable income when filing taxes.
Key Takeaways
Funds received from a trust are subject to different taxation than funds from ordinary investment accounts.Trust beneficiaries must pay taxes on income and other distributions from a trust.Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets.IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.
Understanding Trusts and Beneficiaries
A trust is a fiduciary relationship whereby the trustor or grantor gives another party, the trustee, the right to hold property or assets for the benefit of a beneficiary. Trusts are established to provide legal protection and safeguard assets, usually as part of estate planning. Trusts can ensure assets are properly distributed according to the grantor's intentions. Trusts also can help to reduce estate and inheritance taxes and avoid probate.
Trusts include the revocable trust that can be changed or closed during the grantor's lifetime. An irrevocable trust can't be amended or closed after it has been opened, including those trusts that become irrevocable upon the grantor's death. Varying tax rules apply to beneficiaries, depending on whether the trust is revocable or irrevocable and the type of income the trust receives.
The trust must pay taxes on any interest income it holds and doesn't distribute past year-end. The interest income the trust distributes is taxable for the beneficiary who receives it.
Interest vs. Principal Distributions
When trust beneficiaries receive distributions from the trust's principal balance, they don't have to pay taxes on this disbursement. The Internal Revenue Service (IRS) assumes this money was taxed before being placed into the trust. Gains on the trust are taxable as income to the beneficiary or the trust.
The amount distributed to the beneficiary is considered from current-year income first, then accumulated principal. The principal is the original contribution plus subsequent deposits. Capital gains may be taxable to either the trust or the beneficiary.
If the income or deduction is part of a change in the principal or part of the estate's distributable income, income tax is paid by the trust and not passed on to the beneficiary. As of Dec. 2023, an irrevocable trust with distributions and earnings pays a trust tax on the taxable income per the following:
Taxable Income
Tax Imposed
Less than or equal to $1,500
15% of taxable income
$1,500 to $3,500
$225 plus 28% of the excess over $1,500
$3,501 to $5,500
$785 plus 31% of the excess over $3,500
$5,501 to $7,500
$1,405 plus 36% of the excess over $5,500
Over $7,500
$2,125 plus 39.6% of the excess over $7,500
House.gov: 26 USC 1
Tax Forms
The two tax forms for trusts are Form 1041 and K-1. Form 1041 is similar to Form 1040. On this form, the trust deducts from its taxable income any interest it distributes to beneficiaries. At the same time, the trust issues a K-1, which breaks down the distribution, or how much of the money came from principal versus interest. The K-1 is the form that lets the beneficiary know their tax liability.
The K-1 schedule for taxing distributed amounts is generated by the trust and provided to the IRS. The IRS delivers the document to the beneficiary to pay the tax. The trust then completes Form 1041 to determine the income distribution deduction according to the distributed amount.
Trust Legislation
President Biden's Build Back Better Act, proposed in 2021, would have made sweeping changes to tax implications for trusts and beneficiaries. The estate tax exemption would have been significantly reduced, for example. In addition, the law would have treated the transfer of property between a grantor and trust as a taxable event. However, the final legislative product, the Inflation Reduction Act of 2022, eliminated all provisions related to trust taxation of this kind.
What Is a Trust Beneficiary?
A trust beneficiary is a person for whom—or for whose benefit—the trust is created; they stand to inherit at least some portion of its holdings. A beneficiary can be any recipient of a trust's largesse. Though individuals are the most typical, beneficiaries can also be groups of people or even entities—such as a charity.
How Does a Beneficiary Get Money From a Trust?
Beneficiaries get money—officially known as distributions–from a trust in one of three basic ways:Outright distributions: Receive the funds in a lump payment or two, with no restrictions.Staggered distributions: Receive the funds over a certain period or at periodic intervals, often in a set sum each time; or after a specific event, such as graduation from college, reaching the age of majority, or becoming a parent.Discretionary distributions: Receive the funds in amounts and at times determined by the trustee often by the grantor's instructions and stated wishes.
Can a Trustee Remove a Beneficiary From a Trust?
It depends. A grantor of a revocable trust can remove a beneficiary if they have explicitly retained authority to amend a revocable trust. Thus, if the trust is a revocable living trust, and the trustee is also the grantor (the person who set the trust up), then the trustee can amend the trust at any time. Generally, the only way a trustee could remove a beneficiary is if the grantor (or creator) of the trust gave them a power of appointment—a special provision in the trust agreement that explicitly allows them to make such a change. If the trust is irrevocable, neither the grantor nor the trustee can remove a beneficiary unless the terms of the trust allow that to be done.
The Bottom Line
Whether beneficiaries pay tax on money received from a trust depends on how the distribution is classified. If the funds are deemed as coming from the trust's income—that is, earnings on its assets—the beneficiary does owe income tax on them. Whether it's taxed as regular income or capital gains depends on the nature of the funds (cash, dividends, etc.). If the funds are considered part of the trust's principal, the beneficiary doesn't owe tax because the funds are considered a return of money already taxed before it went into the trust.
|
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https://www.investopedia.com/robo-advisor-ranking-methodology-4693455
|
How We Review Robo-Advisors
|
<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"> Investopedia’s list of the best <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> is based on in-depth research and robust data across 21 companies that offer digital investment services. We reviewed each company’s account services, investment options, customizable portfolio management features, cash management tools, fees, and much more. This guide explains the categories and criteria we used to evaluate each company’s offerings and our scoring process for determining the best robo-advisors.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Our editors and researchers independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation. Our advertising partnerships are not a factor in how we evaluate products, though they may affect the order of products you see listed in our articles.
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<span class="heading-toc" id="toc-how-we-research-robo-advisors"></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"> How We Research Robo-Advisors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Through a combination of subject matter expertise, consumer survey and company survey data, and industry research, we developed a quantitative model that scores each company based on nine major categories and 59 criteria that are crucial in evaluating the advisors’ offerings and usability.
</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 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_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In 2023, 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 that are part of our rubric. Participants in this <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 survey</a> opted-in to an online, self-administered questionnaire from a market research vendor. Survey 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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> This 2023 survey was used to inform our weighting and scoring process for our 2024 best robo-advisor awards to best serve readers’ needs. We adjusted the weights for goal planning, fees, portfolio contents, portfolio management, and user experience because our survey told us that those factors matter more and less to readers looking for a robo-advisor.Investors are likely to use robo-advisor platforms to invest for goals like large purchases—houses, vehicles, and travel—more than retirement. The majority of investors who use these platforms are in their 20s and 30s, and consider themselves to have intermediate-to-advanced computer skills. Fee-based financial planning tools and services is the most searched topic by robo-advisor users.<br/>
</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-robo-advisor-evaluation-categories"></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"> Robo-Advisor Evaluation Categories </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Based on a combination of subject matter expertise and the results of our 2023 Robo-Advisor Consumer Survey, we developed the following category weights:
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_17-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Dcv4p/7/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Robo-Advisor Evaluation Categories"></iframe></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"> These categories were then broken down into 59 weighted criteria, resulting in 1,239 data points that make up our scoring rubric.<br/>
</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-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/0RY3M/4/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Number of Weighted Criteria By Category"></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"> Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors.<br/>
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<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_25-0"> <div class="figure-media">
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<img alt="Titan Demo Pic Edited 1" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/DG-Jn7KgsFJz58D8Of6ppQS5GE8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/DG-Jn7KgsFJz58D8Of6ppQS5GE8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg" data-srcset="https://www.investopedia.com/thmb/IIz-JCasvq2nk2ok8PXyxu09cNg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg 750w" data-tracking-container="true" height="1316" id="mntl-sc-block-image_1-0" width="2179"/>
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<img alt="Titan Demo Pic Edited 1" class="img--noscript universal-image__image" height="1316" sizes="750px" src="https://www.investopedia.com/thmb/DG-Jn7KgsFJz58D8Of6ppQS5GE8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg" srcset="https://www.investopedia.com/thmb/IIz-JCasvq2nk2ok8PXyxu09cNg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg 750w" width="2179"/>
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<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">From Titan's online demonstration with Investopedia.</span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_26-0"> <span class="mntl-sc-block-subheading__text"> Data Collection and Scoring </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li>Data points are scored on a 0.00 - 1.00 scale</li><li>Binary criteria = [0,1]</li><li>Scaled criteria (e.g., 5-point) = [0.00, 0.25, 0.50, 0.75, 1.00]</li><li>Continuous criteria, minimum value in the database was re-scaled to 0.00 and maximum value was re-scaled to 1.00 <br/></li>
</ul>
<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-goal-planning"></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"> Goal Planning </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Investors have diverse sets of goals and timelines that extend well beyond simply saving for retirement. That's why having access to tools that help you build the capital needed to make large purchases is also a top considerations when choosing a robo-advisor.
</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"> This entire section accounts for 21% of the total weighted score in our evaluation.
</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 evaluate goal planning, we looked to see if the following tools and features were available to clients:
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_36-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/aVvbV/2/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Goal Planning Criteria Weights"></iframe></div>
<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"> Retirement Planning Tools </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> We score this on a binary scale, awarding 1 point to companies offering retirement planning tools, and 0 points to those that lacked these tools.
</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"> Planning Tools for Large Purchases </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> We score this on a binary scale. If the robo-advisor offers planning tools for large purchases, a score of 1 was given. For companies lacking these tools, a score of 0 was given.
</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"> Other Goal Tools </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of goal-planning tools outside of retirement and large purchases the highest scores. Conversely, companies with more limited goal-planning tools received the lowest scores.
</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-portfolio-management"></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"> Portfolio Management </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The quality and availability of portfolio management features is critical when choosing a robo-advisor. It’s essential to know how portfolios are managed and the features available to clients to monitor their portfolios. This entire section accounts for 17% of the total weighted score in our evaluation.
</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"> To evaluate portfolio management, we looked at the following features:
</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/UMRTV/2/" frameborder="0" id="mntl-sc-block-iframe__uri_4-0" title="Portfolio Management Criteria Weights"></iframe></div>
<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"> Automatic Rebalancing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Companies that provide daily portfolio monitoring and rebalancing based on portfolio drift from predefined thresholds received the highest score, while companies that rebalance with less frequency received a lower score.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-subheading__text"> Tax-Loss Harvesting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> We score this on a binary scale, giving robo-advisors that provide true tax-loss harvesting features a score of 1, while companies that lack this feature or only provide tax mitigation strategies received a score of 0.
</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"> Frequency of Tax-Loss Harvesting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest frequency of tax-loss harvesting activity the highest scores. Conversely, companies with more limited tax-loss harvesting activity received the lowest scores.
</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"> Real-Time Reporting on Progress Towards Goals </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> We scored this on a binary scale, awarding 1 point to companies that provide real-time reporting on progress toward goals, and 0 points to companies that lack this feature.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> Consideration of Synced External Accounts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> We score this on a binary scale. Companies got a score of 1 if they consider synced external accounts when performing critical functions like portfolio analysis or taxable transactions. Companies that lack this feature received a score of 0.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></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"> Account Types </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale of 1 or 0. Companies with the largest selection of supported account types received a higher score and companies with the smallest selection received a lower score.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div>
<span class="heading-toc" id="toc-portfolio-contents"></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"> Portfolio Contents </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> The asset management industry is always evolving and new investment vehicles that improve tax efficiency, provide access to new asset classes, and address socially sensitive concerns are constantly being introduced. The best robo-advisors quickly incorporate these features and maintain a wide range of non-proprietary investment types that help lower the barrier to entry, suppress fees, and broaden allocation options.
</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"> This entire section accounts for 17% of the total weighted score in our evaluation.
</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"> To evaluate portfolio contents, we looked to see if the following asset classes were available to clients:
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_79-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/H0SvV/1/" frameborder="0" id="mntl-sc-block-iframe__uri_5-0" title="Portfolio Contents Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_81-0"> <span class="mntl-sc-block-subheading__text"> Socially Responsible Investing (SRI) or Environment, Social, and Governance (ESG) Options </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> Robo-advisors that provide SRI or ESG investments were given a binary score of 1, while a 0 was given if these options are not available.
</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"> Non-Proprietary ETFs or Mutual Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> We scored this item on a continuous scale of 0.00 to 1.00. Companies with the largest selection of non-proprietary ETFs or mutual funds received a high score and companies with the smallest selection received a low score.
</p>
<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"> International Stocks and Bonds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of international stocks and bonds the highest scores. Conversely, companies with limited international stock and bond offerings received the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_90-0"> <span class="mntl-sc-block-subheading__text"> Fractional Shares </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> We score this on a binary scale. Robo-advisors that offer fractional share investing were given a score of 1, while a lack of this offering resulted in a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-subheading__text"> Dividends on Fractional Shares </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> We scored this on a binary scale. Companies that offer customers the ability to collect dividends on fractional shares received a score of 1, while a score of 0 was given to companies lacking this offering.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_96-0"> <span class="mntl-sc-block-subheading__text"> Hedging Strategies </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_97-0"> We scored this on a binary scale. Companies that employ hedging strategies were given 1 point, and companies that do not use these strategies got 0 points.
</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-fees"></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"> Fees </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Because many of these digital wealth management platforms invest client assets in prepackaged portfolios and involve minimal human supervision, they are able to charge lower fees than traditional financial advisors. But there are also a number of robo-advisors that provide more customized products and access to licensed representatives, which may result in higher fees.
</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"> This entire section accounts for 15% of the total weighted score in our evaluation.
</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"> When analyzing the costs associated with using a robo-advisor’s platform and services, we looked at the following criteria:
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_106-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/NyK0q/1/" frameborder="0" id="mntl-sc-block-iframe__uri_6-0" title="Fees Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_108-0"> <span class="mntl-sc-block-subheading__text"> Fees and Commissions Charged for Trading Individual Stocks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_109-0"> We score this on a binary scale. If the ability to trade individual stocks was offered for no fee, a score of 1 was given. Companies that either lacked stock trading capabilities or charged a fee for offering this feature received a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_111-0"> <span class="mntl-sc-block-subheading__text"> Cost Per Month for an Account With $5,000 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $5,000 balance the highest scores. We gave companies that charge the most the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_114-0"> <span class="mntl-sc-block-subheading__text"> Cost Per Month for an Account With $25,000 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $25,000 balance the highest scores. We gave companies that charge the most the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_117-0"> <span class="mntl-sc-block-subheading__text"> Cost Per Month for an Account With $100,000 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_118-0"> We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $100,000 balance the highest scores. We gave companies that charge the most the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_119-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_120-0"> <span class="mntl-sc-block-subheading__text"> Termination Fees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_121-0"> For this criteria, we score on a binary scale and companies that did not charge a termination fee were given 1 point, while companies charging termination fees received 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_122-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_123-0"> <span class="mntl-sc-block-subheading__text"> Average Underlying Fee for ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and gave the highest scores to companies with the lowest average underlying fee for ETFs. Conversely, companies with the highest average underlying fee were given the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_125-0"></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_126-0"> <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_127-0"> In an industry as competitive as the robo-advisor industry, the best platforms must offer robust cash management tools and give access to convenient banking services in order to keep customers happy.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_128-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_129-0"> This entire section accounts for 10% of the total weighted score in our evaluation.
</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"> Our account services category measures the quantity and quality of the following key services that each platform offers:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_132-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_133-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/4UF33/1/" frameborder="0" id="mntl-sc-block-iframe__uri_7-0" title="Account Services Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_134-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_135-0"> <span class="mntl-sc-block-subheading__text"> Combining Self-Driven Trading and Robo-Advisor Services </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_136-0"> A binary score of 1 was given to companies that provide self-driven trading services at the stand-alone digital advisor level, while a 0 was given to those companies without this capability.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_137-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_138-0"> <span class="mntl-sc-block-subheading__text"> Placing Trades for Individual Stocks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_139-0"> Companies that allow users to place trades in stocks at the stand-alone digital advisor level were awarded a binary score of 1, while a 0 was given to those companies without this offering.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_140-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_141-0"> <span class="mntl-sc-block-subheading__text"> Number of Individual Stocks Available to Trade </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_142-0"> We scored this item on a continuous scale of 0.00 to 1.00. Companies that offer access to trading in the largest number of stocks received the highest scores, while companies with smaller stock offerings received lower scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_143-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_144-0"> <span class="mntl-sc-block-subheading__text"> Placing Trades for Specific Mutual Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_145-0"> Companies that offer their users the ability to place trades for specific mutual funds received a binary score of 1 and companies lacking this offering were given a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_146-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_147-0"> <span class="mntl-sc-block-subheading__text"> Placing Trades for Fixed Income </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_148-0"> Companies that offered their users the ability to place trades for fixed income directly, not through ETFs or mutual funds, received a binary score of 1, while a lack of this capability demanded a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_149-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_150-0"> <span class="mntl-sc-block-subheading__text"> Placing Trades for REITs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_151-0"> Robo-advisors that allowed their customers to place trades for REITs at the stand-alone digital level directly, not through ETFs or mutual funds, received a binary score of 1, while companies without this offering received a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_152-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_153-0"> <span class="mntl-sc-block-subheading__text"> Placing Trades for Other Asset Classes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_154-0"> Companies that allowed users to place trades for any other asset classes, such as crypto or forex, received a binary score of 1, and companies without this capability were given a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_155-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_156-0"> <span class="mntl-sc-block-subheading__text"> Automatic Sweeps </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_157-0"> Here, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most automatic sweep options the highest scores. We gave the lowest scores to companies with the fewest options.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_158-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_159-0"> <span class="mntl-sc-block-subheading__text"> Interest Paid on Cash Balances </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_160-0"> The amount of interest paid on cash balances was scored on a continuous scale of 0.00 to 1.00. Companies offering the highest APY on uninvested cash received the highest scores, while companies that offer low or no interest received the lowest scores. Since APYs are variable, we are constantly monitoring how rate changes may impact the winners in our lists.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_161-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_162-0"> <span class="mntl-sc-block-subheading__text"> Integration With Banking or Brokerage Accounts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_163-0"> Companies that offered integration with banking or brokerage accounts for easy account transfers received a binary score of 1, while a lack of this capability resulted in a score of 0.
</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"> Portfolio Margin Availability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_166-0"> Robo-advisors that make portfolio margin available were given a binary score of 1, while digital advisors without this item received a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_167-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_168-0"> <span class="mntl-sc-block-subheading__text"> Fee Charged for Using Portfolio Margin </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_169-0"> We scored this item on a continuous scale of 0.00 to 1.00. Companies that charge the lowest fees for portfolio margin received the highest scores, while companies with the highest fees received lower scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_170-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_171-0"> <span class="mntl-sc-block-subheading__text"> Process for Withdrawing Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_172-0"> When it comes to withdrawing funds, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most convenient methods the highest scores. Conversely, companies that added layers of complexity to this process were given the lowest scores. For example, convenient methods include one-click withdrawal, which takes two days to settle, and auto monthly, quarterly, or annual withdrawals.)
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_173-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_174-0"> <span class="mntl-sc-block-subheading__text"> Charitable Giving Options </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_175-0"> For this criteria, companies that provided charitable giving options were given a binary score of 1, and those without this capability received a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_176-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_177-0"> <span class="mntl-sc-block-subheading__text"> Discounts Available on Other Products and Services </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_178-0"> Companies that offer discounts on other products and services, like lower interest rates on loans provided by the parent company, were given a binary score of 1, while companies without these offerings received a score of 0.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_179-0"></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_180-0"> <span class="mntl-sc-block-heading__text"> User Experience </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_181-0"> At their core, robo-advisors are digital wealth management platforms, which means human assistance is often limited during the onboarding process. Therefore, the best robo-advisors provide a smooth user journey and easy-to-use features that make investing enjoyable for less experienced investors.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_182-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_183-0"> This entire section accounts for 5% of the total weighted score in our evaluation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_184-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_185-0"> To evaluate each platform’s user experience, we looked at the following features:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_186-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_187-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/oidrr/1/" frameborder="0" id="mntl-sc-block-iframe__uri_8-0" title="User Experience Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_188-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_189-0"> <span class="mntl-sc-block-subheading__text"> Usability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_190-0"> We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Our subject matter expert tested the usability of each platform and gave companies with the best user experience a high score. Conversely, platforms that offer a weak user experience were given lower scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_191-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_192-0"> <span class="mntl-sc-block-subheading__text"> iOS App Availability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_193-0"> A binary score of 1 was given to companies that provide an app for iOS devices, while a lack of this app resulted in a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_194-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_195-0"> <span class="mntl-sc-block-subheading__text"> Android App Availability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_196-0"> A binary score of 1 was given to companies that provide an app for Android devices, and a score of 0 was given for no app availability. <br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_197-0"></div>
<span class="heading-toc" id="toc-security-and-education"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_198-0"> <span class="mntl-sc-block-heading__text"> Security and Education </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_199-0"> Although robo-advisors are designed so that you only need minimal involvement in the money management process beyond the initial onboarding survey, the best robo-advisors provide useful prompts and other forms of educational content to help guide you along your journey.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_200-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_201-0"> In addition, most robo-advisors offer two-factor authentication and encrypted security measures. However, there are meaningful differences in the level of SIPC insurance available to insure your money against institutional failure.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_202-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_203-0"> This entire section accounts for 5% of the total weighted score in our evaluation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_204-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_205-0"> When examining the educational and security offerings of the companies we reviewed, we looked at the following criteria:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_206-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_207-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/DKn0o/1/" frameborder="0" id="mntl-sc-block-iframe__uri_9-0" title="Security & Education Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_208-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_209-0"> <span class="mntl-sc-block-subheading__text"> Educational Videos </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_210-0"> If a robo-advisor offered educational videos, it received a binary score of 1. For robo-advisors without this form of educational content, a score of 0 was given.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_211-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_212-0"> <span class="mntl-sc-block-subheading__text"> Educational Articles </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_213-0"> If a robo-advisor provided access to educational articles, it received a binary score of 1. Any company that lacked this content received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_214-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_215-0"> <span class="mntl-sc-block-subheading__text"> Frequently Asked Questions (FAQs) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_216-0"> Companies offering access to FAQs were awarded a binary score of 1, and companies lacking this information received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_217-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_218-0"> <span class="mntl-sc-block-subheading__text"> Website Encryption </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_219-0"> Robo-advisors that have encrypted websites were given a binary score of 1, and companies lacking this level of security received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_220-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_221-0"> <span class="mntl-sc-block-subheading__text"> Two-Factor Authentication </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_222-0"> Companies requiring two-factor authentication were awarded a binary score of 1, while companies without this level of security received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_223-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_224-0"> <span class="mntl-sc-block-subheading__text"> Excess SIPC Insurance </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_225-0"> If robo-advisors offered excess SIPC insurance, they received a binary score of 1. Any company not offering this extra level of security received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_226-0"></div>
<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_227-0"> <span class="mntl-sc-block-heading__text"> Customer Service </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_228-0"> Some robo-advisor platforms are designed so that the growing number of users who prefer to help themselves can do so using FAQs and features like chatbots. However, other robo-advisors have found better ways to maintain a human element in their customer service for those clients who still need it.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_229-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_230-0"> This entire section accounts for 5% of the total weighted score in our evaluation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_231-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_232-0"> When measuring the breadth of customer service offerings each of these digital platforms delivers, we considered the following criteria:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_233-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_234-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/EnSP3/1/" frameborder="0" id="mntl-sc-block-iframe__uri_10-0" title="Customer Service Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_235-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_236-0"> <span class="mntl-sc-block-subheading__text"> Online Chat for Prospective Clients </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_237-0"> Companies that have an online chat for prospective clients received a binary score of 1, while a 0 was given to companies without this feature.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_238-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_239-0"> <span class="mntl-sc-block-subheading__text"> Licenses Held by Advisors </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_240-0"> For this key criteria, we scaled responses (0.00, 0.25, 0.50, 0.75, 1.00) so that companies that provide access to advisors with the most professional licenses received the highest scores, and advisors with fewer licenses were given the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_241-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_242-0"> <span class="mntl-sc-block-subheading__text"> Telephone Customer Service Hours </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_243-0"> The hours that customer service is made available via telephone was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_244-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_245-0"> <span class="mntl-sc-block-subheading__text"> Live Chat Customer Service Hours </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_246-0"> The hours that customer service is made available via chat was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability received the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_247-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_248-0"> <span class="mntl-sc-block-subheading__text"> Email Customer Service Hours </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_249-0"> The hours that customer service is made available via email was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_250-0"></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_251-0"> <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_252-0"> Many users look for ease and simplicity when setting up any account, and this is especially true when it comes to signing up for and optimizing a digital investment account, such as with a robo-advisor.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_253-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_254-0"> This entire section accounts for 5% of the total weighted score in our evaluation.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_255-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_256-0"> As we examined the account setup category, we considered the following set of critical criteria:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_257-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_258-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/48l25/1/" frameborder="0" id="mntl-sc-block-iframe__uri_11-0" title="Account Setup Criteria Weights"></iframe></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_259-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_260-0"> <span class="mntl-sc-block-subheading__text"> Online or Offline Account Setup Process </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_261-0"> If the entire process of setting up a robo-advisor account could be completed online, a binary score of 1 was awarded. Conversely, platforms where any part of the process required offline procedures received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_262-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_263-0"> <span class="mntl-sc-block-subheading__text"> Minimum Account Size </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_264-0"> This item was scored on a continuous scale of 0.00 to 1.00. Companies with the lowest account minimums received higher scores, while companies requiring high account minimums received lower scores.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_265-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_266-0"> <span class="mntl-sc-block-subheading__text"> Ability to View a Portfolio Prior to Funding </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_267-0"> If robo-advisor companies allowed customers to see proposed portfolios prior to funding, they were awarded a binary score of 1. Any companies that did not allow this advantage received a score of 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_268-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_269-0"> <span class="mntl-sc-block-subheading__text"> Portfolio Customization Availability </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_270-0"> For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest flexibility of portfolio customization (companies that provided the easiest and most efficient way of portfolio customization like dynamic portfolio allocation, portfolio diversification, etc.) the highest scores. Conversely, companies with limited customization methods received the lowest scores.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_271-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_272-0"> <span class="mntl-sc-block-subheading__text"> Portfolio Customization Options </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_273-0"> When it comes to portfolio customization options, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of portfolio customization options the highest scores (options such as ETF-only portfolios, sustainable impact portfolios, tax aware portfolios, etc.). Conversely, companies with a limited selection received the lowest scores.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_274-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_275-0"> <span class="mntl-sc-block-subheading__text"> Portfolios Adjustments </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_276-0"> If the robo-advisor provides portfolios that adjust according to target dates and specific goals, a binary score of 1 was awarded. Conversely, the lack of this feature received a 0.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_277-0"></div>
<span class="heading-toc" id="toc-extra-credit-for-access-to-human-advisors-at-no-extra-charge"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_278-0"> <span class="mntl-sc-block-heading__text"> Extra Credit for Access to Human Advisors at No Extra Charge </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_279-0"> As the robo-advisor industry has grown increasingly competitive, more and more companies are offering access to human advisors at a variety of service levels. In order to provide our readers with the information necessary to make the most informed decisions possible, our research team collected data at the stand-alone digital advisor level, free of any premium features. We then awarded a credit to companies that allow digital-level customers to speak with a licensed investment professional, and an additional credit if that advice comes at no extra charge.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_280-0"></div>
<span class="heading-toc" id="toc-articles-that-use-our-methodology"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_281-0"> <span class="mntl-sc-block-heading__text"> Articles That Use Our Methodology </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_282-0"> The investment industry is always evolving, with more cutting-edge investment products and platforms constantly being made available. Robo-advisors are an important part of this ever-changing landscape, which is why we’ve written extensively on the subject.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_283-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_284-0"> The research conducted and data collected to create this methodology have been used to compile the following list of recommendations:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_285-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_286-0">
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-robo-advisors-4693125">Best Robo-Advisors</a></li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-robo-advisor-cash-management-accounts-for-2023-7975978">Best Robo-Advisor Cash Management Accounts</a></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_287-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_288-0"> All Investopedia articles that review the robo-advisor companies that make up our list of the best, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wealthfront-review-4587933">Wealthfront</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/betterment-review-4587887">Betterment</a>, are based on the research, data, and grading process described in this methodology, along with subjective insights from our editors and industry experts.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_289-0"></div>
<span class="heading-toc" id="toc-meet-the-investing-research--reviews-team"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_290-0"> <span class="mntl-sc-block-heading__text"> Meet the Investing Research & Reviews Team </span> </h2>
<div class="comp mntl-sc-block mntl-sc-block-bio--universal-image mntl-sc-block-bio mntl-block" id="mntl-sc-block_292-0"><div class="comp mntl-sc-block-bio__person mntl-block" id="mntl-sc-block-bio__person_1-0"><h3 class="comp mntl-sc-block-bio__name mntl-text-block" id="mntl-sc-block-bio__name_1-0">Amrut Deshmukh</h3>
<div class="comp mntl-sc-block-bio__title mntl-text-block" id="mntl-sc-block-bio__title_1-0">Investing & Trading, Research Analyst at Investopedia</div></div>
<div class="comp mntl-sc-block-bio__meta mntl-block" id="mntl-sc-block-bio__meta_1-0"><div class="img-placeholder" style="padding-bottom:109.6%;">
<img alt="Amrut Deshmukh" class="lazyload universal-image__image" data-src="https://www.investopedia.com/thmb/Cy0DfO9ix2B_VlVpDK-1V7QKyFw=/228x250/filters:no_upscale():max_bytes(150000):strip_icc()/Untitleddesign-a3442a70534c4ca2b00d47799d3683a9.png" height="250" width="228"/>
<noscript>
<img alt="Amrut Deshmukh" class="img--noscript universal-image__image" height="250" src="https://www.investopedia.com/thmb/Cy0DfO9ix2B_VlVpDK-1V7QKyFw=/228x250/filters:no_upscale():max_bytes(150000):strip_icc()/Untitleddesign-a3442a70534c4ca2b00d47799d3683a9.png" width="228"/>
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</div></div>
<div class="comp mntl-sc-block-bio__content mntl-block" id="mntl-sc-block-bio__content_1-0"><div class="comp mntl-sc-block-bio__excerpt mntl-text-block" id="mntl-sc-block-bio__excerpt_1-0">As an Investing & Trading Research Analyst at Investopedia, Amrut possesses a strong background in trading, investing, asset management, portfolio management, quantitative fnance, and entrepreneurship. Amrut holds a bachelor's degree in Computer Science & Engineering from Visvesvaraya Technological University (VTU), Bangalore, as well as a Master of Science degree in Finance from the Gabelli School of Business at Fordham University in New York, New York.</div>
<a class="mntl-sc-block-bio__link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/amrut-deshmukh-7968153" id="mntl-sc-block-bio__link_1-0" rel="nocaes"><span class="link__wrapper">Read more</span></a></div></div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_293-0"></div>
<div class="comp mntl-sc-block mntl-sc-block-bio--universal-image mntl-sc-block-bio mntl-block" id="mntl-sc-block_295-0"><div class="comp mntl-sc-block-bio__person mntl-block" id="mntl-sc-block-bio__person_2-0"><h3 class="comp mntl-sc-block-bio__name mntl-text-block" id="mntl-sc-block-bio__name_2-0">Michael Sacchitello</h3>
<div class="comp mntl-sc-block-bio__title mntl-text-block" id="mntl-sc-block-bio__title_2-0">Senior Editor, Investing and Trading Product Reviews</div></div>
<div class="comp mntl-sc-block-bio__meta mntl-block" id="mntl-sc-block-bio__meta_2-0"><div class="img-placeholder" style="padding-bottom:109.6%;">
<img alt="Michael Sacchitello, Senior Editor, Investing and Trading Product Reviews" class="lazyload universal-image__image" data-src="https://www.investopedia.com/thmb/Oe9kQ9xg6AO5Dvu20HC9toh2KG4=/228x250/filters:no_upscale():max_bytes(150000):strip_icc()/MichaelSacchitelloBio-6744f7bcfdbe4b1cb3027f0812327389.jpeg" height="250" width="228"/>
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<img alt="Michael Sacchitello, Senior Editor, Investing and Trading Product Reviews" class="img--noscript universal-image__image" height="250" src="https://www.investopedia.com/thmb/Oe9kQ9xg6AO5Dvu20HC9toh2KG4=/228x250/filters:no_upscale():max_bytes(150000):strip_icc()/MichaelSacchitelloBio-6744f7bcfdbe4b1cb3027f0812327389.jpeg" width="228"/>
</noscript>
</div></div>
<div class="comp mntl-sc-block-bio__content mntl-block" id="mntl-sc-block-bio__content_2-0"><div class="comp mntl-sc-block-bio__excerpt mntl-text-block" id="mntl-sc-block-bio__excerpt_2-0">Michael is the Senior Editor of Investing and Trading Product Reviews for Investopedia and has 20 years of mutual fund, macro market research, institutional trading desk, and trading education experience. He is a chartered member and Subject Matter Expert (SME) for the industry-leading Chartered Market Technicians (CMT) Association.</div>
<a class="mntl-sc-block-bio__link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/michael-sacchitello-5205599" id="mntl-sc-block-bio__link_2-0" rel="nocaes"><span class="link__wrapper">Read more</span></a></div></div></div>
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Investopedia’s list of the best [robo-advisors](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp) is based on in-depth research and robust data across 21 companies that offer digital investment services. We reviewed each company’s account services, investment options, customizable portfolio management features, cash management tools, fees, and much more. This guide explains the categories and criteria we used to evaluate each company’s offerings and our scoring process for determining the best robo-advisors.
Our editors and researchers independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation. Our advertising partnerships are not a factor in how we evaluate products, though they may affect the order of products you see listed in our articles.
## How We Research Robo-Advisors
Through a combination of subject matter expertise, consumer survey and company survey data, and industry research, we developed a quantitative model that scores each company based on nine major categories and 59 criteria that are crucial in evaluating the advisors’ offerings and usability.
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.
In 2023, 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 that are part of our rubric. Participants in this [2023 survey](https://www.investopedia.com/investopedias-2023-robo-advisor-consumer-survey-8303191) opted-in to an online, self-administered questionnaire from a market research vendor. Survey 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.
This 2023 survey was used to inform our weighting and scoring process for our 2024 best robo-advisor awards to best serve readers’ needs. We adjusted the weights for goal planning, fees, portfolio contents, portfolio management, and user experience because our survey told us that those factors matter more and less to readers looking for a robo-advisor.Investors are likely to use robo-advisor platforms to invest for goals like large purchases—houses, vehicles, and travel—more than retirement. The majority of investors who use these platforms are in their 20s and 30s, and consider themselves to have intermediate-to-advanced computer skills. Fee-based financial planning tools and services is the most searched topic by robo-advisor users.
## Robo-Advisor Evaluation Categories
Based on a combination of subject matter expertise and the results of our 2023 Robo-Advisor Consumer Survey, we developed the following category weights:
These categories were then broken down into 59 weighted criteria, resulting in 1,239 data points that make up our scoring rubric.
Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors.
![Titan Demo Pic Edited 1]()
:max_bytes(150000):strip_icc()/TitanDemoPicEdited-1-b762a4f20d634c58b82bd06f4323950f.jpg)
From Titan's online demonstration with Investopedia.
### Data Collection and Scoring
* Data points are scored on a 0.00 - 1.00 scale
* Binary criteria = [0,1]
* Scaled criteria (e.g., 5-point) = [0.00, 0.25, 0.50, 0.75, 1.00]
* Continuous criteria, minimum value in the database was re-scaled to 0.00 and maximum value was re-scaled to 1.00
## Goal Planning
Investors have diverse sets of goals and timelines that extend well beyond simply saving for retirement. That's why having access to tools that help you build the capital needed to make large purchases is also a top considerations when choosing a robo-advisor.
This entire section accounts for 21% of the total weighted score in our evaluation.
To evaluate goal planning, we looked to see if the following tools and features were available to clients:
### Retirement Planning Tools
We score this on a binary scale, awarding 1 point to companies offering retirement planning tools, and 0 points to those that lacked these tools.
### Planning Tools for Large Purchases
We score this on a binary scale. If the robo-advisor offers planning tools for large purchases, a score of 1 was given. For companies lacking these tools, a score of 0 was given.
### Other Goal Tools
For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of goal-planning tools outside of retirement and large purchases the highest scores. Conversely, companies with more limited goal-planning tools received the lowest scores.
## Portfolio Management
The quality and availability of portfolio management features is critical when choosing a robo-advisor. It’s essential to know how portfolios are managed and the features available to clients to monitor their portfolios. This entire section accounts for 17% of the total weighted score in our evaluation.
To evaluate portfolio management, we looked at the following features:
### Automatic Rebalancing
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Companies that provide daily portfolio monitoring and rebalancing based on portfolio drift from predefined thresholds received the highest score, while companies that rebalance with less frequency received a lower score.
### Tax-Loss Harvesting
We score this on a binary scale, giving robo-advisors that provide true tax-loss harvesting features a score of 1, while companies that lack this feature or only provide tax mitigation strategies received a score of 0.
### Frequency of Tax-Loss Harvesting
For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest frequency of tax-loss harvesting activity the highest scores. Conversely, companies with more limited tax-loss harvesting activity received the lowest scores.
### Real-Time Reporting on Progress Towards Goals
We scored this on a binary scale, awarding 1 point to companies that provide real-time reporting on progress toward goals, and 0 points to companies that lack this feature.
### Consideration of Synced External Accounts
We score this on a binary scale. Companies got a score of 1 if they consider synced external accounts when performing critical functions like portfolio analysis or taxable transactions. Companies that lack this feature received a score of 0.
### Account Types
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale of 1 or 0. Companies with the largest selection of supported account types received a higher score and companies with the smallest selection received a lower score.
## Portfolio Contents
The asset management industry is always evolving and new investment vehicles that improve tax efficiency, provide access to new asset classes, and address socially sensitive concerns are constantly being introduced. The best robo-advisors quickly incorporate these features and maintain a wide range of non-proprietary investment types that help lower the barrier to entry, suppress fees, and broaden allocation options.
This entire section accounts for 17% of the total weighted score in our evaluation.
To evaluate portfolio contents, we looked to see if the following asset classes were available to clients:
### Socially Responsible Investing (SRI) or Environment, Social, and Governance (ESG) Options
Robo-advisors that provide SRI or ESG investments were given a binary score of 1, while a 0 was given if these options are not available.
### Non-Proprietary ETFs or Mutual Funds
We scored this item on a continuous scale of 0.00 to 1.00. Companies with the largest selection of non-proprietary ETFs or mutual funds received a high score and companies with the smallest selection received a low score.
### International Stocks and Bonds
For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of international stocks and bonds the highest scores. Conversely, companies with limited international stock and bond offerings received the lowest scores.
### Fractional Shares
We score this on a binary scale. Robo-advisors that offer fractional share investing were given a score of 1, while a lack of this offering resulted in a score of 0.
### Dividends on Fractional Shares
We scored this on a binary scale. Companies that offer customers the ability to collect dividends on fractional shares received a score of 1, while a score of 0 was given to companies lacking this offering.
### Hedging Strategies
We scored this on a binary scale. Companies that employ hedging strategies were given 1 point, and companies that do not use these strategies got 0 points.
## Fees
Because many of these digital wealth management platforms invest client assets in prepackaged portfolios and involve minimal human supervision, they are able to charge lower fees than traditional financial advisors. But there are also a number of robo-advisors that provide more customized products and access to licensed representatives, which may result in higher fees.
This entire section accounts for 15% of the total weighted score in our evaluation.
When analyzing the costs associated with using a robo-advisor’s platform and services, we looked at the following criteria:
### Fees and Commissions Charged for Trading Individual Stocks
We score this on a binary scale. If the ability to trade individual stocks was offered for no fee, a score of 1 was given. Companies that either lacked stock trading capabilities or charged a fee for offering this feature received a score of 0.
### Cost Per Month for an Account With $5,000
We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $5,000 balance the highest scores. We gave companies that charge the most the lowest scores.
### Cost Per Month for an Account With $25,000
We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $25,000 balance the highest scores. We gave companies that charge the most the lowest scores.
### Cost Per Month for an Account With $100,000
We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $100,000 balance the highest scores. We gave companies that charge the most the lowest scores.
### Termination Fees
For this criteria, we score on a binary scale and companies that did not charge a termination fee were given 1 point, while companies charging termination fees received 0.
### Average Underlying Fee for ETFs
We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and gave the highest scores to companies with the lowest average underlying fee for ETFs. Conversely, companies with the highest average underlying fee were given the lowest scores.
## Account Services
In an industry as competitive as the robo-advisor industry, the best platforms must offer robust cash management tools and give access to convenient banking services in order to keep customers happy.
This entire section accounts for 10% of the total weighted score in our evaluation.
Our account services category measures the quantity and quality of the following key services that each platform offers:
### Combining Self-Driven Trading and Robo-Advisor Services
A binary score of 1 was given to companies that provide self-driven trading services at the stand-alone digital advisor level, while a 0 was given to those companies without this capability.
### Placing Trades for Individual Stocks
Companies that allow users to place trades in stocks at the stand-alone digital advisor level were awarded a binary score of 1, while a 0 was given to those companies without this offering.
### Number of Individual Stocks Available to Trade
We scored this item on a continuous scale of 0.00 to 1.00. Companies that offer access to trading in the largest number of stocks received the highest scores, while companies with smaller stock offerings received lower scores.
### Placing Trades for Specific Mutual Funds
Companies that offer their users the ability to place trades for specific mutual funds received a binary score of 1 and companies lacking this offering were given a score of 0.
### Placing Trades for Fixed Income
Companies that offered their users the ability to place trades for fixed income directly, not through ETFs or mutual funds, received a binary score of 1, while a lack of this capability demanded a score of 0.
### Placing Trades for REITs
Robo-advisors that allowed their customers to place trades for REITs at the stand-alone digital level directly, not through ETFs or mutual funds, received a binary score of 1, while companies without this offering received a score of 0.
### Placing Trades for Other Asset Classes
Companies that allowed users to place trades for any other asset classes, such as crypto or forex, received a binary score of 1, and companies without this capability were given a 0.
### Automatic Sweeps
Here, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most automatic sweep options the highest scores. We gave the lowest scores to companies with the fewest options.
### Interest Paid on Cash Balances
The amount of interest paid on cash balances was scored on a continuous scale of 0.00 to 1.00. Companies offering the highest APY on uninvested cash received the highest scores, while companies that offer low or no interest received the lowest scores. Since APYs are variable, we are constantly monitoring how rate changes may impact the winners in our lists.
### Integration With Banking or Brokerage Accounts
Companies that offered integration with banking or brokerage accounts for easy account transfers received a binary score of 1, while a lack of this capability resulted in a score of 0.
### Portfolio Margin Availability
Robo-advisors that make portfolio margin available were given a binary score of 1, while digital advisors without this item received a score of 0.
### Fee Charged for Using Portfolio Margin
We scored this item on a continuous scale of 0.00 to 1.00. Companies that charge the lowest fees for portfolio margin received the highest scores, while companies with the highest fees received lower scores.
### Process for Withdrawing Funds
When it comes to withdrawing funds, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most convenient methods the highest scores. Conversely, companies that added layers of complexity to this process were given the lowest scores. For example, convenient methods include one-click withdrawal, which takes two days to settle, and auto monthly, quarterly, or annual withdrawals.)
### Charitable Giving Options
For this criteria, companies that provided charitable giving options were given a binary score of 1, and those without this capability received a score of 0.
### Discounts Available on Other Products and Services
Companies that offer discounts on other products and services, like lower interest rates on loans provided by the parent company, were given a binary score of 1, while companies without these offerings received a score of 0.
## User Experience
At their core, robo-advisors are digital wealth management platforms, which means human assistance is often limited during the onboarding process. Therefore, the best robo-advisors provide a smooth user journey and easy-to-use features that make investing enjoyable for less experienced investors.
This entire section accounts for 5% of the total weighted score in our evaluation.
To evaluate each platform’s user experience, we looked at the following features:
### Usability
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Our subject matter expert tested the usability of each platform and gave companies with the best user experience a high score. Conversely, platforms that offer a weak user experience were given lower scores.
### iOS App Availability
A binary score of 1 was given to companies that provide an app for iOS devices, while a lack of this app resulted in a score of 0.
### Android App Availability
A binary score of 1 was given to companies that provide an app for Android devices, and a score of 0 was given for no app availability.
## Security and Education
Although robo-advisors are designed so that you only need minimal involvement in the money management process beyond the initial onboarding survey, the best robo-advisors provide useful prompts and other forms of educational content to help guide you along your journey.
In addition, most robo-advisors offer two-factor authentication and encrypted security measures. However, there are meaningful differences in the level of SIPC insurance available to insure your money against institutional failure.
This entire section accounts for 5% of the total weighted score in our evaluation.
When examining the educational and security offerings of the companies we reviewed, we looked at the following criteria:
### Educational Videos
If a robo-advisor offered educational videos, it received a binary score of 1. For robo-advisors without this form of educational content, a score of 0 was given.
### Educational Articles
If a robo-advisor provided access to educational articles, it received a binary score of 1. Any company that lacked this content received a 0.
### Frequently Asked Questions (FAQs)
Companies offering access to FAQs were awarded a binary score of 1, and companies lacking this information received a 0.
### Website Encryption
Robo-advisors that have encrypted websites were given a binary score of 1, and companies lacking this level of security received a 0.
### Two-Factor Authentication
Companies requiring two-factor authentication were awarded a binary score of 1, while companies without this level of security received a 0.
### Excess SIPC Insurance
If robo-advisors offered excess SIPC insurance, they received a binary score of 1. Any company not offering this extra level of security received a 0.
## Customer Service
Some robo-advisor platforms are designed so that the growing number of users who prefer to help themselves can do so using FAQs and features like chatbots. However, other robo-advisors have found better ways to maintain a human element in their customer service for those clients who still need it.
This entire section accounts for 5% of the total weighted score in our evaluation.
When measuring the breadth of customer service offerings each of these digital platforms delivers, we considered the following criteria:
### Online Chat for Prospective Clients
Companies that have an online chat for prospective clients received a binary score of 1, while a 0 was given to companies without this feature.
### Licenses Held by Advisors
For this key criteria, we scaled responses (0.00, 0.25, 0.50, 0.75, 1.00) so that companies that provide access to advisors with the most professional licenses received the highest scores, and advisors with fewer licenses were given the lowest scores.
### Telephone Customer Service Hours
The hours that customer service is made available via telephone was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
### Live Chat Customer Service Hours
The hours that customer service is made available via chat was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability received the lowest scores.
### Email Customer Service Hours
The hours that customer service is made available via email was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
## Account Setup
Many users look for ease and simplicity when setting up any account, and this is especially true when it comes to signing up for and optimizing a digital investment account, such as with a robo-advisor.
This entire section accounts for 5% of the total weighted score in our evaluation.
As we examined the account setup category, we considered the following set of critical criteria:
### Online or Offline Account Setup Process
If the entire process of setting up a robo-advisor account could be completed online, a binary score of 1 was awarded. Conversely, platforms where any part of the process required offline procedures received a 0.
### Minimum Account Size
This item was scored on a continuous scale of 0.00 to 1.00. Companies with the lowest account minimums received higher scores, while companies requiring high account minimums received lower scores.
### Ability to View a Portfolio Prior to Funding
If robo-advisor companies allowed customers to see proposed portfolios prior to funding, they were awarded a binary score of 1. Any companies that did not allow this advantage received a score of 0.
### Portfolio Customization Availability
For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest flexibility of portfolio customization (companies that provided the easiest and most efficient way of portfolio customization like dynamic portfolio allocation, portfolio diversification, etc.) the highest scores. Conversely, companies with limited customization methods received the lowest scores.
### Portfolio Customization Options
When it comes to portfolio customization options, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of portfolio customization options the highest scores (options such as ETF-only portfolios, sustainable impact portfolios, tax aware portfolios, etc.). Conversely, companies with a limited selection received the lowest scores.
### Portfolios Adjustments
If the robo-advisor provides portfolios that adjust according to target dates and specific goals, a binary score of 1 was awarded. Conversely, the lack of this feature received a 0.
## Extra Credit for Access to Human Advisors at No Extra Charge
As the robo-advisor industry has grown increasingly competitive, more and more companies are offering access to human advisors at a variety of service levels. In order to provide our readers with the information necessary to make the most informed decisions possible, our research team collected data at the stand-alone digital advisor level, free of any premium features. We then awarded a credit to companies that allow digital-level customers to speak with a licensed investment professional, and an additional credit if that advice comes at no extra charge.
## Articles That Use Our Methodology
The investment industry is always evolving, with more cutting-edge investment products and platforms constantly being made available. Robo-advisors are an important part of this ever-changing landscape, which is why we’ve written extensively on the subject.
The research conducted and data collected to create this methodology have been used to compile the following list of recommendations:
* [Best Robo-Advisors](https://www.investopedia.com/best-robo-advisors-4693125)
* [Best Robo-Advisor Cash Management Accounts](https://www.investopedia.com/best-robo-advisor-cash-management-accounts-for-2023-7975978)
All Investopedia articles that review the robo-advisor companies that make up our list of the best, such as [Wealthfront](https://www.investopedia.com/wealthfront-review-4587933) and [Betterment](https://www.investopedia.com/betterment-review-4587887), are based on the research, data, and grading process described in this methodology, along with subjective insights from our editors and industry experts.
## Meet the Investing Research & Reviews Team
### Amrut Deshmukh
Investing & Trading, Research Analyst at Investopedia
![Amrut Deshmukh]()
:max_bytes(150000):strip_icc()/Untitleddesign-a3442a70534c4ca2b00d47799d3683a9.png)
As an Investing & Trading Research Analyst at Investopedia, Amrut possesses a strong background in trading, investing, asset management, portfolio management, quantitative fnance, and entrepreneurship. Amrut holds a bachelor's degree in Computer Science & Engineering from Visvesvaraya Technological University (VTU), Bangalore, as well as a Master of Science degree in Finance from the Gabelli School of Business at Fordham University in New York, New York.
[Read more](https://www.investopedia.com/amrut-deshmukh-7968153)
### Michael Sacchitello
Senior Editor, Investing and Trading Product Reviews
![Michael Sacchitello, Senior Editor, Investing and Trading Product Reviews]()
:max_bytes(150000):strip_icc()/MichaelSacchitelloBio-6744f7bcfdbe4b1cb3027f0812327389.jpeg)
Michael is the Senior Editor of Investing and Trading Product Reviews for Investopedia and has 20 years of mutual fund, macro market research, institutional trading desk, and trading education experience. He is a chartered member and Subject Matter Expert (SME) for the industry-leading Chartered Market Technicians (CMT) Association.
[Read more](https://www.investopedia.com/michael-sacchitello-5205599)
|
Investopedia’s list of the best robo-advisors is based on in-depth research and robust data across 21 companies that offer digital investment services. We reviewed each company’s account services, investment options, customizable portfolio management features, cash management tools, fees, and much more. This guide explains the categories and criteria we used to evaluate each company’s offerings and our scoring process for determining the best robo-advisors.
Our editors and researchers independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation. Our advertising partnerships are not a factor in how we evaluate products, though they may affect the order of products you see listed in our articles.
How We Research Robo-Advisors
Through a combination of subject matter expertise, consumer survey and company survey data, and industry research, we developed a quantitative model that scores each company based on nine major categories and 59 criteria that are crucial in evaluating the advisors’ offerings and usability.
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.
In 2023, 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 that are part of our rubric. Participants in this 2023 survey opted-in to an online, self-administered questionnaire from a market research vendor. Survey 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.
This 2023 survey was used to inform our weighting and scoring process for our 2024 best robo-advisor awards to best serve readers’ needs. We adjusted the weights for goal planning, fees, portfolio contents, portfolio management, and user experience because our survey told us that those factors matter more and less to readers looking for a robo-advisor.Investors are likely to use robo-advisor platforms to invest for goals like large purchases—houses, vehicles, and travel—more than retirement. The majority of investors who use these platforms are in their 20s and 30s, and consider themselves to have intermediate-to-advanced computer skills. Fee-based financial planning tools and services is the most searched topic by robo-advisor users.
Robo-Advisor Evaluation Categories
Based on a combination of subject matter expertise and the results of our 2023 Robo-Advisor Consumer Survey, we developed the following category weights:
These categories were then broken down into 59 weighted criteria, resulting in 1,239 data points that make up our scoring rubric.
Through this all-encompassing data collection and review process, Investopedia has provided you with an unbiased and thorough review of the top robo-advisors.
From Titan's online demonstration with Investopedia.
Data Collection and Scoring
Data points are scored on a 0.00 - 1.00 scaleBinary criteria = [0,1]Scaled criteria (e.g., 5-point) = [0.00, 0.25, 0.50, 0.75, 1.00]Continuous criteria, minimum value in the database was re-scaled to 0.00 and maximum value was re-scaled to 1.00
Goal Planning
Investors have diverse sets of goals and timelines that extend well beyond simply saving for retirement. That's why having access to tools that help you build the capital needed to make large purchases is also a top considerations when choosing a robo-advisor.
This entire section accounts for 21% of the total weighted score in our evaluation.
To evaluate goal planning, we looked to see if the following tools and features were available to clients:
Retirement Planning Tools
We score this on a binary scale, awarding 1 point to companies offering retirement planning tools, and 0 points to those that lacked these tools.
Planning Tools for Large Purchases
We score this on a binary scale. If the robo-advisor offers planning tools for large purchases, a score of 1 was given. For companies lacking these tools, a score of 0 was given.
Other Goal Tools
For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of goal-planning tools outside of retirement and large purchases the highest scores. Conversely, companies with more limited goal-planning tools received the lowest scores.
Portfolio Management
The quality and availability of portfolio management features is critical when choosing a robo-advisor. It’s essential to know how portfolios are managed and the features available to clients to monitor their portfolios. This entire section accounts for 17% of the total weighted score in our evaluation.
To evaluate portfolio management, we looked at the following features:
Automatic Rebalancing
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Companies that provide daily portfolio monitoring and rebalancing based on portfolio drift from predefined thresholds received the highest score, while companies that rebalance with less frequency received a lower score.
Tax-Loss Harvesting
We score this on a binary scale, giving robo-advisors that provide true tax-loss harvesting features a score of 1, while companies that lack this feature or only provide tax mitigation strategies received a score of 0.
Frequency of Tax-Loss Harvesting
For this criteria, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest frequency of tax-loss harvesting activity the highest scores. Conversely, companies with more limited tax-loss harvesting activity received the lowest scores.
Real-Time Reporting on Progress Towards Goals
We scored this on a binary scale, awarding 1 point to companies that provide real-time reporting on progress toward goals, and 0 points to companies that lack this feature.
Consideration of Synced External Accounts
We score this on a binary scale. Companies got a score of 1 if they consider synced external accounts when performing critical functions like portfolio analysis or taxable transactions. Companies that lack this feature received a score of 0.
Account Types
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale of 1 or 0. Companies with the largest selection of supported account types received a higher score and companies with the smallest selection received a lower score.
Portfolio Contents
The asset management industry is always evolving and new investment vehicles that improve tax efficiency, provide access to new asset classes, and address socially sensitive concerns are constantly being introduced. The best robo-advisors quickly incorporate these features and maintain a wide range of non-proprietary investment types that help lower the barrier to entry, suppress fees, and broaden allocation options.
This entire section accounts for 17% of the total weighted score in our evaluation.
To evaluate portfolio contents, we looked to see if the following asset classes were available to clients:
Socially Responsible Investing (SRI) or Environment, Social, and Governance (ESG) Options
Robo-advisors that provide SRI or ESG investments were given a binary score of 1, while a 0 was given if these options are not available.
Non-Proprietary ETFs or Mutual Funds
We scored this item on a continuous scale of 0.00 to 1.00. Companies with the largest selection of non-proprietary ETFs or mutual funds received a high score and companies with the smallest selection received a low score.
International Stocks and Bonds
For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of international stocks and bonds the highest scores. Conversely, companies with limited international stock and bond offerings received the lowest scores.
Fractional Shares
We score this on a binary scale. Robo-advisors that offer fractional share investing were given a score of 1, while a lack of this offering resulted in a score of 0.
Dividends on Fractional Shares
We scored this on a binary scale. Companies that offer customers the ability to collect dividends on fractional shares received a score of 1, while a score of 0 was given to companies lacking this offering.
Hedging Strategies
We scored this on a binary scale. Companies that employ hedging strategies were given 1 point, and companies that do not use these strategies got 0 points.
Fees
Because many of these digital wealth management platforms invest client assets in prepackaged portfolios and involve minimal human supervision, they are able to charge lower fees than traditional financial advisors. But there are also a number of robo-advisors that provide more customized products and access to licensed representatives, which may result in higher fees.
This entire section accounts for 15% of the total weighted score in our evaluation.
When analyzing the costs associated with using a robo-advisor’s platform and services, we looked at the following criteria:
Fees and Commissions Charged for Trading Individual Stocks
We score this on a binary scale. If the ability to trade individual stocks was offered for no fee, a score of 1 was given. Companies that either lacked stock trading capabilities or charged a fee for offering this feature received a score of 0.
Cost Per Month for an Account With $5,000
We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $5,000 balance the highest scores. We gave companies that charge the most the lowest scores.
Cost Per Month for an Account With $25,000
We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $25,000 balance the highest scores. We gave companies that charge the most the lowest scores.
Cost Per Month for an Account With $100,000
We used scaled criteria (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies that levy the lowest fees on accounts with a $100,000 balance the highest scores. We gave companies that charge the most the lowest scores.
Termination Fees
For this criteria, we score on a binary scale and companies that did not charge a termination fee were given 1 point, while companies charging termination fees received 0.
Average Underlying Fee for ETFs
We used a scaled criteria model (0.00, 0.25, 0.50, 0.75, 1.00) and gave the highest scores to companies with the lowest average underlying fee for ETFs. Conversely, companies with the highest average underlying fee were given the lowest scores.
Account Services
In an industry as competitive as the robo-advisor industry, the best platforms must offer robust cash management tools and give access to convenient banking services in order to keep customers happy.
This entire section accounts for 10% of the total weighted score in our evaluation.
Our account services category measures the quantity and quality of the following key services that each platform offers:
Combining Self-Driven Trading and Robo-Advisor Services
A binary score of 1 was given to companies that provide self-driven trading services at the stand-alone digital advisor level, while a 0 was given to those companies without this capability.
Placing Trades for Individual Stocks
Companies that allow users to place trades in stocks at the stand-alone digital advisor level were awarded a binary score of 1, while a 0 was given to those companies without this offering.
Number of Individual Stocks Available to Trade
We scored this item on a continuous scale of 0.00 to 1.00. Companies that offer access to trading in the largest number of stocks received the highest scores, while companies with smaller stock offerings received lower scores.
Placing Trades for Specific Mutual Funds
Companies that offer their users the ability to place trades for specific mutual funds received a binary score of 1 and companies lacking this offering were given a score of 0.
Placing Trades for Fixed Income
Companies that offered their users the ability to place trades for fixed income directly, not through ETFs or mutual funds, received a binary score of 1, while a lack of this capability demanded a score of 0.
Placing Trades for REITs
Robo-advisors that allowed their customers to place trades for REITs at the stand-alone digital level directly, not through ETFs or mutual funds, received a binary score of 1, while companies without this offering received a score of 0.
Placing Trades for Other Asset Classes
Companies that allowed users to place trades for any other asset classes, such as crypto or forex, received a binary score of 1, and companies without this capability were given a 0.
Automatic Sweeps
Here, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most automatic sweep options the highest scores. We gave the lowest scores to companies with the fewest options.
Interest Paid on Cash Balances
The amount of interest paid on cash balances was scored on a continuous scale of 0.00 to 1.00. Companies offering the highest APY on uninvested cash received the highest scores, while companies that offer low or no interest received the lowest scores. Since APYs are variable, we are constantly monitoring how rate changes may impact the winners in our lists.
Integration With Banking or Brokerage Accounts
Companies that offered integration with banking or brokerage accounts for easy account transfers received a binary score of 1, while a lack of this capability resulted in a score of 0.
Portfolio Margin Availability
Robo-advisors that make portfolio margin available were given a binary score of 1, while digital advisors without this item received a score of 0.
Fee Charged for Using Portfolio Margin
We scored this item on a continuous scale of 0.00 to 1.00. Companies that charge the lowest fees for portfolio margin received the highest scores, while companies with the highest fees received lower scores.
Process for Withdrawing Funds
When it comes to withdrawing funds, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the most convenient methods the highest scores. Conversely, companies that added layers of complexity to this process were given the lowest scores. For example, convenient methods include one-click withdrawal, which takes two days to settle, and auto monthly, quarterly, or annual withdrawals.)
Charitable Giving Options
For this criteria, companies that provided charitable giving options were given a binary score of 1, and those without this capability received a score of 0.
Discounts Available on Other Products and Services
Companies that offer discounts on other products and services, like lower interest rates on loans provided by the parent company, were given a binary score of 1, while companies without these offerings received a score of 0.
User Experience
At their core, robo-advisors are digital wealth management platforms, which means human assistance is often limited during the onboarding process. Therefore, the best robo-advisors provide a smooth user journey and easy-to-use features that make investing enjoyable for less experienced investors.
This entire section accounts for 5% of the total weighted score in our evaluation.
To evaluate each platform’s user experience, we looked at the following features:
Usability
We scored this item on a continuous scale of 0.00 to 1.00, as opposed to a binary scale. Our subject matter expert tested the usability of each platform and gave companies with the best user experience a high score. Conversely, platforms that offer a weak user experience were given lower scores.
iOS App Availability
A binary score of 1 was given to companies that provide an app for iOS devices, while a lack of this app resulted in a score of 0.
Android App Availability
A binary score of 1 was given to companies that provide an app for Android devices, and a score of 0 was given for no app availability.
Security and Education
Although robo-advisors are designed so that you only need minimal involvement in the money management process beyond the initial onboarding survey, the best robo-advisors provide useful prompts and other forms of educational content to help guide you along your journey.
In addition, most robo-advisors offer two-factor authentication and encrypted security measures. However, there are meaningful differences in the level of SIPC insurance available to insure your money against institutional failure.
This entire section accounts for 5% of the total weighted score in our evaluation.
When examining the educational and security offerings of the companies we reviewed, we looked at the following criteria:
Educational Videos
If a robo-advisor offered educational videos, it received a binary score of 1. For robo-advisors without this form of educational content, a score of 0 was given.
Educational Articles
If a robo-advisor provided access to educational articles, it received a binary score of 1. Any company that lacked this content received a 0.
Frequently Asked Questions (FAQs)
Companies offering access to FAQs were awarded a binary score of 1, and companies lacking this information received a 0.
Website Encryption
Robo-advisors that have encrypted websites were given a binary score of 1, and companies lacking this level of security received a 0.
Two-Factor Authentication
Companies requiring two-factor authentication were awarded a binary score of 1, while companies without this level of security received a 0.
Excess SIPC Insurance
If robo-advisors offered excess SIPC insurance, they received a binary score of 1. Any company not offering this extra level of security received a 0.
Customer Service
Some robo-advisor platforms are designed so that the growing number of users who prefer to help themselves can do so using FAQs and features like chatbots. However, other robo-advisors have found better ways to maintain a human element in their customer service for those clients who still need it.
This entire section accounts for 5% of the total weighted score in our evaluation.
When measuring the breadth of customer service offerings each of these digital platforms delivers, we considered the following criteria:
Online Chat for Prospective Clients
Companies that have an online chat for prospective clients received a binary score of 1, while a 0 was given to companies without this feature.
Licenses Held by Advisors
For this key criteria, we scaled responses (0.00, 0.25, 0.50, 0.75, 1.00) so that companies that provide access to advisors with the most professional licenses received the highest scores, and advisors with fewer licenses were given the lowest scores.
Telephone Customer Service Hours
The hours that customer service is made available via telephone was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
Live Chat Customer Service Hours
The hours that customer service is made available via chat was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability received the lowest scores.
Email Customer Service Hours
The hours that customer service is made available via email was scaled (0.00, 0.25, 0.50, 0.75, 1.00) so that companies with the most availability were given the highest scores, and companies with limited availability were given the lowest scores.
Account Setup
Many users look for ease and simplicity when setting up any account, and this is especially true when it comes to signing up for and optimizing a digital investment account, such as with a robo-advisor.
This entire section accounts for 5% of the total weighted score in our evaluation.
As we examined the account setup category, we considered the following set of critical criteria:
Online or Offline Account Setup Process
If the entire process of setting up a robo-advisor account could be completed online, a binary score of 1 was awarded. Conversely, platforms where any part of the process required offline procedures received a 0.
Minimum Account Size
This item was scored on a continuous scale of 0.00 to 1.00. Companies with the lowest account minimums received higher scores, while companies requiring high account minimums received lower scores.
Ability to View a Portfolio Prior to Funding
If robo-advisor companies allowed customers to see proposed portfolios prior to funding, they were awarded a binary score of 1. Any companies that did not allow this advantage received a score of 0.
Portfolio Customization Availability
For this item, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the greatest flexibility of portfolio customization (companies that provided the easiest and most efficient way of portfolio customization like dynamic portfolio allocation, portfolio diversification, etc.) the highest scores. Conversely, companies with limited customization methods received the lowest scores.
Portfolio Customization Options
When it comes to portfolio customization options, we scaled the responses (0.00, 0.25, 0.50, 0.75, 1.00) and awarded companies with the largest selection of portfolio customization options the highest scores (options such as ETF-only portfolios, sustainable impact portfolios, tax aware portfolios, etc.). Conversely, companies with a limited selection received the lowest scores.
Portfolios Adjustments
If the robo-advisor provides portfolios that adjust according to target dates and specific goals, a binary score of 1 was awarded. Conversely, the lack of this feature received a 0.
Extra Credit for Access to Human Advisors at No Extra Charge
As the robo-advisor industry has grown increasingly competitive, more and more companies are offering access to human advisors at a variety of service levels. In order to provide our readers with the information necessary to make the most informed decisions possible, our research team collected data at the stand-alone digital advisor level, free of any premium features. We then awarded a credit to companies that allow digital-level customers to speak with a licensed investment professional, and an additional credit if that advice comes at no extra charge.
Articles That Use Our Methodology
The investment industry is always evolving, with more cutting-edge investment products and platforms constantly being made available. Robo-advisors are an important part of this ever-changing landscape, which is why we’ve written extensively on the subject.
The research conducted and data collected to create this methodology have been used to compile the following list of recommendations:
Best Robo-Advisors
Best Robo-Advisor Cash Management Accounts
All Investopedia articles that review the robo-advisor companies that make up our list of the best, such as Wealthfront and Betterment, are based on the research, data, and grading process described in this methodology, along with subjective insights from our editors and industry experts.
Meet the Investing Research & Reviews Team
Amrut Deshmukh
Investing & Trading, Research Analyst at Investopedia
As an Investing & Trading Research Analyst at Investopedia, Amrut possesses a strong background in trading, investing, asset management, portfolio management, quantitative fnance, and entrepreneurship. Amrut holds a bachelor's degree in Computer Science & Engineering from Visvesvaraya Technological University (VTU), Bangalore, as well as a Master of Science degree in Finance from the Gabelli School of Business at Fordham University in New York, New York.
Read more
Michael Sacchitello
Senior Editor, Investing and Trading Product Reviews
Michael is the Senior Editor of Investing and Trading Product Reviews for Investopedia and has 20 years of mutual fund, macro market research, institutional trading desk, and trading education experience. He is a chartered member and Subject Matter Expert (SME) for the industry-leading Chartered Market Technicians (CMT) Association.
Read more
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https://www.investopedia.com/terms/c/convexity-adjustment.asp
|
Convexity Adjustment in Bonds: Calculations and Formulas
|
<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-convexity-adjustment"></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 Convexity Adjustment? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A convexity adjustment is a change required to be made to a forward interest rate or yield to get the expected future interest rate or yield. This adjustment is made in response to a difference between the forward interest rate and the future interest rate; this difference has to be added to the former to arrive at the latter. The need for this adjustment arises because of the non-linear relationship between bond prices and yields.
</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>Convexity adjustment involves modifying a bond's convexity based on the difference in forward and future interest rates.</li><li>As its name suggests, convexity is non-linear. It is for this reason that adjustments to it must be made from time to time.</li><li>A bond's convexity measures how its duration changes as a result of changes in interest rates or time to maturity.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-formula-for-convexity-adjustment-is"></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 Formula for Convexity Adjustment Is </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <span data-value="\begin{aligned} &CA = CV \times 100 \times (\Delta y)^2 \\ &\textbf{where:} \\ &CV=\text{Bond's convexity} \\ &\Delta y=\text{Change of yield} \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
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<mi>
C
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</mo>
<mi>
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</mo>
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Δ
</mi>
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y
</mi>
<msup>
<mo>
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<mtext>
where:
</mtext>
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</mstyle>
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<mi>
C
</mi>
<mi>
V
</mi>
<mo>
=
</mo>
<mtext>
Bond’s convexity
</mtext>
</mrow>
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Change of yield
</mtext>
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<annotation encoding="application/x-tex">
\begin{aligned} &CA = CV \times 100 \times (\Delta y)^2 \\ &\textbf{where:} \\ &CV=\text{Bond's convexity} \\ &\Delta y=\text{Change of yield} \\ \end{aligned}
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="strut"></span><span class="strut bottom"></span><span class="base"><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></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 mathit">C</span><span class="mord mathit">A</span><span class="mrel">=</span><span class="mord mathit">C</span><span class="mord mathit">V</span><span class="mbin">×</span><span class="mord mathrm">1</span><span class="mord mathrm">0</span><span class="mord mathrm">0</span><span class="mbin">×</span><span class="mopen">(</span><span class="mord mathrm">Δ</span><span class="mord mathit">y</span><span class="mclose"><span class="mclose">)</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mathrm mtight">2</span></span></span></span></span></span></span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord mathbf">where:</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathit">C</span><span class="mord mathit">V</span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Bond’s convexity</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord mathrm">Δ</span><span class="mord mathit">y</span><span class="mrel">=</span><span class="mord text"><span class="mord mathrm">Change of yield</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></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_8-0"></div>
<span class="heading-toc" id="toc-what-does-the-convexity-adjustment-tell-you"></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"> What Does the Convexity Adjustment Tell You? </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/c/convexity.asp">Convexity</a> refers to the non-linear change in the price of an output given a change in the price or rate of an underlying variable. The price of the output, instead, depends on the second derivative. In reference to bonds, convexity is the second derivative of bond price with respect to interest rates.
</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"> Bond prices move inversely with interest rates—when interest rates rise, bond prices decline, and vice versa. To state this differently, the relationship between price and yield is not linear, but convex. To measure <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestraterisk.asp">interest rate risk</a> due to changes in the prevailing interest rates in the economy, the duration of the bond can be calculated.
</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"> Duration is the weighted average of the present value of coupon payments and principal repayment. It is measured in years and estimates the percent change in a bond’s price for a small change in the interest rate. One can think of duration as the tool that measures the linear change of an otherwise non-linear function.
</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"> Convexity is the rate that the duration changes along the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldcurve.asp">yield curve</a>. Thus, it's the first derivative of the equation for the duration and the second derivative of the equation for the price-yield function or the function for change in bond prices following a change in interest rates.
</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"> Because the estimated price change using duration may not be accurate for a large change in yield due to the convex nature of the yield curve, convexity helps to approximate the change in price that is not captured or explained by duration.
</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"> A convexity adjustment takes into account the curvature of the price-yield relationship shown in a yield curve in order to estimate a more accurate price for larger changes in interest rates. To improve the estimate provided by duration, a convexity adjustment measure can be used.
</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-how-to-use-convexity-adjustment"></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 How to Use Convexity Adjustment </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Take a look at this example of how convexity adjustment is applied:
</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"> <span data-value="\begin{aligned} &\text{AMD} = -\text{Duration} \times \text{Change in Yield} \\ &\textbf{where:} \\ &\text{AMD} = \text{Annual modified duration} \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
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AMD
</mtext>
<mo>
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<mo>
−
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<mtext>
Duration
</mtext>
<mo>
×
</mo>
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Change in Yield
</mtext>
</mrow>
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where:
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AMD
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Annual modified duration
</mtext>
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</mstyle>
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</mtr>
</mtable>
<annotation encoding="application/x-tex">
\begin{aligned} &\text{AMD} = -\text{Duration} \times \text{Change in Yield} \\ &\textbf{where:} \\ &\text{AMD} = \text{Annual modified duration} \\ \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><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">AMD</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord">−</span><span class="mord text"><span class="mord">Duration</span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord text"><span class="mord">Change in Yield</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">AMD</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Annual modified duration</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_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <span data-value="\begin{aligned} &\text{CA} = \frac{ 1 }{ 2 } \times \text{BC} \times \text{Change in Yield} ^2 \\ &\textbf{where:} \\ &\text{CA} = \text{Convexity adjustment} \\ &\text{BC} = \text{Bond's convexity} \\ \end{aligned}"><span class="katex"><span class="katex-mathml">
<math>
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<mtext>
CA
</mtext>
<mo>
=
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<mn>
1
</mn>
<mn>
2
</mn>
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<mo>
×
</mo>
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BC
</mtext>
<mo>
×
</mo>
<msup>
<mtext>
Change in Yield
</mtext>
<mn>
2
</mn>
</msup>
</mrow>
</mstyle>
</mtd>
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<mtr>
<mtd>
<mstyle>
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</mtd>
<mtd>
<mstyle>
<mrow>
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<mtext>
where:
</mtext>
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<mstyle>
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<mtext>
CA
</mtext>
<mo>
=
</mo>
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Convexity adjustment
</mtext>
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</mstyle>
</mtd>
</mtr>
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<mstyle>
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<mrow>
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<mtext>
BC
</mtext>
<mo>
=
</mo>
<mtext>
Bond’s convexity
</mtext>
</mrow>
</mstyle>
</mtd>
</mtr>
</mtable>
<annotation encoding="application/x-tex">
\begin{aligned} &\text{CA} = \frac{ 1 }{ 2 } \times \text{BC} \times \text{Change in Yield} ^2 \\ &\textbf{where:} \\ &\text{CA} = \text{Convexity adjustment} \\ &\text{BC} = \text{Bond's convexity} \\ \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">CA</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">2</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">1</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 class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord text"><span class="mord">BC</span></span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span><span class="mord"><span class="mord text"><span class="mord">Change in Yield</span></span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></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">CA</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Convexity adjustment</span></span></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord"></span><span class="mord text"><span class="mord">BC</span></span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span><span class="mord text"><span class="mord">Bond’s convexity</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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Assume a bond has an annual convexity of 780 and an annual modified duration of 25.00. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldtomaturity.asp">yield to maturity</a> is 2.5% and is expected to increase by 100 basis points (bps):
</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"> <span data-value="\text{AMD} = -25 \times 0.01 = -0.25 = -25\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mtext>
AMD
</mtext>
<mo>
=
</mo>
<mo>
−
</mo>
<mn>
25
</mn>
<mo>
×
</mo>
<mn>
0.01
</mn>
<mo>
=
</mo>
<mo>
−
</mo>
<mn>
0.25
</mn>
<mo>
=
</mo>
<mo>
−
</mo>
<mn>
25
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
\text{AMD} = -25 \times 0.01 = -0.25 = -25\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">AMD</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><span class="mord">2</span><span class="mord">5</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">0</span><span class="mord">.</span><span class="mord">0</span><span class="mord">1</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><span class="mord">0</span><span class="mord">.</span><span class="mord">2</span><span class="mord">5</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><span class="mord">2</span><span class="mord">5</span><span class="mord">%</span></span></span></span></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"> Note that 100 basis points is equivalent to 1%.
</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"> <span data-value="\text{CA} = \frac{1}{2} \times 780 \times 0.01^2 = 0.039 = 3.9\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mtext>
CA
</mtext>
<mo>
=
</mo>
<mfrac>
<mn>
1
</mn>
<mn>
2
</mn>
</mfrac>
<mo>
×
</mo>
<mn>
780
</mn>
<mo>
×
</mo>
<mn>
0.0
</mn>
<msup>
<mn>
1
</mn>
<mn>
2
</mn>
</msup>
<mo>
=
</mo>
<mn>
0.039
</mn>
<mo>
=
</mo>
<mn>
3.9
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
\text{CA} = \frac{1}{2} \times 780 \times 0.01^2 = 0.039 = 3.9\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">CA</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 mtight">2</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 mtight">1</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 class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">7</span><span class="mord">8</span><span class="mord">0</span><span class="mspace"></span><span class="mbin">×</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">0</span><span class="mord">.</span><span class="mord">0</span><span class="mord"><span class="mord">1</span><span class="msupsub"><span class="vlist-t"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="sizing reset-size6 size3 mtight"><span class="mord mtight">2</span></span></span></span></span></span></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">0</span><span class="mord">.</span><span class="mord">0</span><span class="mord">3</span><span class="mord">9</span><span class="mspace"></span><span class="mrel">=</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">3</span><span class="mord">.</span><span class="mord">9</span><span class="mord">%</span></span></span></span></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"> The estimated price change of the bond following a 100 bps increase in yield is:
</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"> <span data-value="\text{Annual Duration} + \text{CA} = -25\% + 3.9\% = -21.1\%"><span class="katex"><span class="katex-mathml">
<math>
<semantics>
<mrow>
<mtext>
Annual Duration
</mtext>
<mo>
+
</mo>
<mtext>
CA
</mtext>
<mo>
=
</mo>
<mo>
−
</mo>
<mn>
25
</mn>
<mi>
%
</mi>
<mo>
+
</mo>
<mn>
3.9
</mn>
<mi>
%
</mi>
<mo>
=
</mo>
<mo>
−
</mo>
<mn>
21.1
</mn>
<mi>
%
</mi>
</mrow>
<annotation encoding="application/x-tex">
\text{Annual Duration} + \text{CA} = -25\% + 3.9\% = -21.1\%
</annotation>
</semantics>
</math></span><span class="katex-html"><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">Annual Duration</span></span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord text"><span class="mord">CA</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><span class="mord">2</span><span class="mord">5</span><span class="mord">%</span><span class="mspace"></span><span class="mbin">+</span><span class="mspace"></span></span><span class="base"><span class="strut"></span><span class="mord">3</span><span class="mord">.</span><span class="mord">9</span><span class="mord">%</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><span class="mord">2</span><span class="mord">1</span><span class="mord">.</span><span class="mord">1</span><span class="mord">%</span></span></span></span></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"> Remember that an increase in yield leads to a fall in prices, and vice versa. An adjustment for convexity is often necessary when pricing bonds, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrateswap.asp">interest rate swaps</a>, and other derivatives. This adjustment is required because of the unsymmetrical change in the price of a bond in relation to changes in interest rates or yields.
</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, the percentage increase in the price of a bond for a defined decrease in rates or yields is always more than the decline in the bond price for the same increase in rates or yields. Several factors influence the convexity of a bond, including its coupon rate, duration, maturity, and current price.
</p></div>
|
## What Is a Convexity Adjustment?
A convexity adjustment is a change required to be made to a forward interest rate or yield to get the expected future interest rate or yield. This adjustment is made in response to a difference between the forward interest rate and the future interest rate; this difference has to be added to the former to arrive at the latter. The need for this adjustment arises because of the non-linear relationship between bond prices and yields.
### Key Takeaways
* Convexity adjustment involves modifying a bond's convexity based on the difference in forward and future interest rates.
* As its name suggests, convexity is non-linear. It is for this reason that adjustments to it must be made from time to time.
* A bond's convexity measures how its duration changes as a result of changes in interest rates or time to maturity.
## The Formula for Convexity Adjustment Is
C
A
=
C
V
×
1
0
0
×
(
Δ
y
)
2
where:
C
V
=
Bond’s convexity
Δ
y
=
Change of yield
\begin{aligned} &CA = CV \times 100 \times (\Delta y)^2 \\ &\textbf{where:} \\ &CV=\text{Bond's convexity} \\ &\Delta y=\text{Change of yield} \\ \end{aligned}
CA=CV×100×(Δy)2where:CV=Bond’s convexityΔy=Change of yield
## What Does the Convexity Adjustment Tell You?
[Convexity](https://www.investopedia.com/terms/c/convexity.asp) refers to the non-linear change in the price of an output given a change in the price or rate of an underlying variable. The price of the output, instead, depends on the second derivative. In reference to bonds, convexity is the second derivative of bond price with respect to interest rates.
Bond prices move inversely with interest rates—when interest rates rise, bond prices decline, and vice versa. To state this differently, the relationship between price and yield is not linear, but convex. To measure [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp) due to changes in the prevailing interest rates in the economy, the duration of the bond can be calculated.
Duration is the weighted average of the present value of coupon payments and principal repayment. It is measured in years and estimates the percent change in a bond’s price for a small change in the interest rate. One can think of duration as the tool that measures the linear change of an otherwise non-linear function.
Convexity is the rate that the duration changes along the [yield curve](https://www.investopedia.com/terms/y/yieldcurve.asp). Thus, it's the first derivative of the equation for the duration and the second derivative of the equation for the price-yield function or the function for change in bond prices following a change in interest rates.
Because the estimated price change using duration may not be accurate for a large change in yield due to the convex nature of the yield curve, convexity helps to approximate the change in price that is not captured or explained by duration.
A convexity adjustment takes into account the curvature of the price-yield relationship shown in a yield curve in order to estimate a more accurate price for larger changes in interest rates. To improve the estimate provided by duration, a convexity adjustment measure can be used.
## Example of How to Use Convexity Adjustment
Take a look at this example of how convexity adjustment is applied:
AMD
=
−
Duration
×
Change in Yield
where:
AMD
=
Annual modified duration
\begin{aligned} &\text{AMD} = -\text{Duration} \times \text{Change in Yield} \\ &\textbf{where:} \\ &\text{AMD} = \text{Annual modified duration} \\ \end{aligned}
AMD=−Duration×Change in Yieldwhere:AMD=Annual modified duration
CA
=
1
2
×
BC
×
Change in Yield
2
where:
CA
=
Convexity adjustment
BC
=
Bond’s convexity
\begin{aligned} &\text{CA} = \frac{ 1 }{ 2 } \times \text{BC} \times \text{Change in Yield} ^2 \\ &\textbf{where:} \\ &\text{CA} = \text{Convexity adjustment} \\ &\text{BC} = \text{Bond's convexity} \\ \end{aligned}
CA=21×BC×Change in Yield2where:CA=Convexity adjustmentBC=Bond’s convexity
Assume a bond has an annual convexity of 780 and an annual modified duration of 25.00. The [yield to maturity](https://www.investopedia.com/terms/y/yieldtomaturity.asp) is 2.5% and is expected to increase by 100 basis points (bps):
AMD
=
−
25
×
0.01
=
−
0.25
=
−
25
%
\text{AMD} = -25 \times 0.01 = -0.25 = -25\%
AMD=−25×0.01=−0.25=−25%
Note that 100 basis points is equivalent to 1%.
CA
=
1
2
×
780
×
0.0
1
2
=
0.039
=
3.9
%
\text{CA} = \frac{1}{2} \times 780 \times 0.01^2 = 0.039 = 3.9\%
CA=21×780×0.012=0.039=3.9%
The estimated price change of the bond following a 100 bps increase in yield is:
Annual Duration
+
CA
=
−
25
%
+
3.9
%
=
−
21.1
%
\text{Annual Duration} + \text{CA} = -25\% + 3.9\% = -21.1\%
Annual Duration+CA=−25%+3.9%=−21.1%
Remember that an increase in yield leads to a fall in prices, and vice versa. An adjustment for convexity is often necessary when pricing bonds, [interest rate swaps](https://www.investopedia.com/terms/i/interestrateswap.asp), and other derivatives. This adjustment is required because of the unsymmetrical change in the price of a bond in relation to changes in interest rates or yields.
In other words, the percentage increase in the price of a bond for a defined decrease in rates or yields is always more than the decline in the bond price for the same increase in rates or yields. Several factors influence the convexity of a bond, including its coupon rate, duration, maturity, and current price.
|
What Is a Convexity Adjustment?
A convexity adjustment is a change required to be made to a forward interest rate or yield to get the expected future interest rate or yield. This adjustment is made in response to a difference between the forward interest rate and the future interest rate; this difference has to be added to the former to arrive at the latter. The need for this adjustment arises because of the non-linear relationship between bond prices and yields.
Key Takeaways
Convexity adjustment involves modifying a bond's convexity based on the difference in forward and future interest rates.As its name suggests, convexity is non-linear. It is for this reason that adjustments to it must be made from time to time.A bond's convexity measures how its duration changes as a result of changes in interest rates or time to maturity.
The Formula for Convexity Adjustment Is
C
A
=
C
V
×
1
0
0
×
(
Δ
y
)
2
where:
C
V
=
Bond’s convexity
Δ
y
=
Change of yield
\begin{aligned} &CA = CV \times 100 \times (\Delta y)^2 \\ &\textbf{where:} \\ &CV=\text{Bond's convexity} \\ &\Delta y=\text{Change of yield} \\ \end{aligned}
CA=CV×100×(Δy)2where:CV=Bond’s convexityΔy=Change of yield
What Does the Convexity Adjustment Tell You?
Convexity refers to the non-linear change in the price of an output given a change in the price or rate of an underlying variable. The price of the output, instead, depends on the second derivative. In reference to bonds, convexity is the second derivative of bond price with respect to interest rates.
Bond prices move inversely with interest rates—when interest rates rise, bond prices decline, and vice versa. To state this differently, the relationship between price and yield is not linear, but convex. To measure interest rate risk due to changes in the prevailing interest rates in the economy, the duration of the bond can be calculated.
Duration is the weighted average of the present value of coupon payments and principal repayment. It is measured in years and estimates the percent change in a bond’s price for a small change in the interest rate. One can think of duration as the tool that measures the linear change of an otherwise non-linear function.
Convexity is the rate that the duration changes along the yield curve. Thus, it's the first derivative of the equation for the duration and the second derivative of the equation for the price-yield function or the function for change in bond prices following a change in interest rates.
Because the estimated price change using duration may not be accurate for a large change in yield due to the convex nature of the yield curve, convexity helps to approximate the change in price that is not captured or explained by duration.
A convexity adjustment takes into account the curvature of the price-yield relationship shown in a yield curve in order to estimate a more accurate price for larger changes in interest rates. To improve the estimate provided by duration, a convexity adjustment measure can be used.
Example of How to Use Convexity Adjustment
Take a look at this example of how convexity adjustment is applied:
AMD
=
−
Duration
×
Change in Yield
where:
AMD
=
Annual modified duration
\begin{aligned} &\text{AMD} = -\text{Duration} \times \text{Change in Yield} \\ &\textbf{where:} \\ &\text{AMD} = \text{Annual modified duration} \\ \end{aligned}
AMD=−Duration×Change in Yieldwhere:AMD=Annual modified duration
CA
=
1
2
×
BC
×
Change in Yield
2
where:
CA
=
Convexity adjustment
BC
=
Bond’s convexity
\begin{aligned} &\text{CA} = \frac{ 1 }{ 2 } \times \text{BC} \times \text{Change in Yield} ^2 \\ &\textbf{where:} \\ &\text{CA} = \text{Convexity adjustment} \\ &\text{BC} = \text{Bond's convexity} \\ \end{aligned}
CA=21×BC×Change in Yield2where:CA=Convexity adjustmentBC=Bond’s convexity
Assume a bond has an annual convexity of 780 and an annual modified duration of 25.00. The yield to maturity is 2.5% and is expected to increase by 100 basis points (bps):
AMD
=
−
25
×
0.01
=
−
0.25
=
−
25
%
\text{AMD} = -25 \times 0.01 = -0.25 = -25\%
AMD=−25×0.01=−0.25=−25%
Note that 100 basis points is equivalent to 1%.
CA
=
1
2
×
780
×
0.0
1
2
=
0.039
=
3.9
%
\text{CA} = \frac{1}{2} \times 780 \times 0.01^2 = 0.039 = 3.9\%
CA=21×780×0.012=0.039=3.9%
The estimated price change of the bond following a 100 bps increase in yield is:
Annual Duration
+
CA
=
−
25
%
+
3.9
%
=
−
21.1
%
\text{Annual Duration} + \text{CA} = -25\% + 3.9\% = -21.1\%
Annual Duration+CA=−25%+3.9%=−21.1%
Remember that an increase in yield leads to a fall in prices, and vice versa. An adjustment for convexity is often necessary when pricing bonds, interest rate swaps, and other derivatives. This adjustment is required because of the unsymmetrical change in the price of a bond in relation to changes in interest rates or yields.
In other words, the percentage increase in the price of a bond for a defined decrease in rates or yields is always more than the decline in the bond price for the same increase in rates or yields. Several factors influence the convexity of a bond, including its coupon rate, duration, maturity, and current price.
|
[
[
"Convexity",
"https://www.investopedia.com/terms/c/convexity.asp"
],
[
"interest rate risk",
"https://www.investopedia.com/terms/i/interestraterisk.asp"
],
[
"yield curve",
"https://www.investopedia.com/terms/y/yieldcurve.asp"
],
[
"yield to maturity",
"https://www.investopedia.com/terms/y/yieldtomaturity.asp"
],
[
"interest rate swaps",
"https://www.investopedia.com/terms/i/interestrateswap.asp"
]
] |
https://www.investopedia.com/how-to-get-your-extra-usd300-in-unemployment-benefits-5076898
|
What Is Federal Pandemic Unemployment Compensation (FPUC)?
|
<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-federal-pandemic-unemployment-compensation"></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 Federal Pandemic Unemployment Compensation? </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/federal-pandemic-unemployment-compensation-fpuc-definition-4802039">Federal Pandemic Unemployment Compensation (FPUC)</a> program, authorized by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707">CARES Act</a> and renewed by subsequent legislation and a presidential order, initially provided $600 per week in extra unemployment benefits to unemployed workers in states that opted into the program.
</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 August 2020, the additional payment was lowered to $300, the amount continued by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/american-rescue-plan-definition-5095694">American Rescue Plan Act (ARPA) of 2021</a> through Sept. 6, 2021.<span class="ql-inline-citation" data-cite="14"></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_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 Federal Pandemic Unemployment Compensation (FPUC) program provided $300 per week in extra pandemic-related unemployment benefits to unemployed and underemployed workers through state unemployment agencies.</li><li>After several extensions and expirations, FPUC funding was renewed through Sept. 6, 2021, by the American Rescue Plan Act (ARPA) of 2021.</li><li>Some state governors discontinued participation based on a belief that the extended and expanded benefits discourage people from returning to work.<br/></li><li>Although extra FPUC payments stopped, those eligible continued to receive their regular unemployment insurance payments.</li><li>As of September 6, 2021, FPUC benefits are no longer being sent out.</li></ul><p><br/></p></div></div></div>
<span class="heading-toc" id="toc-how-federal-pandemic-unemployment-compensation-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 Federal Pandemic Unemployment Compensation Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> To receive the FPUC extra $300 per week benefit, you had to file a claim for unemployment benefits, but you didn't need to sign up expressly. The payments were automatic if you qualified for regular unemployment insurance (UI) payments. When FPUC payments ended on Sept. 6, 2021, those eligible for regular unemployment compensation from their state continued to receive 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"> At least 26 states stopped making FPUC payments before the September deadline. One of the reasons governors cited was that the unemployment rate was low.<span class="ql-inline-citation" data-cite="23"></span> For example, on Aug. 20, 2021, the national unemployment rate was 5.2%, down 0.2% over the month, and 3.2 points lower than in August 2020.<span class="ql-inline-citation" data-cite="21"></span><br/>
</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-history-of-fpuc-authorization-and-funding"></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 FPUC Authorization and Funding </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> As noted, additional unemployment benefits of $600 per week were originally authorized by the CARES Act through July 31, 2021. This was followed by the Lost Wages Assistance (LWA) program, authorized by an Aug. 8, 2020, presidential memo and subsequent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dol.asp">Department of Labor (DOL)</a> guidance.
</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"> LWA funds, which were expected to last from Aug. 1, 2020, to Dec. 27, 2020, were depleted by Sept. 5, 2020.<span class="ql-inline-citation" data-cite="1"></span> The signing of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/congress-agrees-on-second-stimulus-here-s-what-s-in-it-and-what-s-not-5093226">Consolidated Appropriations Act of 2021</a> into law on Dec. 27, 2020, restarted the FPUC program and authorized $300 FPUC payments beginning after Dec. 26, 2020, and ending on or before March 14, 2021.<span class="ql-inline-citation" data-cite="24"></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"> The American Rescue Plan Act (ARPA) of 2021, which became law March 11, 2021, extended FPUC payments through Sept. 6, 2021. ARPA also provided a waiver of federal income taxes on the first $10, 200 in unemployment benefits received in 2020.<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>
<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-important" 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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>According to the U.S. Department of Labor, regular unemployment benefits replace about 38% of a worker's wages, on average.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div>
<span class="heading-toc" id="toc-history-of-fpuc"></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"> History of FPUC </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus. You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unemployment-compensation.asp">UC</a>, pandemic emergency unemployment compensation <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pandemic-emergency-unemployment-compensation-peuc-definition-4802046">PEUC</a>, extended benefits <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unemployment-insurance.asp">EB</a>, or pandemic unemployment assistance <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pandemic-unemployment-assistance-pua-definition-4802064">PUA</a>).
</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"> You had to be able and willing to return to work. You had to have become unemployed or had hours reduced due to the COVID-19 pandemic. Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.
</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 states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus:
</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>You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation (UC, pandemic emergency unemployment compensation PEUC, extended benefits EB, or pandemic unemployment assistance PUA).</li><li>You had to be able and willing to return to work.</li><li>You had to have become unemployed or had hours reduced due to the COVID-19 pandemic.</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"> Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.<span class="ql-inline-citation" data-cite="25"></span><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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> For you to receive FPUC funds, your state or territory (also includes Washington D.C.) had to sign up. According to the DOL, as of April 29, 2020, all 50 states and the District of Columbia were signed up and paying FPUC benefits.<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_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> As of August 20, 2021, according to the Congressional Research Service, 26 states stopped providing temporary federal unemployment benefits, including FPUC program funds. These state officials stated that extra and extended unemployment benefits discouraged unemployed workers from returning to the workforce.<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_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> As of Sept. 24, 2021, some states are reinstating requirements that out-of-work benefits recipients prove they are looking for work, a stipulation most states dropped after the pandemic hit in 2020. Some states and businesses are now offering sign-up bonuses to encourage workers to apply for available jobs.<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_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Interestingly, a working research paper by economics Professor Arindrajit Dube of the University of Massachusetts at Amherst, suggests that low unemployment insurance benefits do not increase employment levels more than happens in states with high levels of unemployment insurance benefits.<span class="ql-inline-citation" data-cite="16"></span>
</p></div>
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## What Is Federal Pandemic Unemployment Compensation?
The [Federal Pandemic Unemployment Compensation (FPUC)](https://www.investopedia.com/federal-pandemic-unemployment-compensation-fpuc-definition-4802039) program, authorized by the [CARES Act](https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707) and renewed by subsequent legislation and a presidential order, initially provided $600 per week in extra unemployment benefits to unemployed workers in states that opted into the program.
In August 2020, the additional payment was lowered to $300, the amount continued by the [American Rescue Plan Act (ARPA) of 2021](https://www.investopedia.com/american-rescue-plan-definition-5095694) through Sept. 6, 2021.
### Key Takeaways
* The Federal Pandemic Unemployment Compensation (FPUC) program provided $300 per week in extra pandemic-related unemployment benefits to unemployed and underemployed workers through state unemployment agencies.
* After several extensions and expirations, FPUC funding was renewed through Sept. 6, 2021, by the American Rescue Plan Act (ARPA) of 2021.
* Some state governors discontinued participation based on a belief that the extended and expanded benefits discourage people from returning to work.
* Although extra FPUC payments stopped, those eligible continued to receive their regular unemployment insurance payments.
* As of September 6, 2021, FPUC benefits are no longer being sent out.
## How Federal Pandemic Unemployment Compensation Works
To receive the FPUC extra $300 per week benefit, you had to file a claim for unemployment benefits, but you didn't need to sign up expressly. The payments were automatic if you qualified for regular unemployment insurance (UI) payments. When FPUC payments ended on Sept. 6, 2021, those eligible for regular unemployment compensation from their state continued to receive it.
At least 26 states stopped making FPUC payments before the September deadline. One of the reasons governors cited was that the unemployment rate was low. For example, on Aug. 20, 2021, the national unemployment rate was 5.2%, down 0.2% over the month, and 3.2 points lower than in August 2020.
## History of FPUC Authorization and Funding
As noted, additional unemployment benefits of $600 per week were originally authorized by the CARES Act through July 31, 2021. This was followed by the Lost Wages Assistance (LWA) program, authorized by an Aug. 8, 2020, presidential memo and subsequent [Department of Labor (DOL)](https://www.investopedia.com/terms/d/dol.asp) guidance.
LWA funds, which were expected to last from Aug. 1, 2020, to Dec. 27, 2020, were depleted by Sept. 5, 2020. The signing of the [Consolidated Appropriations Act of 2021](https://www.investopedia.com/congress-agrees-on-second-stimulus-here-s-what-s-in-it-and-what-s-not-5093226) into law on Dec. 27, 2020, restarted the FPUC program and authorized $300 FPUC payments beginning after Dec. 26, 2020, and ending on or before March 14, 2021.
The American Rescue Plan Act (ARPA) of 2021, which became law March 11, 2021, extended FPUC payments through Sept. 6, 2021. ARPA also provided a waiver of federal income taxes on the first $10, 200 in unemployment benefits received in 2020.
###
According to the U.S. Department of Labor, regular unemployment benefits replace about 38% of a worker's wages, on average.
## History of FPUC
In states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus. You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation ([UC](https://www.investopedia.com/terms/u/unemployment-compensation.asp), pandemic emergency unemployment compensation [PEUC](https://www.investopedia.com/pandemic-emergency-unemployment-compensation-peuc-definition-4802046), extended benefits [EB](https://www.investopedia.com/terms/u/unemployment-insurance.asp), or pandemic unemployment assistance [PUA](https://www.investopedia.com/pandemic-unemployment-assistance-pua-definition-4802064)).
You had to be able and willing to return to work. You had to have become unemployed or had hours reduced due to the COVID-19 pandemic. Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.
In states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus:
* You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation (UC, pandemic emergency unemployment compensation PEUC, extended benefits EB, or pandemic unemployment assistance PUA).
* You had to be able and willing to return to work.
* You had to have become unemployed or had hours reduced due to the COVID-19 pandemic.
Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.
## Special Considerations
For you to receive FPUC funds, your state or territory (also includes Washington D.C.) had to sign up. According to the DOL, as of April 29, 2020, all 50 states and the District of Columbia were signed up and paying FPUC benefits.
As of August 20, 2021, according to the Congressional Research Service, 26 states stopped providing temporary federal unemployment benefits, including FPUC program funds. These state officials stated that extra and extended unemployment benefits discouraged unemployed workers from returning to the workforce.
As of Sept. 24, 2021, some states are reinstating requirements that out-of-work benefits recipients prove they are looking for work, a stipulation most states dropped after the pandemic hit in 2020. Some states and businesses are now offering sign-up bonuses to encourage workers to apply for available jobs.
Interestingly, a working research paper by economics Professor Arindrajit Dube of the University of Massachusetts at Amherst, suggests that low unemployment insurance benefits do not increase employment levels more than happens in states with high levels of unemployment insurance benefits.
|
What Is Federal Pandemic Unemployment Compensation?
The Federal Pandemic Unemployment Compensation (FPUC) program, authorized by the CARES Act and renewed by subsequent legislation and a presidential order, initially provided $600 per week in extra unemployment benefits to unemployed workers in states that opted into the program.
In August 2020, the additional payment was lowered to $300, the amount continued by the American Rescue Plan Act (ARPA) of 2021 through Sept. 6, 2021.
Key Takeaways
The Federal Pandemic Unemployment Compensation (FPUC) program provided $300 per week in extra pandemic-related unemployment benefits to unemployed and underemployed workers through state unemployment agencies.After several extensions and expirations, FPUC funding was renewed through Sept. 6, 2021, by the American Rescue Plan Act (ARPA) of 2021.Some state governors discontinued participation based on a belief that the extended and expanded benefits discourage people from returning to work.Although extra FPUC payments stopped, those eligible continued to receive their regular unemployment insurance payments.As of September 6, 2021, FPUC benefits are no longer being sent out.
How Federal Pandemic Unemployment Compensation Works
To receive the FPUC extra $300 per week benefit, you had to file a claim for unemployment benefits, but you didn't need to sign up expressly. The payments were automatic if you qualified for regular unemployment insurance (UI) payments. When FPUC payments ended on Sept. 6, 2021, those eligible for regular unemployment compensation from their state continued to receive it.
At least 26 states stopped making FPUC payments before the September deadline. One of the reasons governors cited was that the unemployment rate was low. For example, on Aug. 20, 2021, the national unemployment rate was 5.2%, down 0.2% over the month, and 3.2 points lower than in August 2020.
History of FPUC Authorization and Funding
As noted, additional unemployment benefits of $600 per week were originally authorized by the CARES Act through July 31, 2021. This was followed by the Lost Wages Assistance (LWA) program, authorized by an Aug. 8, 2020, presidential memo and subsequent Department of Labor (DOL) guidance.
LWA funds, which were expected to last from Aug. 1, 2020, to Dec. 27, 2020, were depleted by Sept. 5, 2020. The signing of the Consolidated Appropriations Act of 2021 into law on Dec. 27, 2020, restarted the FPUC program and authorized $300 FPUC payments beginning after Dec. 26, 2020, and ending on or before March 14, 2021.
The American Rescue Plan Act (ARPA) of 2021, which became law March 11, 2021, extended FPUC payments through Sept. 6, 2021. ARPA also provided a waiver of federal income taxes on the first $10, 200 in unemployment benefits received in 2020.
According to the U.S. Department of Labor, regular unemployment benefits replace about 38% of a worker's wages, on average.
History of FPUC
In states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus. You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation (UC, pandemic emergency unemployment compensation PEUC, extended benefits EB, or pandemic unemployment assistance PUA).
You had to be able and willing to return to work. You had to have become unemployed or had hours reduced due to the COVID-19 pandemic. Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.
In states where FPUC funds were available, payment was generally automatic and did not require a special application. In most states, to get the now defunct-extra $300 weekly bonus:
You had to be eligible for—and receiving—unemployment benefits, including unemployment compensation (UC, pandemic emergency unemployment compensation PEUC, extended benefits EB, or pandemic unemployment assistance PUA).You had to be able and willing to return to work.You had to have become unemployed or had hours reduced due to the COVID-19 pandemic.
Beyond stated eligibility standards, it was up to the state or territory to decide what, if anything, you needed to do to receive the money.
Special Considerations
For you to receive FPUC funds, your state or territory (also includes Washington D.C.) had to sign up. According to the DOL, as of April 29, 2020, all 50 states and the District of Columbia were signed up and paying FPUC benefits.
As of August 20, 2021, according to the Congressional Research Service, 26 states stopped providing temporary federal unemployment benefits, including FPUC program funds. These state officials stated that extra and extended unemployment benefits discouraged unemployed workers from returning to the workforce.
As of Sept. 24, 2021, some states are reinstating requirements that out-of-work benefits recipients prove they are looking for work, a stipulation most states dropped after the pandemic hit in 2020. Some states and businesses are now offering sign-up bonuses to encourage workers to apply for available jobs.
Interestingly, a working research paper by economics Professor Arindrajit Dube of the University of Massachusetts at Amherst, suggests that low unemployment insurance benefits do not increase employment levels more than happens in states with high levels of unemployment insurance benefits.
|
[
[
"Federal Pandemic Unemployment Compensation (FPUC)",
"https://www.investopedia.com/federal-pandemic-unemployment-compensation-fpuc-definition-4802039"
],
[
"CARES Act",
"https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707"
],
[
"American Rescue Plan Act (ARPA) of 2021",
"https://www.investopedia.com/american-rescue-plan-definition-5095694"
],
[
"Department of Labor (DOL)",
"https://www.investopedia.com/terms/d/dol.asp"
],
[
"Consolidated Appropriations Act of 2021",
"https://www.investopedia.com/congress-agrees-on-second-stimulus-here-s-what-s-in-it-and-what-s-not-5093226"
],
[
"UC",
"https://www.investopedia.com/terms/u/unemployment-compensation.asp"
],
[
"PEUC",
"https://www.investopedia.com/pandemic-emergency-unemployment-compensation-peuc-definition-4802046"
],
[
"EB",
"https://www.investopedia.com/terms/u/unemployment-insurance.asp"
],
[
"PUA",
"https://www.investopedia.com/pandemic-unemployment-assistance-pua-definition-4802064"
]
] |
https://www.investopedia.com/articles/basics/12/manage-your-own-money.asp
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A Beginners' Guide to Managing Your Money
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<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 internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/e-trade-review-4587893" rel="noopener noreferrer">E*TRADE Financial</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_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Online brokers and easy access to financial data make investing your money as simple as starting a savings account. But in an internet-driven, do-it-yourself world, is investing also a do-it-yourself activity? If so, why not just fire your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp#axzz1n1rLWewe" rel="noopener noreferrer">financial advisor</a>, pay fewer fees to your mutual funds, and set up a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp#axzz1n1rLWewe" rel="noopener noreferrer">portfolio</a> of your own? We look at some of the basics of managing your own money before you actually become your own financial manager.
</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 wealth of information available online may offer inexperienced investors with a false sense of security.</li><li>It's important to understand modern portfolio theory and risk.</li><li>Watch the market first in order to learn how it works and how it reacts to daily events. </li><li>Set up a virtual paper trading account so you don't lose more money than you should.</li></ul></div></div></div>
<span class="heading-toc" id="toc-should-you-manage-your-own-money"></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"> Should You Manage Your Own Money? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> That first trade, made by William Porter, changed the way investment products are researched, discussed, bought, and sold. Computerized trading has resulted in highly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidmarket.asp">liquid markets</a>, making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data professionals use. Websites like StockTwits set up entire communities of investors and traders who exchange information in real time.<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"> But just because it's possible, does that mean managing your own money is a good idea? Professional investors have a saying: "The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockmarket.asp" rel="noopener noreferrer">stock market</a> is an expensive place to learn how to invest." They understand that it's easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with an inexperienced financial background may offer a false sense of security.
</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"> Tools are only as good as the knowledge and experience of the person using them. Does a high-priced software package used by the world's best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in the field a top-performing surgeon?
</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's no doubt that the internet has given the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retailinvestor.asp" rel="noopener noreferrer">retail investor</a> the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser?
</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-modern-portfolio-theory"></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"> Modern Portfolio Theory </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> It's important to get a grasp of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp" rel="noopener noreferrer">modern portfolio theory (MPT)</a> and gain an understanding of how <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp#axzz1n1rLWewe" rel="noopener noreferrer">asset allocation</a> is determined for an individual based on their individual factors. In order to gain a true understanding of these principles, you'll have to dig deeper than the top-level internet articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation, but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.
</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"> Along with efficiency comes the dynamic nature of <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>. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor.
</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-understanding-risk"></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"> Understanding Risk </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> In the plethora of free resources available, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp" rel="noopener noreferrer">risk</a> is treated too benignly. The term risk tolerance has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. But it's not really that simple. In fact, it's much more than that.
</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"> Risk is a behavior that is hard to understand rationally because investors often act against their best interests. A study conducted by Dalbar showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.<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_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>Risk is hard to understand rationally because investors often act against their best interests.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Since risk is a behavior, it's extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/daytrader.asp" rel="noopener noreferrer">Day traders</a>, often seen as having a high-risk tolerance, may actually have an extremely low tolerance because they're unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That's hard to do when you're working with your own money.
</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-can-you-beat-the-market"></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"> Can You Beat the Market? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Do you know how likely you are to outperform the overall <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market.asp" rel="noopener noreferrer">market</a>? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp" rel="noopener noreferrer">Efficient market hypothesis (EMH)</a> might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fairvalue.asp" rel="noopener noreferrer">fair value</a>.
</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"> For the retail investor who tries to pick individual stock names in the hopes of achieving <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gain.asp" rel="noopener noreferrer">gains</a> that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits. But over a sustained period of decades, this strategy breaks down, at least, according to the proponents of EMH.
</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"> Even the brightest investment minds employing teams of researchers all over the world haven't been able to beat the market over a sustained period, according to famed investor Charles Ellis in his book, "Winning The Loser's Game: Timeless Strategies For Successful Investing."<span class="ql-inline-citation" data-cite="4"></span> Critics of this theory cite investors like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/071801.asp" rel="noopener noreferrer">Warren Buffett</a> who consistently beat the market, but what does EMH mean for the individual investor? Before deciding on your investing strategy, you need the knowledge and statistics to back it up.
</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"> If you're going to pick individual stocks in the hopes that they'll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If you're planning to invest in stocks for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp" rel="noopener noreferrer">dividends</a>, is there any evidence that proves that an income strategy works? Would investing in an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp#axzz1n1rLWewe" rel="noopener noreferrer">index fund</a> be the best way? Where can you find the data needed to make these decisions?
</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-learning-to-invest"></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"> Learning to Invest </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> What do you do for a living? If you have a college degree, you might be one of the people who say that you didn't become highly skilled as a result of your degree, but instead because of the experience you amassed. When you first started your job were you highly effective from the very beginning?
</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"> Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-planning-4689695" rel="noopener noreferrer">retirement savings</a> isn't an option.
</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"> Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes it's hypersensitive to news events and other times it brushes them off. Some stocks are highly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp" rel="noopener noreferrer">volatile</a> while others have muted reactions.
</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"> The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-investing-courses-4783334" rel="noopener noreferrer">learning to invest</a> while also gaining experience before committing real money to the markets.
</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-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"> Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge?
</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"> You may answer in the affirmative, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be okay, but leave your retirement money to the professionals.
</p></div>
|
The internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now [E\*TRADE Financial](https://www.investopedia.com/e-trade-review-4587893).
Online brokers and easy access to financial data make investing your money as simple as starting a savings account. But in an internet-driven, do-it-yourself world, is investing also a do-it-yourself activity? If so, why not just fire your [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp#axzz1n1rLWewe), pay fewer fees to your mutual funds, and set up a [portfolio](https://www.investopedia.com/terms/p/portfolio.asp#axzz1n1rLWewe) of your own? We look at some of the basics of managing your own money before you actually become your own financial manager.
### Key Takeaways
* The wealth of information available online may offer inexperienced investors with a false sense of security.
* It's important to understand modern portfolio theory and risk.
* Watch the market first in order to learn how it works and how it reacts to daily events.
* Set up a virtual paper trading account so you don't lose more money than you should.
## Should You Manage Your Own Money?
That first trade, made by William Porter, changed the way investment products are researched, discussed, bought, and sold. Computerized trading has resulted in highly [liquid markets](https://www.investopedia.com/terms/l/liquidmarket.asp), making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data professionals use. Websites like StockTwits set up entire communities of investors and traders who exchange information in real time.
But just because it's possible, does that mean managing your own money is a good idea? Professional investors have a saying: "The [stock market](https://www.investopedia.com/terms/s/stockmarket.asp) is an expensive place to learn how to invest." They understand that it's easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with an inexperienced financial background may offer a false sense of security.
Tools are only as good as the knowledge and experience of the person using them. Does a high-priced software package used by the world's best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in the field a top-performing surgeon?
There's no doubt that the internet has given the [retail investor](https://www.investopedia.com/terms/r/retailinvestor.asp) the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser?
## Modern Portfolio Theory
It's important to get a grasp of the [modern portfolio theory (MPT)](https://www.investopedia.com/terms/m/modernportfoliotheory.asp) and gain an understanding of how [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp#axzz1n1rLWewe) is determined for an individual based on their individual factors. In order to gain a true understanding of these principles, you'll have to dig deeper than the top-level internet articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation, but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.
Along with efficiency comes the dynamic nature of [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp). At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor.
## Understanding Risk
In the plethora of free resources available, [risk](https://www.investopedia.com/terms/r/risk.asp) is treated too benignly. The term risk tolerance has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. But it's not really that simple. In fact, it's much more than that.
Risk is a behavior that is hard to understand rationally because investors often act against their best interests. A study conducted by Dalbar showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.
###
Risk is hard to understand rationally because investors often act against their best interests.
Since risk is a behavior, it's extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. [Day traders](https://www.investopedia.com/terms/d/daytrader.asp), often seen as having a high-risk tolerance, may actually have an extremely low tolerance because they're unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That's hard to do when you're working with your own money.
## Can You Beat the Market?
Do you know how likely you are to outperform the overall [market](https://www.investopedia.com/terms/m/market.asp)? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?
[Efficient market hypothesis (EMH)](https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or [fair value](https://www.investopedia.com/terms/f/fairvalue.asp).
For the retail investor who tries to pick individual stock names in the hopes of achieving [gains](https://www.investopedia.com/terms/g/gain.asp) that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits. But over a sustained period of decades, this strategy breaks down, at least, according to the proponents of EMH.
Even the brightest investment minds employing teams of researchers all over the world haven't been able to beat the market over a sustained period, according to famed investor Charles Ellis in his book, "Winning The Loser's Game: Timeless Strategies For Successful Investing." Critics of this theory cite investors like [Warren Buffett](https://www.investopedia.com/articles/01/071801.asp) who consistently beat the market, but what does EMH mean for the individual investor? Before deciding on your investing strategy, you need the knowledge and statistics to back it up.
If you're going to pick individual stocks in the hopes that they'll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If you're planning to invest in stocks for [dividends](https://www.investopedia.com/terms/d/dividend.asp), is there any evidence that proves that an income strategy works? Would investing in an [index fund](https://www.investopedia.com/terms/i/indexfund.asp#axzz1n1rLWewe) be the best way? Where can you find the data needed to make these decisions?
## Learning to Invest
What do you do for a living? If you have a college degree, you might be one of the people who say that you didn't become highly skilled as a result of your degree, but instead because of the experience you amassed. When you first started your job were you highly effective from the very beginning?
Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your [retirement savings](https://www.investopedia.com/retirement-planning-4689695) isn't an option.
Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes it's hypersensitive to news events and other times it brushes them off. Some stocks are highly [volatile](https://www.investopedia.com/terms/v/volatility.asp) while others have muted reactions.
The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for [learning to invest](https://www.investopedia.com/best-investing-courses-4783334) while also gaining experience before committing real money to the markets.
## The Bottom Line
Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge?
You may answer in the affirmative, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be okay, but leave your retirement money to the professionals.
|
The internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now E*TRADE Financial.
Online brokers and easy access to financial data make investing your money as simple as starting a savings account. But in an internet-driven, do-it-yourself world, is investing also a do-it-yourself activity? If so, why not just fire your financial advisor, pay fewer fees to your mutual funds, and set up a portfolio of your own? We look at some of the basics of managing your own money before you actually become your own financial manager.
Key Takeaways
The wealth of information available online may offer inexperienced investors with a false sense of security.It's important to understand modern portfolio theory and risk.Watch the market first in order to learn how it works and how it reacts to daily events. Set up a virtual paper trading account so you don't lose more money than you should.
Should You Manage Your Own Money?
That first trade, made by William Porter, changed the way investment products are researched, discussed, bought, and sold. Computerized trading has resulted in highly liquid markets, making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data professionals use. Websites like StockTwits set up entire communities of investors and traders who exchange information in real time.
But just because it's possible, does that mean managing your own money is a good idea? Professional investors have a saying: "The stock market is an expensive place to learn how to invest." They understand that it's easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with an inexperienced financial background may offer a false sense of security.
Tools are only as good as the knowledge and experience of the person using them. Does a high-priced software package used by the world's best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in the field a top-performing surgeon?
There's no doubt that the internet has given the retail investor the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser?
Modern Portfolio Theory
It's important to get a grasp of the modern portfolio theory (MPT) and gain an understanding of how asset allocation is determined for an individual based on their individual factors. In order to gain a true understanding of these principles, you'll have to dig deeper than the top-level internet articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation, but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.
Along with efficiency comes the dynamic nature of risk tolerance. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor.
Understanding Risk
In the plethora of free resources available, risk is treated too benignly. The term risk tolerance has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. But it's not really that simple. In fact, it's much more than that.
Risk is a behavior that is hard to understand rationally because investors often act against their best interests. A study conducted by Dalbar showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.
Risk is hard to understand rationally because investors often act against their best interests.
Since risk is a behavior, it's extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. Day traders, often seen as having a high-risk tolerance, may actually have an extremely low tolerance because they're unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That's hard to do when you're working with your own money.
Can You Beat the Market?
Do you know how likely you are to outperform the overall market? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?
Efficient market hypothesis (EMH) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or fair value.
For the retail investor who tries to pick individual stock names in the hopes of achieving gains that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits. But over a sustained period of decades, this strategy breaks down, at least, according to the proponents of EMH.
Even the brightest investment minds employing teams of researchers all over the world haven't been able to beat the market over a sustained period, according to famed investor Charles Ellis in his book, "Winning The Loser's Game: Timeless Strategies For Successful Investing." Critics of this theory cite investors like Warren Buffett who consistently beat the market, but what does EMH mean for the individual investor? Before deciding on your investing strategy, you need the knowledge and statistics to back it up.
If you're going to pick individual stocks in the hopes that they'll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If you're planning to invest in stocks for dividends, is there any evidence that proves that an income strategy works? Would investing in an index fund be the best way? Where can you find the data needed to make these decisions?
Learning to Invest
What do you do for a living? If you have a college degree, you might be one of the people who say that you didn't become highly skilled as a result of your degree, but instead because of the experience you amassed. When you first started your job were you highly effective from the very beginning?
Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your retirement savings isn't an option.
Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes it's hypersensitive to news events and other times it brushes them off. Some stocks are highly volatile while others have muted reactions.
The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for learning to invest while also gaining experience before committing real money to the markets.
The Bottom Line
Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge?
You may answer in the affirmative, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be okay, but leave your retirement money to the professionals.
|
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https://www.investopedia.com/terms/a/asip.asp
|
Agricultural Sector Investment Program (ASIP)
|
<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-agricultural-sector-investment-program-asip"></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 Agricultural Sector Investment Program (ASIP)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Agricultural Sector Investment Program (ASIP) was an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economicgrowth.asp" rel="noopener noreferrer">economic development</a> project initiated in March 1995 by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/worldbank.asp" rel="noopener noreferrer">World Bank Group</a>. The project directed $60 million in funds toward the improvement of agricultural productivity in Zambia and other African countries. Unfortunately, the project ended in 2001 after failing to meet its objectives.<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_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 Agricultural Sector Investment Program (ASIP) was a World Bank initiative designed to promote increased productivity in the agricultural sectors of several African nations.</li><li>Most of its resources were concentrated on Zambia.</li><li>Although the ASIP failed to achieve its goals, the World Bank continues to advance several similar initiatives throughout the world.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-the-asip-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 the ASIP Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The overarching purpose of the ASIP was to help African countries improve their agricultural sectors in the interest of improving food security and contributing to domestic economy development. Initially, Zambia, Angola, Benin, and Senegal were selected to participate in the program, but the program was terminated after failing to achieve its stated targets in Zambia.
</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"> Ultimately, a post-termination assessment indicated that the project failed due to a lack of institutional support, suggesting that the financial and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/humanresources.asp">human resources</a> dedicated to the project were not sufficient to ensure its success.<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"> The report cited an array of challenges and complications that contributed to this disappointing outcome. Restructuring and decentralization of the central ministry took much longer than anticipated, which was a source of frustration for many of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/philanthropy.asp">donors</a>. Unrealistic expectations and an overly broad scope that was impossible to manage further contributed to the challenges that, ultimately, could not be overcome.<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_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> If the ASIP had been successful, it may have had a lasting impact on the domestic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/agribusiness.asp">agricultural economies</a> of Zambia and the other participating countries. Under the four primary goals of the ASIP project, these countries would have seen legal changes and institutional improvements relating to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/food-insecurity-impacts-economy-8303222">food security</a>, land usage, agricultural pricing, and export practices; as well as increased partnerships between governments and private firms.
</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 program sought to attract additional private funding to these nations, partly through the creation of a rural investment fund designed to provide small-scale capital investments in rural areas. By providing grants to local governments, it also encouraged the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privatization.asp">privatization</a> of government-owned farms.
</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-real-world-example-of-the-asip"></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"> Real-World Example of the ASIP </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The ASIP program was part of several larger programs that were high on the World Bank's primary agenda during the 1990s. These included achieving the eight Millennium Development Goals, three of which are eradicating extreme poverty and hunger, reducing child mortality, and ensuring environmental sustainability. ASIP fell under the umbrella of the World Bank’s Corporate Advocacy Priorities and Global Public Goods Priorities programs, designed to foster productive coordination between the word’s business and public policy communities.
</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"> Although the ASIP was not successful, the World Bank continues to provide low-interest loans, zero-interest credit, and a variety of grants to developing countries. These programs and resources are designed to help these nations achieve important, attainable results in critical areas such as health, education, economic development, infrastructure building and maintenance, and agriculture.<span class="ql-inline-citation" data-cite="3"></span>
</p></div>
|
## What Is the Agricultural Sector Investment Program (ASIP)?
The Agricultural Sector Investment Program (ASIP) was an [economic development](https://www.investopedia.com/terms/e/economicgrowth.asp) project initiated in March 1995 by the [World Bank Group](https://www.investopedia.com/terms/w/worldbank.asp). The project directed $60 million in funds toward the improvement of agricultural productivity in Zambia and other African countries. Unfortunately, the project ended in 2001 after failing to meet its objectives.
### Key Takeaways
* The Agricultural Sector Investment Program (ASIP) was a World Bank initiative designed to promote increased productivity in the agricultural sectors of several African nations.
* Most of its resources were concentrated on Zambia.
* Although the ASIP failed to achieve its goals, the World Bank continues to advance several similar initiatives throughout the world.
## How the ASIP Works
The overarching purpose of the ASIP was to help African countries improve their agricultural sectors in the interest of improving food security and contributing to domestic economy development. Initially, Zambia, Angola, Benin, and Senegal were selected to participate in the program, but the program was terminated after failing to achieve its stated targets in Zambia.
Ultimately, a post-termination assessment indicated that the project failed due to a lack of institutional support, suggesting that the financial and [human resources](https://www.investopedia.com/terms/h/humanresources.asp) dedicated to the project were not sufficient to ensure its success.
The report cited an array of challenges and complications that contributed to this disappointing outcome. Restructuring and decentralization of the central ministry took much longer than anticipated, which was a source of frustration for many of the [donors](https://www.investopedia.com/terms/p/philanthropy.asp). Unrealistic expectations and an overly broad scope that was impossible to manage further contributed to the challenges that, ultimately, could not be overcome.
If the ASIP had been successful, it may have had a lasting impact on the domestic [agricultural economies](https://www.investopedia.com/terms/a/agribusiness.asp) of Zambia and the other participating countries. Under the four primary goals of the ASIP project, these countries would have seen legal changes and institutional improvements relating to [food security](https://www.investopedia.com/food-insecurity-impacts-economy-8303222), land usage, agricultural pricing, and export practices; as well as increased partnerships between governments and private firms.
This program sought to attract additional private funding to these nations, partly through the creation of a rural investment fund designed to provide small-scale capital investments in rural areas. By providing grants to local governments, it also encouraged the [privatization](https://www.investopedia.com/terms/p/privatization.asp) of government-owned farms.
## Real-World Example of the ASIP
The ASIP program was part of several larger programs that were high on the World Bank's primary agenda during the 1990s. These included achieving the eight Millennium Development Goals, three of which are eradicating extreme poverty and hunger, reducing child mortality, and ensuring environmental sustainability. ASIP fell under the umbrella of the World Bank’s Corporate Advocacy Priorities and Global Public Goods Priorities programs, designed to foster productive coordination between the word’s business and public policy communities.
Although the ASIP was not successful, the World Bank continues to provide low-interest loans, zero-interest credit, and a variety of grants to developing countries. These programs and resources are designed to help these nations achieve important, attainable results in critical areas such as health, education, economic development, infrastructure building and maintenance, and agriculture.
|
What Is the Agricultural Sector Investment Program (ASIP)?
The Agricultural Sector Investment Program (ASIP) was an economic development project initiated in March 1995 by the World Bank Group. The project directed $60 million in funds toward the improvement of agricultural productivity in Zambia and other African countries. Unfortunately, the project ended in 2001 after failing to meet its objectives.
Key Takeaways
The Agricultural Sector Investment Program (ASIP) was a World Bank initiative designed to promote increased productivity in the agricultural sectors of several African nations.Most of its resources were concentrated on Zambia.Although the ASIP failed to achieve its goals, the World Bank continues to advance several similar initiatives throughout the world.
How the ASIP Works
The overarching purpose of the ASIP was to help African countries improve their agricultural sectors in the interest of improving food security and contributing to domestic economy development. Initially, Zambia, Angola, Benin, and Senegal were selected to participate in the program, but the program was terminated after failing to achieve its stated targets in Zambia.
Ultimately, a post-termination assessment indicated that the project failed due to a lack of institutional support, suggesting that the financial and human resources dedicated to the project were not sufficient to ensure its success.
The report cited an array of challenges and complications that contributed to this disappointing outcome. Restructuring and decentralization of the central ministry took much longer than anticipated, which was a source of frustration for many of the donors. Unrealistic expectations and an overly broad scope that was impossible to manage further contributed to the challenges that, ultimately, could not be overcome.
If the ASIP had been successful, it may have had a lasting impact on the domestic agricultural economies of Zambia and the other participating countries. Under the four primary goals of the ASIP project, these countries would have seen legal changes and institutional improvements relating to food security, land usage, agricultural pricing, and export practices; as well as increased partnerships between governments and private firms.
This program sought to attract additional private funding to these nations, partly through the creation of a rural investment fund designed to provide small-scale capital investments in rural areas. By providing grants to local governments, it also encouraged the privatization of government-owned farms.
Real-World Example of the ASIP
The ASIP program was part of several larger programs that were high on the World Bank's primary agenda during the 1990s. These included achieving the eight Millennium Development Goals, three of which are eradicating extreme poverty and hunger, reducing child mortality, and ensuring environmental sustainability. ASIP fell under the umbrella of the World Bank’s Corporate Advocacy Priorities and Global Public Goods Priorities programs, designed to foster productive coordination between the word’s business and public policy communities.
Although the ASIP was not successful, the World Bank continues to provide low-interest loans, zero-interest credit, and a variety of grants to developing countries. These programs and resources are designed to help these nations achieve important, attainable results in critical areas such as health, education, economic development, infrastructure building and maintenance, and agriculture.
|
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],
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"https://www.investopedia.com/terms/a/agribusiness.asp"
],
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"food security",
"https://www.investopedia.com/food-insecurity-impacts-economy-8303222"
],
[
"privatization",
"https://www.investopedia.com/terms/p/privatization.asp"
]
] |
https://www.investopedia.com/terms/f/finding_development.asp
|
Finding And Development (F&D): What it Means, 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-finding-and-development-fd"></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 Finding And Development (F&D)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Finding and development (F&D) refers to costs incurred when a company purchases, researches and develops properties in an effort to establish <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodity</a> reserves. Exploration and development businesses rely on finding commodities to manufacture and sell. Finding and development costs represent a cost of doing business for these types of companies.
</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"> Finding and development costs are also known as finding costs.
</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>Finding and development (F&D) costs are those directly related to the discovery of oil (or another commodity) through exploration where it can then be extracted and sold.</li><li>Exploration involves geological surveys, seismic analysis, and the drilling of test wells, among other steps.</li><li>F&D costs can be computed as the ratio of money expended over commodities discovered.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-finding-and-development"></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 Finding And Development </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> While the term finding and development can relate to costs incurred by any type of commodity company, it is commonly used in regards to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/upstream.asp">upstream</a> costs of an oil or gas business. In this case, the costs of finding and development can be expressed per barrel. Finding costs are calculated over a given period of time. During that period, the amount of money spent to locate additional commodity reserves is tallied then divided by the additional quantity of reserves actually discovered during that same time period.
</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"> F&D costs are calculated by dividing the costs incurred during a period of time by the number of commodities found during that same time. Oil is usually measured in barrels; gas is often measured by a given quantity of cubic feet.
</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-exploration-costs"></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"> Exploration Costs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Oil exploration & production involves locating and extracting <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nonrenewableresource.asp">nonrenewable resources</a> from the Earth; the process of oil and gas exploration and production typically involves four stages.
</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"> Exploration </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> At this stage, the search for hydrocarbons beneath the ground entails geophysical prospecting for shale formations that hold deposits of oil and natural gas. One method of exploration involves seismology, a process whereby substantial vibrations, via explosives or machinery, are produced at the Earth’s surface. Seismic waves travel to the Earth’s mantle, and the respondent force is analyzed at the surface to identify layers of rock that trap reservoirs of oil and natural gas. Exxon Mobil Corporation maintains many large exploratory fields in the Gulf of Mexico, extending operations to 339 deepwater blocks.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Well Development </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> After identifying potentially viable fields, engineers determine the number of wells needed to meet production requirements and the method of extraction of the liquid hydrocarbons. Platform construction costs are estimated with regard to the site, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/offshore.asp">offshore</a> or onshore, and designs are rendered for systems used to facilitate environmental protections. Newer drilling technologies, prominent in the Marcellus and Bennett shale fields in Pennsylvania and Texas, allow companies such as Chesapeake Energy Corporation to extend horizontal legs about 5,000 feet from vertical wells in search of natural gas pockets, producing four times as much gas at only twice the cost of a vertical well.
</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"> Abandonment </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> As exploratory sites are deemed unproductive or existing operations exhaust capacity, companies plug wells and attempt to restore the areas to environmental states that existed prior to drilling activities. As natural gas prices descended to historic lows in January 2016, many exploratory wells were shuttered as high production costs rendered extraction unprofitable. In 2014, the state of Ohio ramped up efforts to plug nearly 600 orphan wells that posed hazards to surface water and aquifers.
</p></div>
|
## What Is Finding And Development (F&D)?
Finding and development (F&D) refers to costs incurred when a company purchases, researches and develops properties in an effort to establish [commodity](https://www.investopedia.com/terms/c/commodity.asp) reserves. Exploration and development businesses rely on finding commodities to manufacture and sell. Finding and development costs represent a cost of doing business for these types of companies.
Finding and development costs are also known as finding costs.
### Key Takeaways
* Finding and development (F&D) costs are those directly related to the discovery of oil (or another commodity) through exploration where it can then be extracted and sold.
* Exploration involves geological surveys, seismic analysis, and the drilling of test wells, among other steps.
* F&D costs can be computed as the ratio of money expended over commodities discovered.
## Understanding Finding And Development
While the term finding and development can relate to costs incurred by any type of commodity company, it is commonly used in regards to the [upstream](https://www.investopedia.com/terms/u/upstream.asp) costs of an oil or gas business. In this case, the costs of finding and development can be expressed per barrel. Finding costs are calculated over a given period of time. During that period, the amount of money spent to locate additional commodity reserves is tallied then divided by the additional quantity of reserves actually discovered during that same time period.
F&D costs are calculated by dividing the costs incurred during a period of time by the number of commodities found during that same time. Oil is usually measured in barrels; gas is often measured by a given quantity of cubic feet.
## Exploration Costs
Oil exploration & production involves locating and extracting [nonrenewable resources](https://www.investopedia.com/terms/n/nonrenewableresource.asp) from the Earth; the process of oil and gas exploration and production typically involves four stages.
### Exploration
At this stage, the search for hydrocarbons beneath the ground entails geophysical prospecting for shale formations that hold deposits of oil and natural gas. One method of exploration involves seismology, a process whereby substantial vibrations, via explosives or machinery, are produced at the Earth’s surface. Seismic waves travel to the Earth’s mantle, and the respondent force is analyzed at the surface to identify layers of rock that trap reservoirs of oil and natural gas. Exxon Mobil Corporation maintains many large exploratory fields in the Gulf of Mexico, extending operations to 339 deepwater blocks.
### Well Development
After identifying potentially viable fields, engineers determine the number of wells needed to meet production requirements and the method of extraction of the liquid hydrocarbons. Platform construction costs are estimated with regard to the site, [offshore](https://www.investopedia.com/terms/o/offshore.asp) or onshore, and designs are rendered for systems used to facilitate environmental protections. Newer drilling technologies, prominent in the Marcellus and Bennett shale fields in Pennsylvania and Texas, allow companies such as Chesapeake Energy Corporation to extend horizontal legs about 5,000 feet from vertical wells in search of natural gas pockets, producing four times as much gas at only twice the cost of a vertical well.
### Abandonment
As exploratory sites are deemed unproductive or existing operations exhaust capacity, companies plug wells and attempt to restore the areas to environmental states that existed prior to drilling activities. As natural gas prices descended to historic lows in January 2016, many exploratory wells were shuttered as high production costs rendered extraction unprofitable. In 2014, the state of Ohio ramped up efforts to plug nearly 600 orphan wells that posed hazards to surface water and aquifers.
|
What Is Finding And Development (F&D)?
Finding and development (F&D) refers to costs incurred when a company purchases, researches and develops properties in an effort to establish commodity reserves. Exploration and development businesses rely on finding commodities to manufacture and sell. Finding and development costs represent a cost of doing business for these types of companies.
Finding and development costs are also known as finding costs.
Key Takeaways
Finding and development (F&D) costs are those directly related to the discovery of oil (or another commodity) through exploration where it can then be extracted and sold.Exploration involves geological surveys, seismic analysis, and the drilling of test wells, among other steps.F&D costs can be computed as the ratio of money expended over commodities discovered.
Understanding Finding And Development
While the term finding and development can relate to costs incurred by any type of commodity company, it is commonly used in regards to the upstream costs of an oil or gas business. In this case, the costs of finding and development can be expressed per barrel. Finding costs are calculated over a given period of time. During that period, the amount of money spent to locate additional commodity reserves is tallied then divided by the additional quantity of reserves actually discovered during that same time period.
F&D costs are calculated by dividing the costs incurred during a period of time by the number of commodities found during that same time. Oil is usually measured in barrels; gas is often measured by a given quantity of cubic feet.
Exploration Costs
Oil exploration & production involves locating and extracting nonrenewable resources from the Earth; the process of oil and gas exploration and production typically involves four stages.
Exploration
At this stage, the search for hydrocarbons beneath the ground entails geophysical prospecting for shale formations that hold deposits of oil and natural gas. One method of exploration involves seismology, a process whereby substantial vibrations, via explosives or machinery, are produced at the Earth’s surface. Seismic waves travel to the Earth’s mantle, and the respondent force is analyzed at the surface to identify layers of rock that trap reservoirs of oil and natural gas. Exxon Mobil Corporation maintains many large exploratory fields in the Gulf of Mexico, extending operations to 339 deepwater blocks.
Well Development
After identifying potentially viable fields, engineers determine the number of wells needed to meet production requirements and the method of extraction of the liquid hydrocarbons. Platform construction costs are estimated with regard to the site, offshore or onshore, and designs are rendered for systems used to facilitate environmental protections. Newer drilling technologies, prominent in the Marcellus and Bennett shale fields in Pennsylvania and Texas, allow companies such as Chesapeake Energy Corporation to extend horizontal legs about 5,000 feet from vertical wells in search of natural gas pockets, producing four times as much gas at only twice the cost of a vertical well.
Abandonment
As exploratory sites are deemed unproductive or existing operations exhaust capacity, companies plug wells and attempt to restore the areas to environmental states that existed prior to drilling activities. As natural gas prices descended to historic lows in January 2016, many exploratory wells were shuttered as high production costs rendered extraction unprofitable. In 2014, the state of Ohio ramped up efforts to plug nearly 600 orphan wells that posed hazards to surface water and aquifers.
|
[
[
"commodity",
"https://www.investopedia.com/terms/c/commodity.asp"
],
[
"upstream",
"https://www.investopedia.com/terms/u/upstream.asp"
],
[
"nonrenewable resources",
"https://www.investopedia.com/terms/n/nonrenewableresource.asp"
],
[
"offshore",
"https://www.investopedia.com/terms/o/offshore.asp"
]
] |
https://www.investopedia.com/mortgage-rates-drop-to-lowest-level-in-4-weeks-8643909
|
Mortgage Rates Drop to Lowest Level in 4 Weeks
|
<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"> Ending the week with a three-day fall, 30-year mortgage rates dropped Friday to 7.11%—their cheapest average since early April. Rates moved notably down for most other new purchase <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage types</a> as well, with many dropping by double-digit basis points.<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">Editor's Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.</p></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:76.1%;">
<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 6, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/r-TXKoFb_jAWOkhwrc9WtKBOWyg=/1240x0/filters:no_upscale():max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/It4jFcRS_skkz-lw12AJtZcFEsg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png" data-srcset="https://www.investopedia.com/thmb/NmhU_gzngkgbt6hNJ2qpthhwm-A=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png 750w" data-tracking-container="true" height="944" id="mntl-sc-block-image_1-0" width="1240"/>
<noscript>
<img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 6, 2024" class="img--noscript universal-image__image" height="944" sizes="750px" src="https://www.investopedia.com/thmb/It4jFcRS_skkz-lw12AJtZcFEsg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png" srcset="https://www.investopedia.com/thmb/NmhU_gzngkgbt6hNJ2qpthhwm-A=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png 750w" width="1240"/>
</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_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>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Rate Averages for Top 5 Mortgage Types</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase</b></td>
<td><b>Refinance</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.11%</td>
<td>7.63%</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.67%</td>
<td>6.65%</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.21%</td>
<td>6.32%</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>7.94%</td>
<td>8.26%</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.06%</td>
<td>7.07%</td>
</tr>
<tr>
<td><sup><sub><em><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></em></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
<figcaption>National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.</figcaption>
</div></figure>
<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"> 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 seek.
</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 mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_10-0"><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_11-0"></div>
<div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_13-0"><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_14-0"></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_15-0"> <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_16-0"> After shooting up just over a week ago to a five-month high of 7.37%, rates on 30-year new purchase have come down somewhat. Dropping a notable 14 basis points Friday after a slide of 11 basis points the two previous days, the flagship average is down to 7.11%. That's now its lowest level since April 9.
</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"> Thirty-year rates are still significantly elevated vs. early February, when the average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year peak of 8.01% in October.
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_20-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/Csg8K/3/" 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_21-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> New purchase 15-year mortgage rates also saw a big drop Friday. Subtracting 19 basis points, the 15-year average has given up 30 points in three days. That lowers the 15-year average to 6.21%—also a four-week low. Today's 15-year rates are considerably more affordable than last fall's 7.08% average—a peak since 2000.
</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"> Jumbo 30-year rates dropped 10 basis points Friday. That pushes the jumbo 30-year average down to 7.06%, now almost a quarter percentage point below the recent five-month peak of 7.30%. Though daily historical jumbo rates are not available before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
</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"> All other new purchase averages also moved lower Friday, many dramatically. The biggest losers were FHA 15-year rates, which plunged 39 basis points on average, and 10-year loans, whose average sank 27 basis points.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_28-0"> <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 Mortgage Rate Averages - New Purchase Loans</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>New Purchase Rates</b></td>
<td><b>Daily Change</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.11%</td>
<td>-0.14</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.67%</td>
<td>-0.17</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.46%</td>
<td>-0.06</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>6.86%</td>
<td>-0.20</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.21%</td>
<td>-0.19</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>6.28%</td>
<td>-0.39</td>
</tr>
<tr>
<td>10-Year Fixed</td>
<td>6.10%</td>
<td>-0.27</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>7.88%</td>
<td>-0.21</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>7.94%</td>
<td>-0.21</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.06%</td>
<td>-0.10</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>6.98%</td>
<td>-0.20</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>7.76%</td>
<td>-0.08</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>7.82%</td>
<td>-0.12</td>
</tr>
<tr>
<td><sup><sub><em><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></em></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
<figcaption>National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.</figcaption>
</div></figure>
<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/NuVEL/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_31-0"></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_32-0"> <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_33-0"> Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading rose 5 basis points to 7.22%, marking its highest level since late November.<span class="ql-inline-citation" data-cite="4"></span> Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
</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"> Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
</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-todays-mortgage-rate-averages-refinancing"></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"> 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_38-0"> Most refinancing averages also declined Friday, but the 30-year refi average actually tacked on a single basis point. That takes the gap between 30-year new purchase and refi rates to a wide 52 basis points. The 15-year refi average meanwhile fell 17 basis points, while jumbo 30-year refi rates marched in place.
</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=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">National Mortgage Rate Averages - Refinance Loans</th>
</tr>
</thead>
<tbody data-check="-1">
<tr>
<td><b>Loan Type</b></td>
<td><b>Refinance Rates</b></td>
<td><b>Daily Change</b></td>
</tr>
<tr>
<td>30-Year Fixed</td>
<td>7.63%</td>
<td>+0.01</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>6.65%</td>
<td>-0.17</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.31%</td>
<td>-0.08</td>
</tr>
<tr>
<td>20-Year Fixed</td>
<td>7.12%</td>
<td>-0.11</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.32%</td>
<td>-0.17</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>6.33%</td>
<td>-0.49*</td>
</tr>
<tr>
<td>10-Year Fixed</td>
<td>6.32%</td>
<td>-0.66*</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>8.24%</td>
<td>-0.07</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>8.26%</td>
<td>-0.10</td>
</tr>
<tr>
<td>Jumbo 30-Year Fixed</td>
<td>7.07%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 15-Year Fixed</td>
<td>7.47%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>8.02%</td>
<td>No Change</td>
</tr>
<tr>
<td>Jumbo 5/6 ARM</td>
<td>7.58%</td>
<td>-0.48*</td>
</tr>
<tr>
<td><sup><sub><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.zillow.com/" rel="noopener noreferrer sponsored nofollow">Provided via the Zillow Mortgage API</a></sub></sup></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
<figcaption>*Occasionally some rate averages show a much larger than usual change from one day to the next. This can be due to some loan types being less popular among mortgage shoppers, resulting in the average being based on a smaller sample size of rate quotes.</figcaption>
</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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><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 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 Friday were Alaska, New York, North Carolina, Louisiana, Texas, and Idaho, while the states with the highest average rates were West Virginia; Iowa; Washington, D.C.; Maryland; North Dakota; 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/DtoFV/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 sixth consecutive rate hold announced May 1.<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 sustainably, it has said it's 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"> The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.<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_73-0"></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_74-0"> <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_75-0"> The national and state averages cited above are provided as is via the Zillow Mortgage API, 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 (LTV) ratio</a> of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 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. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
</p></div>
|
Ending the week with a three-day fall, 30-year mortgage rates dropped Friday to 7.11%—their cheapest average since early April. Rates moved notably down for most other new purchase [mortgage types](https://www.investopedia.com/mortgage-rates-5094943) as well, with many dropping by double-digit basis points.
### Editor's Note
As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.
![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - May 6, 2024]()
:max_bytes(150000):strip_icc()/4GduY-last-90-days-of-30-year-mortgage-rate-average-a6051f536209410590a75403ad1e69ac.png)
| National Rate Averages for Top 5 Mortgage Types | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase** | **Refinance** |
| 30-Year Fixed | 7.11% | 7.63% |
| FHA 30-Year Fixed | 6.67% | 6.65% |
| 15-Year Fixed | 6.21% | 6.32% |
| 5/6 ARM | 7.94% | 8.26% |
| Jumbo 30-Year Fixed | 7.06% | 7.07% |
| *[Provided via the Zillow Mortgage API](https://www.zillow.com/)* | | |
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
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 seek.
[Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943)
## Today's Mortgage Rate Averages: New Purchase
After shooting up just over a week ago to a five-month high of 7.37%, rates on 30-year new purchase have come down somewhat. Dropping a notable 14 basis points Friday after a slide of 11 basis points the two previous days, the flagship average is down to 7.11%. That's now its lowest level since April 9.
Thirty-year rates are still significantly elevated vs. early February, when the average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year peak of 8.01% in October.
New purchase 15-year mortgage rates also saw a big drop Friday. Subtracting 19 basis points, the 15-year average has given up 30 points in three days. That lowers the 15-year average to 6.21%—also a four-week low. Today's 15-year rates are considerably more affordable than last fall's 7.08% average—a peak since 2000.
Jumbo 30-year rates dropped 10 basis points Friday. That pushes the jumbo 30-year average down to 7.06%, now almost a quarter percentage point below the recent five-month peak of 7.30%. Though daily historical jumbo rates are not available before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
All other new purchase averages also moved lower Friday, many dramatically. The biggest losers were FHA 15-year rates, which plunged 39 basis points on average, and 10-year loans, whose average sank 27 basis points.
| National Mortgage Rate Averages - New Purchase Loans | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase Rates** | **Daily Change** |
| 30-Year Fixed | 7.11% | -0.14 |
| FHA 30-Year Fixed | 6.67% | -0.17 |
| VA 30-Year Fixed | 6.46% | -0.06 |
| 20-Year Fixed | 6.86% | -0.20 |
| 15-Year Fixed | 6.21% | -0.19 |
| FHA 15-Year Fixed | 6.28% | -0.39 |
| 10-Year Fixed | 6.10% | -0.27 |
| 7/6 ARM | 7.88% | -0.21 |
| 5/6 ARM | 7.94% | -0.21 |
| Jumbo 30-Year Fixed | 7.06% | -0.10 |
| Jumbo 15-Year Fixed | 6.98% | -0.20 |
| Jumbo 7/6 ARM | 7.76% | -0.08 |
| Jumbo 5/6 ARM | 7.82% | -0.12 |
| *[Provided via the Zillow Mortgage API](https://www.zillow.com/)* | | |
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
## The Weekly Freddie Mac Average
Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading rose 5 basis points to 7.22%, marking its highest level since late November. Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a *weekly* average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
## Today's Mortgage Rate Averages: Refinancing
Most refinancing averages also declined Friday, but the 30-year refi average actually tacked on a single basis point. That takes the gap between 30-year new purchase and refi rates to a wide 52 basis points. The 15-year refi average meanwhile fell 17 basis points, while jumbo 30-year refi rates marched in place.
| National Mortgage Rate Averages - Refinance Loans | | |
| --- | --- | --- |
| **Loan Type** | **Refinance Rates** | **Daily Change** |
| 30-Year Fixed | 7.63% | +0.01 |
| FHA 30-Year Fixed | 6.65% | -0.17 |
| VA 30-Year Fixed | 6.31% | -0.08 |
| 20-Year Fixed | 7.12% | -0.11 |
| 15-Year Fixed | 6.32% | -0.17 |
| FHA 15-Year Fixed | 6.33% | -0.49\* |
| 10-Year Fixed | 6.32% | -0.66\* |
| 7/6 ARM | 8.24% | -0.07 |
| 5/6 ARM | 8.26% | -0.10 |
| Jumbo 30-Year Fixed | 7.07% | No Change |
| Jumbo 15-Year Fixed | 7.47% | No Change |
| Jumbo 7/6 ARM | 8.02% | No Change |
| Jumbo 5/6 ARM | 7.58% | -0.48\* |
| [Provided via the Zillow Mortgage API](https://www.zillow.com/) | | |
\*Occasionally some rate averages show a much larger than usual change from one day to the next. This can be due to some loan types being less popular among mortgage shoppers, resulting in the average being based on a smaller sample size of rate quotes.
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 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 Friday were Alaska, New York, North Carolina, Louisiana, Texas, and Idaho, while the states with the highest average rates were West Virginia; Iowa; Washington, D.C.; Maryland; North Dakota; 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 sixth consecutive rate hold announced May 1. 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 sustainably, it has said it's hesitant to start cutting rates.
The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.
## How We Track Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a [loan-to-value (LTV) ratio](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 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. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
|
Ending the week with a three-day fall, 30-year mortgage rates dropped Friday to 7.11%—their cheapest average since early April. Rates moved notably down for most other new purchase mortgage types as well, with many dropping by double-digit basis points.
Editor's Note
As of May 1, our daily mortgage rate averages have been provided via the Zillow Mortgage API. As this involves a different rate source as well as a new methodology, our current averages will not directly align with those we published prior to May 1, 2024. All the historical data and analysis in this article and future articles are also based on this new data source.
National Rate Averages for Top 5 Mortgage Types
Loan Type
New Purchase
Refinance
30-Year Fixed
7.11%
7.63%
FHA 30-Year Fixed
6.67%
6.65%
15-Year Fixed
6.21%
6.32%
5/6 ARM
7.94%
8.26%
Jumbo 30-Year Fixed
7.06%
7.07%
Provided via the Zillow Mortgage API
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
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 seek.
Compare the Best Mortgage Rates Today - May 21, 2024
Today's Mortgage Rate Averages: New Purchase
After shooting up just over a week ago to a five-month high of 7.37%, rates on 30-year new purchase have come down somewhat. Dropping a notable 14 basis points Friday after a slide of 11 basis points the two previous days, the flagship average is down to 7.11%. That's now its lowest level since April 9.
Thirty-year rates are still significantly elevated vs. early February, when the average dipped as low as 6.36%. But rates are considerably cheaper than when the 30-year average hit a historic 23-year peak of 8.01% in October.
New purchase 15-year mortgage rates also saw a big drop Friday. Subtracting 19 basis points, the 15-year average has given up 30 points in three days. That lowers the 15-year average to 6.21%—also a four-week low. Today's 15-year rates are considerably more affordable than last fall's 7.08% average—a peak since 2000.
Jumbo 30-year rates dropped 10 basis points Friday. That pushes the jumbo 30-year average down to 7.06%, now almost a quarter percentage point below the recent five-month peak of 7.30%. Though daily historical jumbo rates are not available before 2009, it's estimated the 8.14% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years.
All other new purchase averages also moved lower Friday, many dramatically. The biggest losers were FHA 15-year rates, which plunged 39 basis points on average, and 10-year loans, whose average sank 27 basis points.
National Mortgage Rate Averages - New Purchase Loans
Loan Type
New Purchase Rates
Daily Change
30-Year Fixed
7.11%
-0.14
FHA 30-Year Fixed
6.67%
-0.17
VA 30-Year Fixed
6.46%
-0.06
20-Year Fixed
6.86%
-0.20
15-Year Fixed
6.21%
-0.19
FHA 15-Year Fixed
6.28%
-0.39
10-Year Fixed
6.10%
-0.27
7/6 ARM
7.88%
-0.21
5/6 ARM
7.94%
-0.21
Jumbo 30-Year Fixed
7.06%
-0.10
Jumbo 15-Year Fixed
6.98%
-0.20
Jumbo 7/6 ARM
7.76%
-0.08
Jumbo 5/6 ARM
7.82%
-0.12
Provided via the Zillow Mortgage API
National averages based on a minimum 20% down payment and an applicant credit score of 680 to 739.
The Weekly Freddie Mac Average
Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading rose 5 basis points to 7.22%, marking its highest level since late November. Back in October, however, Freddie Mac's average reached a historic 23-year peak of 7.79%. It later dropped significantly, registering a low point of 6.60% in mid-January.
Freddie Mac’s average differs from what we report for 30-year rates because Freddie Mac calculates a weekly average that blends five previous days of rates. In contrast, our Investopedia 30-year average is a daily reading, offering a more precise and timely indicator of rate movement. In addition, the criteria for included loans (e.g., amount of down payment, credit score, inclusion of discount points) varies between Freddie Mac's methodology and our own.
Today's Mortgage Rate Averages: Refinancing
Most refinancing averages also declined Friday, but the 30-year refi average actually tacked on a single basis point. That takes the gap between 30-year new purchase and refi rates to a wide 52 basis points. The 15-year refi average meanwhile fell 17 basis points, while jumbo 30-year refi rates marched in place.
National Mortgage Rate Averages - Refinance Loans
Loan Type
Refinance Rates
Daily Change
30-Year Fixed
7.63%
+0.01
FHA 30-Year Fixed
6.65%
-0.17
VA 30-Year Fixed
6.31%
-0.08
20-Year Fixed
7.12%
-0.11
15-Year Fixed
6.32%
-0.17
FHA 15-Year Fixed
6.33%
-0.49*
10-Year Fixed
6.32%
-0.66*
7/6 ARM
8.24%
-0.07
5/6 ARM
8.26%
-0.10
Jumbo 30-Year Fixed
7.07%
No Change
Jumbo 15-Year Fixed
7.47%
No Change
Jumbo 7/6 ARM
8.02%
No Change
Jumbo 5/6 ARM
7.58%
-0.48*
Provided via the Zillow Mortgage API
*Occasionally some rate averages show a much larger than usual change from one day to the next. This can be due to some loan types being less popular among mortgage shoppers, resulting in the average being based on a smaller sample size of rate quotes.
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 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 Friday were Alaska, New York, North Carolina, Louisiana, Texas, and Idaho, while the states with the highest average rates were West Virginia; Iowa; Washington, D.C.; Maryland; North Dakota; 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 sixth consecutive rate hold announced May 1. 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 sustainably, it has said it's hesitant to start cutting rates.
The Fed will hold five more meetings this year, with the next one scheduled to conclude June 12.
How We Track Mortgage Rates
The national and state averages cited above are provided as is via the Zillow Mortgage API, assuming a loan-to-value (LTV) ratio of 80% (i.e., a down payment of at least 20%) and an applicant credit score in the 680–739 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. © Zillow, Inc., 2024. Use is subject to the Zillow Terms of Use.
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https://www.investopedia.com/joint-brokerage-accounts-7497852
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Joint Brokerage Accounts: 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"> A joint brokerage account is a type of investment account owned by two or more people. It allows multiple individuals to contribute funds toward <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment.asp">investments</a> and make <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading-4427765">trading</a> decisions together. Joint brokerage accounts are commonly opened by married couples, siblings, or business partners who want to invest together and pool their resources.
</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"> This type of account offers many benefits, such as simplifying tax reporting and the potential for higher returns through a more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/030116/portfolio-diversification-done-right.asp">diversified portfolio</a>. However, it is essential to carefully consider the potential risks and downsides before opening a joint brokerage account.
</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>Joint brokerage accounts are legally binding, and each account holder is responsible for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/11/investors-fees-cheat-sheet.asp">fees</a>,<br/><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp">taxes</a>, and penalties. Consider risks before opening one.</li>
<li>Investments are made jointly, but clear communication and decision-making processes are important to avoid conflicts.</li>
<li>Joint brokerage accounts are often opened by married couples, siblings, or business partners who want to invest together and pool their resources.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-how-does-a-joint-brokerage-account-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 Does a Joint Brokerage Account Work? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jointaccount.asp">joint brokerage account</a> allows multiple people to pool their money and invest together. Usually, each account holder has equal rights to make trades, manage investments, and access account information.
</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"> To open a joint brokerage account, all account holders must provide personal information and complete the necessary paperwork. Once the account is opened, the account holders can buy and sell securities such as <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/m/mutualfund.asp">mutual funds</a>, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> using the pooled funds.
</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"> Investment decisions, including which securities to buy or sell and when to do so, are typically made jointly by all account holders with this type of account. However, it is important to establish clear communication channels and decision-making processes to avoid misunderstandings or conflicts.
</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"> It’s critical to note that joint brokerage accounts are legally binding agreements, and each account holder is responsible for any fees, taxes, or penalties that may result from transactions made in the account.
</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">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Brokerage firms are financial institutions that facilitate the buying and selling of various financial products, such as stocks, bonds, mutual funds, and other investment vehicles. These firms act as intermediaries between buyers and sellers, providing access to stock exchanges and facilitating trades on behalf of their clients.</p></div></div></div>
<span class="heading-toc" id="toc-types-of-joint-brokerage-account"></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"> Types of Joint Brokerage Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> There are three main types of joint brokerage account: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenancy_in_common.asp">tenancy in common (TIC)</a>, joint tenancy with rights of survivorship (JTWROS), and tenancy by the entirety (TBE).
</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 a TIC account, each account holder owns a specific percentage of the account and is free to sell their share or pass it on to their heirs. This type of account may be preferred by investors who want more control over their share of the account.
</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 a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jtwros.asp">JTWROS</a> account, each account holder has an equal share in the account, and ownership automatically passes to the surviving account holder(s) in the event of a death. This type of account can simplify the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transfer.asp">transfer</a> of assets and may be preferred by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investors</a> who want to ensure that their share of the account passes directly to their chosen beneficiary.<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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenancy-by-the-entirety.asp">Tenancy by the entirety (TBE)</a> is a type of joint brokerage account ownership that is available only to married couples. It differs from other joint account types in that it carries a right of survivorship, meaning that if one spouse passes away, the surviving spouse automatically becomes the sole owner of the account. This type of account may offer certain legal protections in some states, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset-protection-trust.asp">protection from creditors</a> or lawsuits.<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"> Some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage firms</a> may offer additional types of joint account, such as community property accounts, which are available in certain states and treat all assets acquired during the marriage as joint property. This type of brokerage account is available only in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington state, and Wisconsin.<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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> It’s important for investors to carefully consider the features and benefits of each type of joint brokerage account before opening an account.
</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-tips-for-managing-a-joint-brokerage-account"></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"> Tips for Managing a Joint Brokerage Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The following five tips can help you to manage a joint brokerage account:
</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"> Establish clear communication channels and decision-making processes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> It’s important for all joint account holders to communicate regularly and to establish a system for making investment decisions. Regular meetings or check-ins can help ensure that all account holders are on the same page and that any disagreements can be addressed in a timely manner.<br>
</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"> Set investment goals and risk tolerance levels together </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Before opening a joint brokerage account, it is important for all account holders to agree on their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/figure-out-your-investment-goals/">investment goals</a> and <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> levels. This can help avoid conflicts down the line and ensure that everyone is working toward the same objectives.
</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-important" 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" 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>Risk tolerance refers to an individual’s or an entity’s willingness to accept the possibility of losing money as a result of investment decisions. An investor with a high risk tolerance is more comfortable with taking on greater investment risks in pursuit of higher potential returns.<span class="ql-inline-citation" data-cite="4"></span></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"> Keep accurate records of all transactions and hold regular account reviews </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> All joint account holders should keep detailed records of all transactions made in the account. Regularly reviewing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/account-statement.asp">account statements</a> can help identify any errors or discrepancies and ensure that the account is performing as desired.<br/>
</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"> Plan for unexpected events, such as death or divorce, by consulting with an attorney </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Joint brokerage accounts can be subject to legal issues in the event of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/10/estate-planning-checklist.asp">death</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/093015/divorce-planning-checklist-what-you-need-know.asp">divorce</a>. It is important for all account holders to consult with an attorney and to have a plan in place for how the account will be handled if an unexpected event occurs.
</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"> Choose a reputable brokerage firm, and regularly check account statements to ensure accuracy </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> When choosing a brokerage firm, it is important to do your research and select a reputable company with a strong track record of customer service and support.
</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-comparisonlist mntl-block" id="mntl-sc-block_51-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_52-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Advantages & Disadvantages of a Joint Brokerage Account</h3>
<div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Advantages</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Increased investment power</p></li>
<li><p>Simplified tax reporting</p></li>
<li><p>Shared responsibility</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">Disadvantages</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Possible conflict over investment decisions</p></li>
<li><p>Potential legal issues</p></li>
<li><p>Personal financial risks</p></li>
</ul>
</div>
</div></div>
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<span class="heading-toc" id="toc-advantages-of-a-joint-brokerage-account-explained"></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"> Advantages of a Joint Brokerage Account, Explained </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0">
<li><strong>Increased investment power</strong>: Joint brokerage accounts allow individuals to pool their resources and invest together, which can lead to a more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversified portfolio</a> and potentially higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">returns</a>.</li>
<li><strong>Simplified tax reporting</strong>: Joint brokerage accounts provide one consolidated statement that includes all trades and income earned from the account, which can save time and reduce the likelihood of errors when <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/051415/what-are-different-ways-i-can-file-my-income-tax-return.asp">filing taxes</a>.</li>
<li><strong>Shared responsibility</strong>: With joint brokerage accounts, each account holder has equal rights and responsibilities, which can promote shared decision making and accountability.</li>
</ul>
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<span class="heading-toc" id="toc-disadvantages-of-a-joint-brokerage-account-explained"></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"> Disadvantages of a Joint Brokerage Account, Explained </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0">
<li><strong>Possible conflict over investment decisions</strong>: Differences in investment goals or risk tolerance can lead to disagreements between account holders about investment decisions, which can cause tension and conflict.</li>
<li><strong>Potential legal issues</strong>: Joint brokerage accounts can be subject to legal issues in the event of a death or divorce, particularly if there is no clear plan in place for how the account will be handled.</li>
<li><strong>Personal financial risks</strong>: Joint brokerage accounts may expose account holders to personal financial risks, such as liabilities resulting from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a> trading or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securities-fraud.asp">account fraud</a>, resulting from transactions made by any of the joint account holders.</li>
</ul>
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<span class="heading-toc" id="toc-tax-implications-with-a-joint-account"></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"> Tax Implications with a Joint Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> As with any account, as income, dividends, and gains accrue to the account, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxableevent.asp">taxable events</a> occur. The tax implications for joint accounts will differ depending on whether the account owners are married spouses or unmarried co-owners.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Should the joint owners be married spouses, the tax treatment of gains and assets that move in and out of the account are more straightforward. However, not all joint accounts are held by married couples who share tax treatments. Should you have a joint account with a non-spouse, moving assets in and out of the account can have tax implications for other account owners, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gifttax.asp">gift tax</a>, <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>, and so on.
</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"> For married spouses with a joint account:<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_66-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0">
<li>The account is treated as jointly owned with no special tax considerations. Any interest, dividends, or capital gains are reported under each spouse’s individual tax ID and go on their personal tax returns.</li>
<li>Even if only one spouse generates all the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentincome.asp">investment income</a>, it is split and reported equally on both spouses’ tax returns.</li>
<li>Transferring assets between spouses does not trigger any taxable events.</li>
</ul>
<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"> For unmarried co-owners of a joint account:<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_70-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0">
<li>Each co-owner reports investment income proportionate to their ownership share of the account on their individual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax return</a>.</li>
<li>If the account ownership split is uneven, the tax burden on investment income is allocated according to ownership percentage.</li>
<li>Transferring assets between unmarried co-owners may be considered a taxable gift if done disproportionately.</li>
<li>Contributions from co-owners are not considered gifts unless one co-owner contributes more than their share to the account.</li>
</ul>
<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"> In summary, joint account taxation follows the individual owners for unmarried co-owners, while spouses enjoy benefits like equal income splitting regardless of contribution sources. Consultation with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxadvisor.asp">tax advisor</a> is recommended when establishing joint non-spousal accounts.<br/>
</p>
<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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> In a standard joint brokerage account, each co-owner is jointly and severally liable for any investing activities within the account. This means each co-owner may be responsible for covering the full amount of any losses or liabilities incurred, even if they did not make the trades themselves.
</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"> For example, if one co-owner sells <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/08/naked-options.asp">uncovered options</a> contracts that end up with obligations beyond the account balance, the broker can seek payment from either account holder via a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margincall.asp">margin call</a>. Or if one co-owner activates a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin_loan_availability.asp">margin loan</a> and cannot cover it, the other co-owner shares responsibility.
</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"> These risks are especially problematic when one co-owner is “silent” and less engaged in investment decisions. They may be shocked to find they are on the hook for substantial losses from their partner’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculation.asp">speculative investing</a> or use of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a>. Even conservative investors can unwittingly take on additional liability that implicates their spouse or other co-owner.
</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"> Setting aligned goals for risk tolerance provides some protection. But ultimately, the joint structure leaves each party somewhat vulnerable to the other’s choices. Those considering a shared brokerage account should have a candid discussion on investment philosophy or utilize an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentadvisor.asp">investment advisor</a> to mitigate blind spots. The risks of joint brokerage accounts extend well beyond routine market volatility.
</p>
<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-what-happens-to-a-joint-brokerage-account-when-one-holder-dies"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens to a Joint Brokerage Account When One Holder Dies?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>When one holder in a joint brokerage account passes away, the ownership of the account typically transfers to the surviving account holder(s). The surviving account holder(s) will then have full ownership and control over the assets held within the account. It’s important to note that the transfer of ownership can vary depending on the specific terms of the joint brokerage account agreement and local laws. In some cases, it may be necessary to provide a death certificate and other legal documents to transfer ownership of the account.<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_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-is-a-joint-brokerage-account-a-good-idea"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Joint Brokerage Account a Good Idea?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Joint brokerage accounts can offer couples or groups of investors several advantages: a single investment manager for the account, if desired; combined resources for a larger pool of investment funds; and likely simplified <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-planning.asp">tax</a> 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="7"></span> However, anyone thinking about opening a joint brokerage account should also consider the need to set up clear communication and decision making to avoid misunderstandings or conflicts. Legal and tax issues also should be discussed before the account is opened.</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-who-pays-taxes-on-a-joint-brokerage-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Pays Taxes on a Joint Brokerage Account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>All owners of a joint account potentially pay taxes on it, up to the amount owed.<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_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-how-can-setting-up-an-llc-to-hold-a-joint-account-be-helpful"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can Setting Up an LLC to Hold a Joint Account Be Helpful?</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/articles/investing/091014/basics-forming-limited-liability-company-llc.asp">Forming a limited liability company</a> (LLC) for a joint investment account offers several advantages over holding the account personally in both owners’ names, by essentially creating a legal shield around the brokerage account, limiting liability for potential losses and debts to the capital invested in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/llc.asp">the LLC</a> itself. Your personal assets outside the LLC remain insulated and protected. This applies to both account co-owners, preventing exposure from each other’s investing choices.</p><p>An LLC also provides more flexibility to customize the account’s operational structure. As co-owners, you can establish clear rules for voting control, profit sharing, and succession planning instead of relying on the default joint account setup. Opening the account under an LLC tax ID gives you a formal business entity with pass-through tax treatment, rather than mingling investment activities with your personal taxes. And for more advanced trading strategies, the LLC structure accommodates options, leverage, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">short selling</a> more seamlessly than in a plain joint account.</p><p>The only real downside is the legal paperwork and filing fees to establish the LLC, which take some time and money upfront. But if you’re investing substantial capital jointly or employing sophisticated strategies, then the liability and flexibility benefits of using an LLC are often well worth it.</p></div>
</div>
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<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_92-0"> <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_93-0"> Joint brokerage accounts offer advantages such as increased investment power, simplified tax reporting, and shared responsibility.
</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"> However, potential disadvantages to consider include conflict over investment decisions, legal issues in the event of a death or divorce, and personal financial risks that may arise from transactions made by any of the joint account holders.
</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"> It’s essential to weigh these pros and cons carefully before deciding to open a joint brokerage account with others.
</p></div>
|
A joint brokerage account is a type of investment account owned by two or more people. It allows multiple individuals to contribute funds toward [investments](https://www.investopedia.com/terms/i/investment.asp) and make [trading](https://www.investopedia.com/trading-4427765) decisions together. Joint brokerage accounts are commonly opened by married couples, siblings, or business partners who want to invest together and pool their resources.
This type of account offers many benefits, such as simplifying tax reporting and the potential for higher returns through a more [diversified portfolio](https://www.investopedia.com/articles/investing/030116/portfolio-diversification-done-right.asp). However, it is essential to carefully consider the potential risks and downsides before opening a joint brokerage account.
### Key Takeaways
* Joint brokerage accounts are legally binding, and each account holder is responsible for [fees](https://www.investopedia.com/articles/basics/11/investors-fees-cheat-sheet.asp),
[taxes](https://www.investopedia.com/articles/investing/072313/investment-tax-basics-all-investors.asp), and penalties. Consider risks before opening one.
* Investments are made jointly, but clear communication and decision-making processes are important to avoid conflicts.
* Joint brokerage accounts are often opened by married couples, siblings, or business partners who want to invest together and pool their resources.
## How Does a Joint Brokerage Account Work?
A [joint brokerage account](https://www.investopedia.com/terms/j/jointaccount.asp) allows multiple people to pool their money and invest together. Usually, each account holder has equal rights to make trades, manage investments, and access account information.
To open a joint brokerage account, all account holders must provide personal information and complete the necessary paperwork. Once the account is opened, the account holders can buy and sell securities such as [stocks](https://www.investopedia.com/terms/s/stock.asp), [bonds](https://www.investopedia.com/terms/b/bond.asp), [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) using the pooled funds.
Investment decisions, including which securities to buy or sell and when to do so, are typically made jointly by all account holders with this type of account. However, it is important to establish clear communication channels and decision-making processes to avoid misunderstandings or conflicts.
It’s critical to note that joint brokerage accounts are legally binding agreements, and each account holder is responsible for any fees, taxes, or penalties that may result from transactions made in the account.
### Note
Brokerage firms are financial institutions that facilitate the buying and selling of various financial products, such as stocks, bonds, mutual funds, and other investment vehicles. These firms act as intermediaries between buyers and sellers, providing access to stock exchanges and facilitating trades on behalf of their clients.
## Types of Joint Brokerage Account
There are three main types of joint brokerage account: [tenancy in common (TIC)](https://www.investopedia.com/terms/t/tenancy_in_common.asp), joint tenancy with rights of survivorship (JTWROS), and tenancy by the entirety (TBE).
In a TIC account, each account holder owns a specific percentage of the account and is free to sell their share or pass it on to their heirs. This type of account may be preferred by investors who want more control over their share of the account.
In a [JTWROS](https://www.investopedia.com/terms/j/jtwros.asp) account, each account holder has an equal share in the account, and ownership automatically passes to the surviving account holder(s) in the event of a death. This type of account can simplify the [transfer](https://www.investopedia.com/terms/t/transfer.asp) of assets and may be preferred by [investors](https://www.investopedia.com/terms/i/investor.asp) who want to ensure that their share of the account passes directly to their chosen beneficiary.
[Tenancy by the entirety (TBE)](https://www.investopedia.com/terms/t/tenancy-by-the-entirety.asp) is a type of joint brokerage account ownership that is available only to married couples. It differs from other joint account types in that it carries a right of survivorship, meaning that if one spouse passes away, the surviving spouse automatically becomes the sole owner of the account. This type of account may offer certain legal protections in some states, such as [protection from creditors](https://www.investopedia.com/terms/a/asset-protection-trust.asp) or lawsuits.
Some [brokerage firms](https://www.investopedia.com/terms/b/brokerage-company.asp) may offer additional types of joint account, such as community property accounts, which are available in certain states and treat all assets acquired during the marriage as joint property. This type of brokerage account is available only in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington state, and Wisconsin.
It’s important for investors to carefully consider the features and benefits of each type of joint brokerage account before opening an account.
## Tips for Managing a Joint Brokerage Account
The following five tips can help you to manage a joint brokerage account:
### Establish clear communication channels and decision-making processes
It’s important for all joint account holders to communicate regularly and to establish a system for making investment decisions. Regular meetings or check-ins can help ensure that all account holders are on the same page and that any disagreements can be addressed in a timely manner.
### Set investment goals and risk tolerance levels together
Before opening a joint brokerage account, it is important for all account holders to agree on their [investment goals](https://www.investopedia.com/investing/figure-out-your-investment-goals/) and [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) levels. This can help avoid conflicts down the line and ensure that everyone is working toward the same objectives.
###
Risk tolerance refers to an individual’s or an entity’s willingness to accept the possibility of losing money as a result of investment decisions. An investor with a high risk tolerance is more comfortable with taking on greater investment risks in pursuit of higher potential returns.
### Keep accurate records of all transactions and hold regular account reviews
All joint account holders should keep detailed records of all transactions made in the account. Regularly reviewing [account statements](https://www.investopedia.com/terms/a/account-statement.asp) can help identify any errors or discrepancies and ensure that the account is performing as desired.
### Plan for unexpected events, such as death or divorce, by consulting with an attorney
Joint brokerage accounts can be subject to legal issues in the event of a [death](https://www.investopedia.com/articles/retirement/10/estate-planning-checklist.asp) or [divorce](https://www.investopedia.com/articles/personal-finance/093015/divorce-planning-checklist-what-you-need-know.asp). It is important for all account holders to consult with an attorney and to have a plan in place for how the account will be handled if an unexpected event occurs.
### Choose a reputable brokerage firm, and regularly check account statements to ensure accuracy
When choosing a brokerage firm, it is important to do your research and select a reputable company with a strong track record of customer service and support.
### Advantages & Disadvantages of a Joint Brokerage Account
Advantages
* Increased investment power
* Simplified tax reporting
* Shared responsibility
Disadvantages
* Possible conflict over investment decisions
* Potential legal issues
* Personal financial risks
## Advantages of a Joint Brokerage Account, Explained
* **Increased investment power**: Joint brokerage accounts allow individuals to pool their resources and invest together, which can lead to a more [diversified portfolio](https://www.investopedia.com/terms/d/diversification.asp) and potentially higher [returns](https://www.investopedia.com/terms/r/returnoninvestment.asp).
* **Simplified tax reporting**: Joint brokerage accounts provide one consolidated statement that includes all trades and income earned from the account, which can save time and reduce the likelihood of errors when [filing taxes](https://www.investopedia.com/ask/answers/051415/what-are-different-ways-i-can-file-my-income-tax-return.asp).
* **Shared responsibility**: With joint brokerage accounts, each account holder has equal rights and responsibilities, which can promote shared decision making and accountability.
## Disadvantages of a Joint Brokerage Account, Explained
* **Possible conflict over investment decisions**: Differences in investment goals or risk tolerance can lead to disagreements between account holders about investment decisions, which can cause tension and conflict.
* **Potential legal issues**: Joint brokerage accounts can be subject to legal issues in the event of a death or divorce, particularly if there is no clear plan in place for how the account will be handled.
* **Personal financial risks**: Joint brokerage accounts may expose account holders to personal financial risks, such as liabilities resulting from [securities](https://www.investopedia.com/terms/s/security.asp) trading or [account fraud](https://www.investopedia.com/terms/s/securities-fraud.asp), resulting from transactions made by any of the joint account holders.
## Tax Implications with a Joint Account
As with any account, as income, dividends, and gains accrue to the account, [taxable events](https://www.investopedia.com/terms/t/taxableevent.asp) occur. The tax implications for joint accounts will differ depending on whether the account owners are married spouses or unmarried co-owners.
Should the joint owners be married spouses, the tax treatment of gains and assets that move in and out of the account are more straightforward. However, not all joint accounts are held by married couples who share tax treatments. Should you have a joint account with a non-spouse, moving assets in and out of the account can have tax implications for other account owners, such as [gift tax](https://www.investopedia.com/terms/g/gifttax.asp), [capital gains tax](https://www.investopedia.com/terms/c/capital_gains_tax.asp), and so on.
For married spouses with a joint account:
* The account is treated as jointly owned with no special tax considerations. Any interest, dividends, or capital gains are reported under each spouse’s individual tax ID and go on their personal tax returns.
* Even if only one spouse generates all the [investment income](https://www.investopedia.com/terms/i/investmentincome.asp), it is split and reported equally on both spouses’ tax returns.
* Transferring assets between spouses does not trigger any taxable events.
For unmarried co-owners of a joint account:
* Each co-owner reports investment income proportionate to their ownership share of the account on their individual [tax return](https://www.investopedia.com/terms/t/taxreturn.asp).
* If the account ownership split is uneven, the tax burden on investment income is allocated according to ownership percentage.
* Transferring assets between unmarried co-owners may be considered a taxable gift if done disproportionately.
* Contributions from co-owners are not considered gifts unless one co-owner contributes more than their share to the account.
In summary, joint account taxation follows the individual owners for unmarried co-owners, while spouses enjoy benefits like equal income splitting regardless of contribution sources. Consultation with a [tax advisor](https://www.investopedia.com/terms/t/taxadvisor.asp) is recommended when establishing joint non-spousal accounts.
## Special Considerations
In a standard joint brokerage account, each co-owner is jointly and severally liable for any investing activities within the account. This means each co-owner may be responsible for covering the full amount of any losses or liabilities incurred, even if they did not make the trades themselves.
For example, if one co-owner sells [uncovered options](https://www.investopedia.com/articles/optioninvestor/08/naked-options.asp) contracts that end up with obligations beyond the account balance, the broker can seek payment from either account holder via a [margin call](https://www.investopedia.com/terms/m/margincall.asp). Or if one co-owner activates a [margin loan](https://www.investopedia.com/terms/m/margin_loan_availability.asp) and cannot cover it, the other co-owner shares responsibility.
These risks are especially problematic when one co-owner is “silent” and less engaged in investment decisions. They may be shocked to find they are on the hook for substantial losses from their partner’s [speculative investing](https://www.investopedia.com/terms/s/speculation.asp) or use of [leverage](https://www.investopedia.com/terms/l/leverage.asp). Even conservative investors can unwittingly take on additional liability that implicates their spouse or other co-owner.
Setting aligned goals for risk tolerance provides some protection. But ultimately, the joint structure leaves each party somewhat vulnerable to the other’s choices. Those considering a shared brokerage account should have a candid discussion on investment philosophy or utilize an [investment advisor](https://www.investopedia.com/terms/i/investmentadvisor.asp) to mitigate blind spots. The risks of joint brokerage accounts extend well beyond routine market volatility.
## What Happens to a Joint Brokerage Account When One Holder Dies?
When one holder in a joint brokerage account passes away, the ownership of the account typically transfers to the surviving account holder(s). The surviving account holder(s) will then have full ownership and control over the assets held within the account. It’s important to note that the transfer of ownership can vary depending on the specific terms of the joint brokerage account agreement and local laws. In some cases, it may be necessary to provide a death certificate and other legal documents to transfer ownership of the account.
## Is a Joint Brokerage Account a Good Idea?
Joint brokerage accounts can offer couples or groups of investors several advantages: a single investment manager for the account, if desired; combined resources for a larger pool of investment funds; and likely simplified [tax](https://www.investopedia.com/terms/t/tax-planning.asp) and [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp). However, anyone thinking about opening a joint brokerage account should also consider the need to set up clear communication and decision making to avoid misunderstandings or conflicts. Legal and tax issues also should be discussed before the account is opened.
## Who Pays Taxes on a Joint Brokerage Account?
All owners of a joint account potentially pay taxes on it, up to the amount owed.
## How Can Setting Up an LLC to Hold a Joint Account Be Helpful?
[Forming a limited liability company](https://www.investopedia.com/articles/investing/091014/basics-forming-limited-liability-company-llc.asp) (LLC) for a joint investment account offers several advantages over holding the account personally in both owners’ names, by essentially creating a legal shield around the brokerage account, limiting liability for potential losses and debts to the capital invested in [the LLC](https://www.investopedia.com/terms/l/llc.asp) itself. Your personal assets outside the LLC remain insulated and protected. This applies to both account co-owners, preventing exposure from each other’s investing choices.
An LLC also provides more flexibility to customize the account’s operational structure. As co-owners, you can establish clear rules for voting control, profit sharing, and succession planning instead of relying on the default joint account setup. Opening the account under an LLC tax ID gives you a formal business entity with pass-through tax treatment, rather than mingling investment activities with your personal taxes. And for more advanced trading strategies, the LLC structure accommodates options, leverage, and [short selling](https://www.investopedia.com/terms/s/shortselling.asp) more seamlessly than in a plain joint account.
The only real downside is the legal paperwork and filing fees to establish the LLC, which take some time and money upfront. But if you’re investing substantial capital jointly or employing sophisticated strategies, then the liability and flexibility benefits of using an LLC are often well worth it.
## The Bottom Line
Joint brokerage accounts offer advantages such as increased investment power, simplified tax reporting, and shared responsibility.
However, potential disadvantages to consider include conflict over investment decisions, legal issues in the event of a death or divorce, and personal financial risks that may arise from transactions made by any of the joint account holders.
It’s essential to weigh these pros and cons carefully before deciding to open a joint brokerage account with others.
|
A joint brokerage account is a type of investment account owned by two or more people. It allows multiple individuals to contribute funds toward investments and make trading decisions together. Joint brokerage accounts are commonly opened by married couples, siblings, or business partners who want to invest together and pool their resources.
This type of account offers many benefits, such as simplifying tax reporting and the potential for higher returns through a more diversified portfolio. However, it is essential to carefully consider the potential risks and downsides before opening a joint brokerage account.
Key Takeaways
Joint brokerage accounts are legally binding, and each account holder is responsible for fees,taxes, and penalties. Consider risks before opening one.
Investments are made jointly, but clear communication and decision-making processes are important to avoid conflicts.
Joint brokerage accounts are often opened by married couples, siblings, or business partners who want to invest together and pool their resources.
How Does a Joint Brokerage Account Work?
A joint brokerage account allows multiple people to pool their money and invest together. Usually, each account holder has equal rights to make trades, manage investments, and access account information.
To open a joint brokerage account, all account holders must provide personal information and complete the necessary paperwork. Once the account is opened, the account holders can buy and sell securities such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs) using the pooled funds.
Investment decisions, including which securities to buy or sell and when to do so, are typically made jointly by all account holders with this type of account. However, it is important to establish clear communication channels and decision-making processes to avoid misunderstandings or conflicts.
It’s critical to note that joint brokerage accounts are legally binding agreements, and each account holder is responsible for any fees, taxes, or penalties that may result from transactions made in the account.
Note
Brokerage firms are financial institutions that facilitate the buying and selling of various financial products, such as stocks, bonds, mutual funds, and other investment vehicles. These firms act as intermediaries between buyers and sellers, providing access to stock exchanges and facilitating trades on behalf of their clients.
Types of Joint Brokerage Account
There are three main types of joint brokerage account: tenancy in common (TIC), joint tenancy with rights of survivorship (JTWROS), and tenancy by the entirety (TBE).
In a TIC account, each account holder owns a specific percentage of the account and is free to sell their share or pass it on to their heirs. This type of account may be preferred by investors who want more control over their share of the account.
In a JTWROS account, each account holder has an equal share in the account, and ownership automatically passes to the surviving account holder(s) in the event of a death. This type of account can simplify the transfer of assets and may be preferred by investors who want to ensure that their share of the account passes directly to their chosen beneficiary.
Tenancy by the entirety (TBE) is a type of joint brokerage account ownership that is available only to married couples. It differs from other joint account types in that it carries a right of survivorship, meaning that if one spouse passes away, the surviving spouse automatically becomes the sole owner of the account. This type of account may offer certain legal protections in some states, such as protection from creditors or lawsuits.
Some brokerage firms may offer additional types of joint account, such as community property accounts, which are available in certain states and treat all assets acquired during the marriage as joint property. This type of brokerage account is available only in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington state, and Wisconsin.
It’s important for investors to carefully consider the features and benefits of each type of joint brokerage account before opening an account.
Tips for Managing a Joint Brokerage Account
The following five tips can help you to manage a joint brokerage account:
Establish clear communication channels and decision-making processes
It’s important for all joint account holders to communicate regularly and to establish a system for making investment decisions. Regular meetings or check-ins can help ensure that all account holders are on the same page and that any disagreements can be addressed in a timely manner.
Set investment goals and risk tolerance levels together
Before opening a joint brokerage account, it is important for all account holders to agree on their investment goals and risk tolerance levels. This can help avoid conflicts down the line and ensure that everyone is working toward the same objectives.
Risk tolerance refers to an individual’s or an entity’s willingness to accept the possibility of losing money as a result of investment decisions. An investor with a high risk tolerance is more comfortable with taking on greater investment risks in pursuit of higher potential returns.
Keep accurate records of all transactions and hold regular account reviews
All joint account holders should keep detailed records of all transactions made in the account. Regularly reviewing account statements can help identify any errors or discrepancies and ensure that the account is performing as desired.
Plan for unexpected events, such as death or divorce, by consulting with an attorney
Joint brokerage accounts can be subject to legal issues in the event of a death or divorce. It is important for all account holders to consult with an attorney and to have a plan in place for how the account will be handled if an unexpected event occurs.
Choose a reputable brokerage firm, and regularly check account statements to ensure accuracy
When choosing a brokerage firm, it is important to do your research and select a reputable company with a strong track record of customer service and support.
Advantages & Disadvantages of a Joint Brokerage Account
Advantages
Increased investment power
Simplified tax reporting
Shared responsibility
Disadvantages
Possible conflict over investment decisions
Potential legal issues
Personal financial risks
Advantages of a Joint Brokerage Account, Explained
Increased investment power: Joint brokerage accounts allow individuals to pool their resources and invest together, which can lead to a more diversified portfolio and potentially higher returns.
Simplified tax reporting: Joint brokerage accounts provide one consolidated statement that includes all trades and income earned from the account, which can save time and reduce the likelihood of errors when filing taxes.
Shared responsibility: With joint brokerage accounts, each account holder has equal rights and responsibilities, which can promote shared decision making and accountability.
Disadvantages of a Joint Brokerage Account, Explained
Possible conflict over investment decisions: Differences in investment goals or risk tolerance can lead to disagreements between account holders about investment decisions, which can cause tension and conflict.
Potential legal issues: Joint brokerage accounts can be subject to legal issues in the event of a death or divorce, particularly if there is no clear plan in place for how the account will be handled.
Personal financial risks: Joint brokerage accounts may expose account holders to personal financial risks, such as liabilities resulting from securities trading or account fraud, resulting from transactions made by any of the joint account holders.
Tax Implications with a Joint Account
As with any account, as income, dividends, and gains accrue to the account, taxable events occur. The tax implications for joint accounts will differ depending on whether the account owners are married spouses or unmarried co-owners.
Should the joint owners be married spouses, the tax treatment of gains and assets that move in and out of the account are more straightforward. However, not all joint accounts are held by married couples who share tax treatments. Should you have a joint account with a non-spouse, moving assets in and out of the account can have tax implications for other account owners, such as gift tax, capital gains tax, and so on.
For married spouses with a joint account:
The account is treated as jointly owned with no special tax considerations. Any interest, dividends, or capital gains are reported under each spouse’s individual tax ID and go on their personal tax returns.
Even if only one spouse generates all the investment income, it is split and reported equally on both spouses’ tax returns.
Transferring assets between spouses does not trigger any taxable events.
For unmarried co-owners of a joint account:
Each co-owner reports investment income proportionate to their ownership share of the account on their individual tax return.
If the account ownership split is uneven, the tax burden on investment income is allocated according to ownership percentage.
Transferring assets between unmarried co-owners may be considered a taxable gift if done disproportionately.
Contributions from co-owners are not considered gifts unless one co-owner contributes more than their share to the account.
In summary, joint account taxation follows the individual owners for unmarried co-owners, while spouses enjoy benefits like equal income splitting regardless of contribution sources. Consultation with a tax advisor is recommended when establishing joint non-spousal accounts.
Special Considerations
In a standard joint brokerage account, each co-owner is jointly and severally liable for any investing activities within the account. This means each co-owner may be responsible for covering the full amount of any losses or liabilities incurred, even if they did not make the trades themselves.
For example, if one co-owner sells uncovered options contracts that end up with obligations beyond the account balance, the broker can seek payment from either account holder via a margin call. Or if one co-owner activates a margin loan and cannot cover it, the other co-owner shares responsibility.
These risks are especially problematic when one co-owner is “silent” and less engaged in investment decisions. They may be shocked to find they are on the hook for substantial losses from their partner’s speculative investing or use of leverage. Even conservative investors can unwittingly take on additional liability that implicates their spouse or other co-owner.
Setting aligned goals for risk tolerance provides some protection. But ultimately, the joint structure leaves each party somewhat vulnerable to the other’s choices. Those considering a shared brokerage account should have a candid discussion on investment philosophy or utilize an investment advisor to mitigate blind spots. The risks of joint brokerage accounts extend well beyond routine market volatility.
What Happens to a Joint Brokerage Account When One Holder Dies?
When one holder in a joint brokerage account passes away, the ownership of the account typically transfers to the surviving account holder(s). The surviving account holder(s) will then have full ownership and control over the assets held within the account. It’s important to note that the transfer of ownership can vary depending on the specific terms of the joint brokerage account agreement and local laws. In some cases, it may be necessary to provide a death certificate and other legal documents to transfer ownership of the account.
Is a Joint Brokerage Account a Good Idea?
Joint brokerage accounts can offer couples or groups of investors several advantages: a single investment manager for the account, if desired; combined resources for a larger pool of investment funds; and likely simplified tax and estate planning. However, anyone thinking about opening a joint brokerage account should also consider the need to set up clear communication and decision making to avoid misunderstandings or conflicts. Legal and tax issues also should be discussed before the account is opened.
Who Pays Taxes on a Joint Brokerage Account?
All owners of a joint account potentially pay taxes on it, up to the amount owed.
How Can Setting Up an LLC to Hold a Joint Account Be Helpful?
Forming a limited liability company (LLC) for a joint investment account offers several advantages over holding the account personally in both owners’ names, by essentially creating a legal shield around the brokerage account, limiting liability for potential losses and debts to the capital invested in the LLC itself. Your personal assets outside the LLC remain insulated and protected. This applies to both account co-owners, preventing exposure from each other’s investing choices.An LLC also provides more flexibility to customize the account’s operational structure. As co-owners, you can establish clear rules for voting control, profit sharing, and succession planning instead of relying on the default joint account setup. Opening the account under an LLC tax ID gives you a formal business entity with pass-through tax treatment, rather than mingling investment activities with your personal taxes. And for more advanced trading strategies, the LLC structure accommodates options, leverage, and short selling more seamlessly than in a plain joint account.The only real downside is the legal paperwork and filing fees to establish the LLC, which take some time and money upfront. But if you’re investing substantial capital jointly or employing sophisticated strategies, then the liability and flexibility benefits of using an LLC are often well worth it.
The Bottom Line
Joint brokerage accounts offer advantages such as increased investment power, simplified tax reporting, and shared responsibility.
However, potential disadvantages to consider include conflict over investment decisions, legal issues in the event of a death or divorce, and personal financial risks that may arise from transactions made by any of the joint account holders.
It’s essential to weigh these pros and cons carefully before deciding to open a joint brokerage account with others.
|
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https://www.investopedia.com/terms/c/carbontrade.asp
|
Carbon Trade: Definition, Purpose, and How Carbon Trading 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-carbon-trade"></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 Carbon Trade? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Carbon trade is the buying and selling of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/carbon_credit.asp">credits</a> that permit a company or other entity to emit a certain amount of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092915/5-countries-produce-most-carbon-dioxide-co2.asp">carbon dioxide</a> or other greenhouse gases. The carbon credits and the carbon trade are authorized by governments with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change.
</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"> Carbon trading is also referred to as carbon emissions trading.
</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>Carbon trade agreements allow for the sale of carbon credits in order to reduce total emissions.</li><li>Several countries and territories have started carbon trading programs.</li><li>Carbon trading is adapted from cap and trade, a regulatory approach that successfully reduced sulfur pollution in the 1990s.</li><li>These measures are aimed at reducing the effects of global warming but their effectiveness remains a matter of debate.<br/></li><li>Rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting an agreement first laid out at the 2015 Paris Climate Agreement.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-carbon-trade"></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 Carbon Trade </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Carbon trading is based on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cap-and-trade.asp">cap and trade</a> regulations that successfully reduced sulfur pollution during the 1990s. This regulation introduced <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carbon-markets-7972128">market-based incentives</a> to reduce pollution: rather than mandating specific measures, the policy rewarded companies that cut their emissions and imposed financial costs on those that could not.<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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The idea of applying a cap-and-trade solution to carbon emissions originated with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/kyoto.asp">Kyoto Protocol</a>, a United Nations treaty to mitigate climate change that took effect in 2005. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels by 2012. The Kyoto Protocol achieved mixed results, and an extension to its terms has not yet been ratified.<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>
<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-note" 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 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 essential tenet of the <strong>Kyoto Protocol</strong> was that industrialized nations needed to lessen the amount of their CO2 emissions.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <br/>The notion is to incentivize each nation to cut back on its carbon emissions in order to have leftover permits to sell. The bigger, wealthier nations effectively subsidize the efforts of poorer, higher-polluting nations by buying their credits. But over time, those wealthier nations are incentivized to reduce their emissions so that they don't need to buy as many credits on the market.
</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 countries use fossil fuels and produce carbon dioxide, they do not pay for the implications of burning those fossil fuels directly. There are some costs that they incur, like the price of the fuel itself, but there are other costs not included in the price of the fuel. These are known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/externality.asp">externalities</a>. In the case of fossil fuel usage, these externalities are often negative externalities, meaning that the consumption of the product has negative effects on third parties.
</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-advantages-and-disadvantages-of-carbon-trading"></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 Carbon Trading </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Proponents of the carbon trade argue that it is a cost-effective partial solution to the problem of climate change and that it incentivizes the adoption of innovative technologies.
</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"> However, carbon emissions trading has been widely and increasingly criticized. It is sometimes seen as a distraction and a half-measure to solve the large and pressing issue of global warming.
</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"> Despite this criticism, carbon trading remains a central concept in many proposals to mitigate or reduce climate change and global warming.
</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-regional-carbon-trading-markets"></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"> Regional Carbon Trading Markets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> While there is no global marketplace for carbon trading, several regional jurisdictions have created their own markets for the exchange of carbon credits. The state of California operates its own cap-and-trade program.<span class="ql-inline-citation" data-cite="4"></span> Several other U.S. states and Canadian provinces got together to create the Western Climate Initiative.<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_28-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> In July 2021, China started a long-awaited national emissions-trading program.<span class="ql-inline-citation" data-cite="11"></span> The program will initially involve 2,225 companies in the power sector and is designed to help the country reach its goal of achieving carbon neutrality by 2060. It will be the world's largest carbon market.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> That made the European Union Emissions Trading System the world's largest carbon trade market.<span class="ql-inline-citation" data-cite="9"></span> The EU's trading market is still considered the benchmark for carbon trading.<br/>
</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-important" 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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In 2021, China launched the world's largest market for carbon emissions trading. Firms representing 40% of the country's carbon output will be able to trade their emissions rights.<span class="ql-inline-citation" data-cite="15"></span></p></div></div></div>
<span class="heading-toc" id="toc-carbon-trading-agreement-post-glasgow-cop26"></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"> Carbon Trading Agreement Post Glasgow COP26 </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> After much deliberation, rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting a globally unified approach first laid out at the 2015 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paris-agreementcop21.asp">Paris Climate Agreement</a>. The agreed-upon framework, known as Article 6, will comprise a centralized system and a separate bilateral system. The centralized system is for the public and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/private-sector.asp">private sectors</a>, while the bilateral system is designed for countries to trade carbon offset credits, helping them meet their emission targets.<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_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Under the new agreement, those who create carbon credits will deposit 5% of proceeds generated into a fund to help developing countries tackle <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/051514/preparing-your-portfolio-climate-change.asp">climate change</a>. Also, 2% of credits will be canceled to ensure an overall reduction in emissions.<span class="ql-inline-citation" data-cite="13"></span> The new rules allow participants to use previous credits created between 2013 and 2020, prompting fears that they could potentially saturate the market and put downward pressure on prices.
</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"> Proponents of the framework say that it creates financial incentives for countries and companies to create emission-reducing technology and initiatives, such as mechanical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carbon-capture-7973911">carbon capture systems</a> and forest planting—all of which will help reduce carbon levels in the atmosphere.<br/>
</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-does-carbon-trading-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Carbon Trading Mean?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Carbon trading, also known as carbon emissions trading, is the use of a marketplace to buy and sell credits that allow companies or other parties to emit a certain amount of carbon dioxide.<span class="ql-inline-citation" data-cite="1"></span> The trade has led to using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/carbon-accounting-7562229">carbon accounting</a> to measure the impact made by companies, individuals, and governments. <br/></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-can-carbon-be-sold"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Carbon Be Sold?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Carbon emissions rights can be sold on various marketplaces—some international, some at the country level, and some on the state or local level, like California's cap-and-trade system.<span class="ql-inline-citation" data-cite="4"></span><br/></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-where-can-you-trade-carbon-emissions"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Can You Trade Carbon Emissions?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are many regional exchanges that can be used for carbon trading. Some of the largest include Xpansiv CBL, based in New York, and AirCarbon Exchange, based in Singapore.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="19"></span> The largest is the Shanghai Environment and Energy Exchange, which opened in 2021.<span class="ql-inline-citation" data-cite="16"></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-what-is-the-current-price-of-carbon"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Current Price of Carbon?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There is no fixed price of carbon worldwide—prices fluctuate by jurisdiction and by market supply and demand—but the benchmark EUA Futures price ranged between €80 and €100 euros for the first four months of 2022.<span class="ql-inline-citation" data-cite="12"></span></p></div>
</div></div>
|
## What Is Carbon Trade?
Carbon trade is the buying and selling of [credits](https://www.investopedia.com/terms/c/carbon_credit.asp) that permit a company or other entity to emit a certain amount of [carbon dioxide](https://www.investopedia.com/articles/investing/092915/5-countries-produce-most-carbon-dioxide-co2.asp) or other greenhouse gases. The carbon credits and the carbon trade are authorized by governments with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change.
Carbon trading is also referred to as carbon emissions trading.
### Key Takeaways
* Carbon trade agreements allow for the sale of carbon credits in order to reduce total emissions.
* Several countries and territories have started carbon trading programs.
* Carbon trading is adapted from cap and trade, a regulatory approach that successfully reduced sulfur pollution in the 1990s.
* These measures are aimed at reducing the effects of global warming but their effectiveness remains a matter of debate.
* Rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting an agreement first laid out at the 2015 Paris Climate Agreement.
## Understanding Carbon Trade
Carbon trading is based on the [cap and trade](https://www.investopedia.com/terms/c/cap-and-trade.asp) regulations that successfully reduced sulfur pollution during the 1990s. This regulation introduced [market-based incentives](https://www.investopedia.com/carbon-markets-7972128) to reduce pollution: rather than mandating specific measures, the policy rewarded companies that cut their emissions and imposed financial costs on those that could not.
The idea of applying a cap-and-trade solution to carbon emissions originated with the [Kyoto Protocol](https://www.investopedia.com/terms/k/kyoto.asp), a United Nations treaty to mitigate climate change that took effect in 2005. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels by 2012. The Kyoto Protocol achieved mixed results, and an extension to its terms has not yet been ratified.
###
The essential tenet of the **Kyoto Protocol** was that industrialized nations needed to lessen the amount of their CO2 emissions.
The notion is to incentivize each nation to cut back on its carbon emissions in order to have leftover permits to sell. The bigger, wealthier nations effectively subsidize the efforts of poorer, higher-polluting nations by buying their credits. But over time, those wealthier nations are incentivized to reduce their emissions so that they don't need to buy as many credits on the market.
When countries use fossil fuels and produce carbon dioxide, they do not pay for the implications of burning those fossil fuels directly. There are some costs that they incur, like the price of the fuel itself, but there are other costs not included in the price of the fuel. These are known as [externalities](https://www.investopedia.com/terms/e/externality.asp). In the case of fossil fuel usage, these externalities are often negative externalities, meaning that the consumption of the product has negative effects on third parties.
## Advantages and Disadvantages of Carbon Trading
Proponents of the carbon trade argue that it is a cost-effective partial solution to the problem of climate change and that it incentivizes the adoption of innovative technologies.
However, carbon emissions trading has been widely and increasingly criticized. It is sometimes seen as a distraction and a half-measure to solve the large and pressing issue of global warming.
Despite this criticism, carbon trading remains a central concept in many proposals to mitigate or reduce climate change and global warming.
## Regional Carbon Trading Markets
While there is no global marketplace for carbon trading, several regional jurisdictions have created their own markets for the exchange of carbon credits. The state of California operates its own cap-and-trade program. Several other U.S. states and Canadian provinces got together to create the Western Climate Initiative.
In July 2021, China started a long-awaited national emissions-trading program. The program will initially involve 2,225 companies in the power sector and is designed to help the country reach its goal of achieving carbon neutrality by 2060. It will be the world's largest carbon market.
That made the European Union Emissions Trading System the world's largest carbon trade market. The EU's trading market is still considered the benchmark for carbon trading.
###
In 2021, China launched the world's largest market for carbon emissions trading. Firms representing 40% of the country's carbon output will be able to trade their emissions rights.
## Carbon Trading Agreement Post Glasgow COP26
After much deliberation, rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting a globally unified approach first laid out at the 2015 [Paris Climate Agreement](https://www.investopedia.com/terms/p/paris-agreementcop21.asp). The agreed-upon framework, known as Article 6, will comprise a centralized system and a separate bilateral system. The centralized system is for the public and [private sectors](https://www.investopedia.com/terms/p/private-sector.asp), while the bilateral system is designed for countries to trade carbon offset credits, helping them meet their emission targets.
Under the new agreement, those who create carbon credits will deposit 5% of proceeds generated into a fund to help developing countries tackle [climate change](https://www.investopedia.com/articles/investing/051514/preparing-your-portfolio-climate-change.asp). Also, 2% of credits will be canceled to ensure an overall reduction in emissions. The new rules allow participants to use previous credits created between 2013 and 2020, prompting fears that they could potentially saturate the market and put downward pressure on prices.
Proponents of the framework say that it creates financial incentives for countries and companies to create emission-reducing technology and initiatives, such as mechanical [carbon capture systems](https://www.investopedia.com/carbon-capture-7973911) and forest planting—all of which will help reduce carbon levels in the atmosphere.
## What Does Carbon Trading Mean?
Carbon trading, also known as carbon emissions trading, is the use of a marketplace to buy and sell credits that allow companies or other parties to emit a certain amount of carbon dioxide. The trade has led to using [carbon accounting](https://www.investopedia.com/carbon-accounting-7562229) to measure the impact made by companies, individuals, and governments.
## Can Carbon Be Sold?
Carbon emissions rights can be sold on various marketplaces—some international, some at the country level, and some on the state or local level, like California's cap-and-trade system.
## Where Can You Trade Carbon Emissions?
There are many regional exchanges that can be used for carbon trading. Some of the largest include Xpansiv CBL, based in New York, and AirCarbon Exchange, based in Singapore. The largest is the Shanghai Environment and Energy Exchange, which opened in 2021.
## What Is the Current Price of Carbon?
There is no fixed price of carbon worldwide—prices fluctuate by jurisdiction and by market supply and demand—but the benchmark EUA Futures price ranged between €80 and €100 euros for the first four months of 2022.
|
What Is Carbon Trade?
Carbon trade is the buying and selling of credits that permit a company or other entity to emit a certain amount of carbon dioxide or other greenhouse gases. The carbon credits and the carbon trade are authorized by governments with the goal of gradually reducing overall carbon emissions and mitigating their contribution to climate change.
Carbon trading is also referred to as carbon emissions trading.
Key Takeaways
Carbon trade agreements allow for the sale of carbon credits in order to reduce total emissions.Several countries and territories have started carbon trading programs.Carbon trading is adapted from cap and trade, a regulatory approach that successfully reduced sulfur pollution in the 1990s.These measures are aimed at reducing the effects of global warming but their effectiveness remains a matter of debate.Rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting an agreement first laid out at the 2015 Paris Climate Agreement.
Understanding Carbon Trade
Carbon trading is based on the cap and trade regulations that successfully reduced sulfur pollution during the 1990s. This regulation introduced market-based incentives to reduce pollution: rather than mandating specific measures, the policy rewarded companies that cut their emissions and imposed financial costs on those that could not.
The idea of applying a cap-and-trade solution to carbon emissions originated with the Kyoto Protocol, a United Nations treaty to mitigate climate change that took effect in 2005. At the time, the measure devised was intended to reduce overall carbon dioxide emissions to roughly 5% below 1990 levels by 2012. The Kyoto Protocol achieved mixed results, and an extension to its terms has not yet been ratified.
The essential tenet of the Kyoto Protocol was that industrialized nations needed to lessen the amount of their CO2 emissions.
The notion is to incentivize each nation to cut back on its carbon emissions in order to have leftover permits to sell. The bigger, wealthier nations effectively subsidize the efforts of poorer, higher-polluting nations by buying their credits. But over time, those wealthier nations are incentivized to reduce their emissions so that they don't need to buy as many credits on the market.
When countries use fossil fuels and produce carbon dioxide, they do not pay for the implications of burning those fossil fuels directly. There are some costs that they incur, like the price of the fuel itself, but there are other costs not included in the price of the fuel. These are known as externalities. In the case of fossil fuel usage, these externalities are often negative externalities, meaning that the consumption of the product has negative effects on third parties.
Advantages and Disadvantages of Carbon Trading
Proponents of the carbon trade argue that it is a cost-effective partial solution to the problem of climate change and that it incentivizes the adoption of innovative technologies.
However, carbon emissions trading has been widely and increasingly criticized. It is sometimes seen as a distraction and a half-measure to solve the large and pressing issue of global warming.
Despite this criticism, carbon trading remains a central concept in many proposals to mitigate or reduce climate change and global warming.
Regional Carbon Trading Markets
While there is no global marketplace for carbon trading, several regional jurisdictions have created their own markets for the exchange of carbon credits. The state of California operates its own cap-and-trade program. Several other U.S. states and Canadian provinces got together to create the Western Climate Initiative.
In July 2021, China started a long-awaited national emissions-trading program. The program will initially involve 2,225 companies in the power sector and is designed to help the country reach its goal of achieving carbon neutrality by 2060. It will be the world's largest carbon market.
That made the European Union Emissions Trading System the world's largest carbon trade market. The EU's trading market is still considered the benchmark for carbon trading.
In 2021, China launched the world's largest market for carbon emissions trading. Firms representing 40% of the country's carbon output will be able to trade their emissions rights.
Carbon Trading Agreement Post Glasgow COP26
After much deliberation, rules for a global carbon market were established at the Glasgow COP26 climate change conference in November 2021, enacting a globally unified approach first laid out at the 2015 Paris Climate Agreement. The agreed-upon framework, known as Article 6, will comprise a centralized system and a separate bilateral system. The centralized system is for the public and private sectors, while the bilateral system is designed for countries to trade carbon offset credits, helping them meet their emission targets.
Under the new agreement, those who create carbon credits will deposit 5% of proceeds generated into a fund to help developing countries tackle climate change. Also, 2% of credits will be canceled to ensure an overall reduction in emissions. The new rules allow participants to use previous credits created between 2013 and 2020, prompting fears that they could potentially saturate the market and put downward pressure on prices.
Proponents of the framework say that it creates financial incentives for countries and companies to create emission-reducing technology and initiatives, such as mechanical carbon capture systems and forest planting—all of which will help reduce carbon levels in the atmosphere.
What Does Carbon Trading Mean?
Carbon trading, also known as carbon emissions trading, is the use of a marketplace to buy and sell credits that allow companies or other parties to emit a certain amount of carbon dioxide. The trade has led to using carbon accounting to measure the impact made by companies, individuals, and governments.
Can Carbon Be Sold?
Carbon emissions rights can be sold on various marketplaces—some international, some at the country level, and some on the state or local level, like California's cap-and-trade system.
Where Can You Trade Carbon Emissions?
There are many regional exchanges that can be used for carbon trading. Some of the largest include Xpansiv CBL, based in New York, and AirCarbon Exchange, based in Singapore. The largest is the Shanghai Environment and Energy Exchange, which opened in 2021.
What Is the Current Price of Carbon?
There is no fixed price of carbon worldwide—prices fluctuate by jurisdiction and by market supply and demand—but the benchmark EUA Futures price ranged between €80 and €100 euros for the first four months of 2022.
|
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],
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"https://www.investopedia.com/articles/investing/092915/5-countries-produce-most-carbon-dioxide-co2.asp"
],
[
"cap and trade",
"https://www.investopedia.com/terms/c/cap-and-trade.asp"
],
[
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"https://www.investopedia.com/carbon-markets-7972128"
],
[
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],
[
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],
[
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https://www.investopedia.com/articles/investing/030215/how-iron-ore-market-works-supply-market-share.asp
|
How the Iron Ore Market 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"> Iron ore is an essential component of the global iron and steel industries. Almost 98% of mined iron ore is used in steel making. About 50 countries mine iron ore, with Australia and Brazil dominating the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketshare.asp">market share</a> for exports.<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_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> Mines in Michigan and Minnesota account for the bulk of iron ore production in the United States. In 2019, U.S. mines produced 46.9 million metric tons of iron ore. Australia led production with 919 million tons, followed by Brazil with 405 million tons.
</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 the summer of 2021, global prices for iron ore rose to a record high of more than $212 per ton, an increase of around 8x from its 2015 lows.<span class="ql-inline-citation" data-cite="5"></span> Prices were around $133 per ton as of January 2022.<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_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>Iron ore is the key input of refined iron and steel products.</li><li>Prices fell to a low in 2015 as steel demand in China weakened.<span class="ql-inline-citation" data-cite="8"></span></li><li>Iron ore dropped to a 2020 low of $82.90 due to the COVID-19 pandemic, which caused a global reduction in steel consumption and production, but quickly rebounded to record highs above $212 by mid-2021.<span class="ql-inline-citation" data-cite="1"></span></li><li>Investors can gain exposure to iron ore price fluctuations by investing in public companies that extract iron ore or use it as a key input in their business.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-iron-ore"></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"> What Is Iron Ore? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Iron ore is the third most common element making up the Earth. The principal components of iron ore are hematite and magnetite. Taconite is a low-grade iron ore. Iron ore is not strong enough for construction, and other purposes, so raw iron is alloyed with other elements such as tungsten, manganese, nickel, vanadium, and chromium. The steel made from iron ore is used in construction, automobile manufacturing, and other industrial applications.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The U.S. is estimated to hold 110 billion tons of iron ore, representing 27 billion tons of iron. Most of this is taconite located in the Lake Superior district of Michigan.<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-iron-ore-price-fluctuations"></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"> Iron Ore Price Fluctuations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Over the years, iron ore prices have fluctuated wildly. For example, prices were $187 per metric ton in Feb. 2011 and then plunged to approximately $41 per ton in Dec. 2015.<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"> The price collapse was largely attributed to a drop in steel demand from China. The country purchases nearly two-thirds of the seaborne iron ore supply, which supports the businesses of major producers such as BHP Billiton (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=bhp">BHP</a>), Rio Tinto (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=rio">RIO</a>), and Vale (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vale">VALE</a>). In addition, these companies have access to low-cost iron ore deposits and benefit from <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economiesofscale.asp">economies of scale</a>. As they ramped up production, the market went into oversupply, which forced high-cost iron ore mines to scale back production or fold.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> In 2020, iron ore saw decreases in production, trade, and shipments due to the COVID-19 pandemic, leading to a global reduction in steel consumption and production. As a result, prices dropped to a 2020 low of $82.90 in June of that year, after touching $119.58 nearly one year earlier in July of 2019.
</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 2021, iron ore rallied back, with prices peaking at $215.81 per ton in June of 2021, before dropping to $113.71 per ton by Sept. 2021.<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_22-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_23-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/w1ejd/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Iron Ore Prices"></iframe>
<cite class="comp mntl-sc-block-iframe__caption mntl-text-block" id="mntl-sc-block-iframe__caption_1-0">Iron Ore Prices</cite></div>
<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-cost-is-key"></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"> Cost Is Key </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating-cost.asp">operating costs</a> of the top iron ore producers are among the lowest in the world. A fully commercial iron ore mine requires heavy <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capital-investment.asp">capital investment</a> in infrastructures such as rail lines and heavy machinery. Other factors impacting cost include the type of metallic iron that is economically retrievable at the mining site, distance to market, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/11/government-regulations.asp">government regulations</a>, and fuel costs.
</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"> In 2020, Fortescue Mining Group (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FSUMF">FSUMF</a>) had a reported <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashcost.asp">cash cost</a> of $12.78 per ton.<span class="ql-inline-citation" data-cite="19"></span> This compared to the $18.60 per ton cash cost reported by Vale.<span class="ql-inline-citation" data-cite="9"></span> Rio Tinto had a cash cost of $15.40 per ton, while the figure was $12.63 per ton for BHP Billiton.<span class="ql-inline-citation" data-cite="10"></span><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_29-0"></div>
<span class="heading-toc" id="toc-large-players-dominate"></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"> Large Players Dominate </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> A few key players dominate iron ore supply and demand. The top producers are listed below:
</p>
<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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_33-0"> <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: 132px;"></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">2020 Global Iron Ore Production</th>
</tr>
<tr>
<th><b>Country</b></th>
<th><b>Production</b></th>
<th><b>Share</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Australia</td>
<td>900 million tons</td>
<td>37.5%</td>
</tr>
<tr>
<td>Brazil</td>
<td>400 million tons</td>
<td>16.7%</td>
</tr>
<tr>
<td>China</td>
<td>340million tons</td>
<td>14.2%</td>
</tr>
<tr>
<td>India</td>
<td>230 million tons</td>
<td>9.6%</td>
</tr>
<tr>
<td>Russia</td>
<td>95 million tons</td>
<td>4.0%</td>
</tr>
<tr>
<td>South Africa</td>
<td>71 million tons</td>
<td>3.0%</td>
</tr>
<tr>
<td><b>World Total</b></td>
<td><b>2.4 billion tons</b></td>
<td><b>100</b>%</td>
</tr>
</tbody>
</table>
</div></figure>
<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"> <em>Source: U.S. Geological Survey.</em><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_36-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Although China was the No. 3 iron ore producer in 2020 with 351 million tons, it was also the top importer, buying up 75.4% of the global trade.<span class="ql-inline-citation" data-cite="20"></span> Japan was the second-largest importer, purchasing 6.1% of international trade, followed by South Korea at 4.4%.<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_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> The top 2020 exporting countries were Australia, which sold 56% of the global trade; Brazil with an 18.4% share; and South Africa with a 4.4% share.<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"> Iron ore mines belonging to BHP Billiton, Rio Tinto, and Fortescue Metals Group are located in Australia, while Vale has operations in Brazil.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="15"></span><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_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"> Large economies of scale benefit the biggest producers, who can afford to weather iron ore price fluctuations. This allows them to take market share from smaller players that have higher costs. Global steel demand is expected to remain healthy, rising 1.7% to 1.8 billion tonnes in 2020.<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_45-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The long-term investment plans of the top three iron ore producers show that they intend to reduce costs further and increase production aggressively. Over the long term, the low-cost iron mines could potentially fill the gap that appears as smaller companies go under. The gain in market share would likely benefit <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margin.asp">margins</a>, operating cash flow, and profits. The threat of a new entrant changing the dynamics in the iron ore market, as it is today, is low.
</p></div>
|
Iron ore is an essential component of the global iron and steel industries. Almost 98% of mined iron ore is used in steel making. About 50 countries mine iron ore, with Australia and Brazil dominating the [market share](https://www.investopedia.com/terms/m/marketshare.asp) for exports.
Mines in Michigan and Minnesota account for the bulk of iron ore production in the United States. In 2019, U.S. mines produced 46.9 million metric tons of iron ore. Australia led production with 919 million tons, followed by Brazil with 405 million tons.
In the summer of 2021, global prices for iron ore rose to a record high of more than $212 per ton, an increase of around 8x from its 2015 lows. Prices were around $133 per ton as of January 2022.
### Key Takeaways
* Iron ore is the key input of refined iron and steel products.
* Prices fell to a low in 2015 as steel demand in China weakened.
* Iron ore dropped to a 2020 low of $82.90 due to the COVID-19 pandemic, which caused a global reduction in steel consumption and production, but quickly rebounded to record highs above $212 by mid-2021.
* Investors can gain exposure to iron ore price fluctuations by investing in public companies that extract iron ore or use it as a key input in their business.
## What Is Iron Ore?
Iron ore is the third most common element making up the Earth. The principal components of iron ore are hematite and magnetite. Taconite is a low-grade iron ore. Iron ore is not strong enough for construction, and other purposes, so raw iron is alloyed with other elements such as tungsten, manganese, nickel, vanadium, and chromium. The steel made from iron ore is used in construction, automobile manufacturing, and other industrial applications.
The U.S. is estimated to hold 110 billion tons of iron ore, representing 27 billion tons of iron. Most of this is taconite located in the Lake Superior district of Michigan.
## Iron Ore Price Fluctuations
Over the years, iron ore prices have fluctuated wildly. For example, prices were $187 per metric ton in Feb. 2011 and then plunged to approximately $41 per ton in Dec. 2015.
The price collapse was largely attributed to a drop in steel demand from China. The country purchases nearly two-thirds of the seaborne iron ore supply, which supports the businesses of major producers such as BHP Billiton ([BHP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=bhp)), Rio Tinto ([RIO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=rio)), and Vale ([VALE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vale)). In addition, these companies have access to low-cost iron ore deposits and benefit from [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp). As they ramped up production, the market went into oversupply, which forced high-cost iron ore mines to scale back production or fold.
In 2020, iron ore saw decreases in production, trade, and shipments due to the COVID-19 pandemic, leading to a global reduction in steel consumption and production. As a result, prices dropped to a 2020 low of $82.90 in June of that year, after touching $119.58 nearly one year earlier in July of 2019.
In 2021, iron ore rallied back, with prices peaking at $215.81 per ton in June of 2021, before dropping to $113.71 per ton by Sept. 2021.
Iron Ore Prices
## Cost Is Key
The [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp) of the top iron ore producers are among the lowest in the world. A fully commercial iron ore mine requires heavy [capital investment](https://www.investopedia.com/terms/c/capital-investment.asp) in infrastructures such as rail lines and heavy machinery. Other factors impacting cost include the type of metallic iron that is economically retrievable at the mining site, distance to market, [government regulations](https://www.investopedia.com/articles/economics/11/government-regulations.asp), and fuel costs.
In 2020, Fortescue Mining Group ([FSUMF](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FSUMF)) had a reported [cash cost](https://www.investopedia.com/terms/c/cashcost.asp) of $12.78 per ton. This compared to the $18.60 per ton cash cost reported by Vale. Rio Tinto had a cash cost of $15.40 per ton, while the figure was $12.63 per ton for BHP Billiton.
## Large Players Dominate
A few key players dominate iron ore supply and demand. The top producers are listed below:
| 2020 Global Iron Ore Production | | |
| --- | --- | --- |
| **Country** | **Production** | **Share** |
| Australia | 900 million tons | 37.5% |
| Brazil | 400 million tons | 16.7% |
| China | 340million tons | 14.2% |
| India | 230 million tons | 9.6% |
| Russia | 95 million tons | 4.0% |
| South Africa | 71 million tons | 3.0% |
| **World Total** | **2.4 billion tons** | **100**% |
*Source: U.S. Geological Survey.*
Although China was the No. 3 iron ore producer in 2020 with 351 million tons, it was also the top importer, buying up 75.4% of the global trade. Japan was the second-largest importer, purchasing 6.1% of international trade, followed by South Korea at 4.4%.
The top 2020 exporting countries were Australia, which sold 56% of the global trade; Brazil with an 18.4% share; and South Africa with a 4.4% share.
Iron ore mines belonging to BHP Billiton, Rio Tinto, and Fortescue Metals Group are located in Australia, while Vale has operations in Brazil.
## The Bottom Line
Large economies of scale benefit the biggest producers, who can afford to weather iron ore price fluctuations. This allows them to take market share from smaller players that have higher costs. Global steel demand is expected to remain healthy, rising 1.7% to 1.8 billion tonnes in 2020.
The long-term investment plans of the top three iron ore producers show that they intend to reduce costs further and increase production aggressively. Over the long term, the low-cost iron mines could potentially fill the gap that appears as smaller companies go under. The gain in market share would likely benefit [margins](https://www.investopedia.com/terms/m/margin.asp), operating cash flow, and profits. The threat of a new entrant changing the dynamics in the iron ore market, as it is today, is low.
|
Iron ore is an essential component of the global iron and steel industries. Almost 98% of mined iron ore is used in steel making. About 50 countries mine iron ore, with Australia and Brazil dominating the market share for exports.
Mines in Michigan and Minnesota account for the bulk of iron ore production in the United States. In 2019, U.S. mines produced 46.9 million metric tons of iron ore. Australia led production with 919 million tons, followed by Brazil with 405 million tons.
In the summer of 2021, global prices for iron ore rose to a record high of more than $212 per ton, an increase of around 8x from its 2015 lows. Prices were around $133 per ton as of January 2022.
Key Takeaways
Iron ore is the key input of refined iron and steel products.Prices fell to a low in 2015 as steel demand in China weakened.Iron ore dropped to a 2020 low of $82.90 due to the COVID-19 pandemic, which caused a global reduction in steel consumption and production, but quickly rebounded to record highs above $212 by mid-2021.Investors can gain exposure to iron ore price fluctuations by investing in public companies that extract iron ore or use it as a key input in their business.
What Is Iron Ore?
Iron ore is the third most common element making up the Earth. The principal components of iron ore are hematite and magnetite. Taconite is a low-grade iron ore. Iron ore is not strong enough for construction, and other purposes, so raw iron is alloyed with other elements such as tungsten, manganese, nickel, vanadium, and chromium. The steel made from iron ore is used in construction, automobile manufacturing, and other industrial applications.
The U.S. is estimated to hold 110 billion tons of iron ore, representing 27 billion tons of iron. Most of this is taconite located in the Lake Superior district of Michigan.
Iron Ore Price Fluctuations
Over the years, iron ore prices have fluctuated wildly. For example, prices were $187 per metric ton in Feb. 2011 and then plunged to approximately $41 per ton in Dec. 2015.
The price collapse was largely attributed to a drop in steel demand from China. The country purchases nearly two-thirds of the seaborne iron ore supply, which supports the businesses of major producers such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). In addition, these companies have access to low-cost iron ore deposits and benefit from economies of scale. As they ramped up production, the market went into oversupply, which forced high-cost iron ore mines to scale back production or fold.
In 2020, iron ore saw decreases in production, trade, and shipments due to the COVID-19 pandemic, leading to a global reduction in steel consumption and production. As a result, prices dropped to a 2020 low of $82.90 in June of that year, after touching $119.58 nearly one year earlier in July of 2019.
In 2021, iron ore rallied back, with prices peaking at $215.81 per ton in June of 2021, before dropping to $113.71 per ton by Sept. 2021.
Iron Ore Prices
Cost Is Key
The operating costs of the top iron ore producers are among the lowest in the world. A fully commercial iron ore mine requires heavy capital investment in infrastructures such as rail lines and heavy machinery. Other factors impacting cost include the type of metallic iron that is economically retrievable at the mining site, distance to market, government regulations, and fuel costs.
In 2020, Fortescue Mining Group (FSUMF) had a reported cash cost of $12.78 per ton. This compared to the $18.60 per ton cash cost reported by Vale. Rio Tinto had a cash cost of $15.40 per ton, while the figure was $12.63 per ton for BHP Billiton.
Large Players Dominate
A few key players dominate iron ore supply and demand. The top producers are listed below:
2020 Global Iron Ore Production
Country
Production
Share
Australia
900 million tons
37.5%
Brazil
400 million tons
16.7%
China
340million tons
14.2%
India
230 million tons
9.6%
Russia
95 million tons
4.0%
South Africa
71 million tons
3.0%
World Total
2.4 billion tons
100%
Source: U.S. Geological Survey.
Although China was the No. 3 iron ore producer in 2020 with 351 million tons, it was also the top importer, buying up 75.4% of the global trade. Japan was the second-largest importer, purchasing 6.1% of international trade, followed by South Korea at 4.4%.
The top 2020 exporting countries were Australia, which sold 56% of the global trade; Brazil with an 18.4% share; and South Africa with a 4.4% share.
Iron ore mines belonging to BHP Billiton, Rio Tinto, and Fortescue Metals Group are located in Australia, while Vale has operations in Brazil.
The Bottom Line
Large economies of scale benefit the biggest producers, who can afford to weather iron ore price fluctuations. This allows them to take market share from smaller players that have higher costs. Global steel demand is expected to remain healthy, rising 1.7% to 1.8 billion tonnes in 2020.
The long-term investment plans of the top three iron ore producers show that they intend to reduce costs further and increase production aggressively. Over the long term, the low-cost iron mines could potentially fill the gap that appears as smaller companies go under. The gain in market share would likely benefit margins, operating cash flow, and profits. The threat of a new entrant changing the dynamics in the iron ore market, as it is today, is low.
|
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https://www.investopedia.com/articles/retirement/06/10secureretirementtips.asp
|
10 Tips for Achieving Financial Security
|
<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"> Are you financially secure?
</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"> Extensive research in 2023 shows that most individuals are unable to demonstrate financial security, particularly for their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement.asp">retirement</a> years.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span> This only underlines the fact that achieving financial security is a challenging process that requires careful planning and follow-through.
</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"> To be sure, financial security means different things to different people. But we'll use a simple definition: having enough financial assets to cover your expenses, emergencies, and retirement without having any concern of running out.
</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"> Below, we review some helpful tips that should help you on your way to achieving financial security.
</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>It is obvious that it is better to start saving at an early age, but it is never too late to start.</li><li>In order to make saving easier, try treating your retirement savings as a recurring expense, similar to paying rent, mortgage, or a car loan.</li><li>If your lifestyle, income, or fiscal responsibilities have changed, it's a good idea to reassess your financial profile and make adjustments where possible.</li><li>If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts.</li><li>Proper asset allocation considers factors such as age, risk tolerance, and whether you need to have your assets grow or produce income.</li><li>If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years.</li><li>Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary.</li></ul></div></div></div>
<span class="heading-toc" id="toc-1-start-as-soon-as-you-can"></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"> 1. Start As Soon As You Can </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> It is obvious that it is better to start saving at an early age, but it is never too late to start—even if you are already close to your retirement years—because every penny saved helps to cover your expenses.
</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"> If you save $200 every month for 40 years at a 5% interest rate, you will have saved significantly more than an individual who saves at the same rate for 10 years. However, the amount saved over a shorter period can go a long way in helping to cover expenses during retirement.
</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"> Also, keep in mind that other areas of financial planning, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a>, will become increasingly important as you get closer to retirement. This is because <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/risk_tolerance.asp">your risk tolerance</a> generally decreases as the number of years in which you can recuperate any losses goes down.
</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-2-view-savings-deposits-as-a-bill"></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"> 2. View Savings Deposits As a Bill </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Saving on a regular basis can be a challenge, especially when you consider the many regular expenses we all face, not to mention the enticing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumer-goods.asp">consumer goods</a> that tempt us to spend our disposable cash.
</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"> You can guard this temptation by treating your retirement savings as a recurring expense, similar to paying rent, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp">mortgage</a>, or a car loan. This is even easier if the amount is automatically debited from your paycheck by your employer.
</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-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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If the amount is deducted from your paycheck on a pre-tax basis, it helps to reduce the amount of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/incometax.asp">income taxes</a> owed on your salary<em>.</em></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Alternatively (or in addition), you may have your salary direct-deposited to a checking or <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>. You can also have the designated savings amount scheduled for automatic <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debit.asp">debit</a> to be credited to the retirement savings account on the same day the salary is credited.
</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-3-save-in-a-tax-deferred-account"></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"> 3. Save in a Tax-Deferred Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Contributing amounts earmarked for your retirement to a tax-deferred retirement account deters you from spending those amounts on impulse because you are likely to face tax consequences and penalties.
</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 instance, any amount distributed from a traditional retirement account may be subject to income taxes the year in which the distribution occurs, and if you are under age 59½ when the distribution occurs, the amount could be subject to a 10% early distribution penalty (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/excisetax.asp">excise tax</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_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts. For instance, in addition to saving in an employer-sponsored retirement plan, think about whether you can also afford to contribute to 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 whether the IRA should be a <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/">Roth IRA or a traditional IRA</a>.
</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-4-diversify-your-portfolio"></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"> 4. Diversify Your Portfolio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> The old adage that tells us that we shouldn't put all of our eggs in one <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basket.asp">basket</a> holds true for retirement assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your <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 (ROI)</a>. As such, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/6-asset-allocation-strategies-work/">asset allocation is a key part</a> of managing your retirement assets. Proper asset allocation considers factors such as the following:
</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><strong>Your age</strong>: This is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you're younger and fewer the closer you get to retirement age.</li><li><strong>Your risk tolerance</strong>: This helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated.</li><li><strong>Whether you need to have your assets grow</strong> or produce income.</li>
</ul>
<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-5-consider-all-potential-expenses"></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"> 5. Consider All Potential Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> When <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp">planning for retirement</a>, some of us make the mistake of not considering expenses for medical and dental costs, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longterm-care-ombudsman.asp">long-term care</a>, and income taxes.
</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"> When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. This will help you to make realistic projections and plan accordingly.
</p>
<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-6-retirement-savings-is-a-must"></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"> 6. Retirement Savings Is a Must </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use high-interest loans to pay your living expenses.
</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"> Therefore, preparing and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-budgeting-apps-5085405">working within a budget is essential</a>. Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disposableincome.asp">disposable income</a> is calculated accurately.
</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-note" 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 with-title" id="mntl-sc-block-callout-heading_3-0">Retirement Age</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>According to a Gallup poll in 2023, the average American expects to retire at age 66.<span class="ql-inline-citation" data-cite="4"></span> Life expectancy is 76.4 years, according to the National Center for Health Statistics.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div>
<span class="heading-toc" id="toc-7-periodically-reassess-your-portfolio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-heading__text"> 7. Periodically Reassess Your Portfolio </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> As you get closer to retirement and your financial needs, expenses, and risk tolerance change, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/strategicassetallocation.asp">strategic asset allocation</a> must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-planning.asp">retirement planning</a> is on target.
</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-8-optimize-your-expenses"></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"> 8. Optimize Your Expenses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> If your lifestyle, income, or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg. For instance, you may have finished <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/05/payoffmortgage.asp">paying off your mortgage</a> or the loan for your car, or the number of individuals for whom you are financially responsible may have changed.
</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"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reassessment.asp">reassessment</a> of your income, expenses, and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis.
</p>
<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-9-consider-your-spouse"></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"> 9. Consider Your Spouse </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years. If your spouse hasn't been saving, you need to determine whether your retirement savings can cover not only your expenses but those of your spouse as well.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div>
<span class="heading-toc" id="toc-10-work-with-a-financial-planner"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_62-0"> <span class="mntl-sc-block-heading__text"> 10. Work With a Financial Planner </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Unless you are experienced in the field of financial planning and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfoliomanagement.asp">portfolio management</a>, engaging the services of an experienced and qualified <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialplanner.asp">financial planner</a> will be necessary. Choosing the one who is right for you will be one of the most important decisions you make.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<span class="heading-toc" id="toc-financial-security-faqs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> Financial Security FAQs </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_66-0"> <span class="mntl-sc-block-subheading__text"> How Much Money Do You Need To Be Financially Secure? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> That depends on your age, income needs, and financial objectives. But generally speaking, the "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/four-percent-rule.asp">4% rule</a>" is a good measure of financial security. In other words, if you're able to safely withdraw 4% from your investment accounts every year and never run out of money, it's probably safe to say you are financially secure.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></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"> What Is the Difference Between Financial Security and Financial Stability? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Broadly speaking, financial stability means being free of debt and being able to comfortably pay off monthly expenses (with plenty left over for savings).<br/>
</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"> Financial security, on the other hand, means having enough money to cover your expenses, emergencies, <em>and</em> retirement without the fear of running out.
</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"> How Can You Protect Your Financial Security? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The best ways to protect your financial security include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> <li>Continuing to live well below your means</li><li>Remaining prudent when it comes to investing </li><li>Establishing different streams of income</li><li>Capitalizing on opportunities when they arise</li>
</ul>
<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"> How Can I Be Financially Free in Five Years? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> In order to be financially free in five years, consider the following steps:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> <li>Figure out your baseline level of revenue and expenses</li><li>Cut your expenses as aggressively as possible</li><li>Pay down as much debt as possible</li><li>Boost your income with a second job or side business</li><li>Ratchet up your monthly savings rate to 75% or greater</li><li>Invest in a way that prioritizes growth assets</li>
</ol>
<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"> What we've discussed here are just a few of the factors that may affect the success of your retirement plan and determine whether you enjoy a financially secure retirement. Your financial planner will help you to determine whether you should consider other factors.
</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"> As we said above, starting early will definitely make the task ahead easier, but it is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110315/4-phases-retirement-and-how-budget-them.asp">not too late to adopt some of these practices</a>, even if you are already retired.
</p></div>
|
Are you financially secure?
Extensive research in 2023 shows that most individuals are unable to demonstrate financial security, particularly for their [retirement](https://www.investopedia.com/terms/r/retirement.asp) years. This only underlines the fact that achieving financial security is a challenging process that requires careful planning and follow-through.
To be sure, financial security means different things to different people. But we'll use a simple definition: having enough financial assets to cover your expenses, emergencies, and retirement without having any concern of running out.
Below, we review some helpful tips that should help you on your way to achieving financial security.
### Key Takeaways
* It is obvious that it is better to start saving at an early age, but it is never too late to start.
* In order to make saving easier, try treating your retirement savings as a recurring expense, similar to paying rent, mortgage, or a car loan.
* If your lifestyle, income, or fiscal responsibilities have changed, it's a good idea to reassess your financial profile and make adjustments where possible.
* If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts.
* Proper asset allocation considers factors such as age, risk tolerance, and whether you need to have your assets grow or produce income.
* If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years.
* Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary.
## 1. Start As Soon As You Can
It is obvious that it is better to start saving at an early age, but it is never too late to start—even if you are already close to your retirement years—because every penny saved helps to cover your expenses.
If you save $200 every month for 40 years at a 5% interest rate, you will have saved significantly more than an individual who saves at the same rate for 10 years. However, the amount saved over a shorter period can go a long way in helping to cover expenses during retirement.
Also, keep in mind that other areas of financial planning, such as [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp), will become increasingly important as you get closer to retirement. This is because [your risk tolerance](https://www.investopedia.com/articles/pf/07/risk_tolerance.asp) generally decreases as the number of years in which you can recuperate any losses goes down.
## 2. View Savings Deposits As a Bill
Saving on a regular basis can be a challenge, especially when you consider the many regular expenses we all face, not to mention the enticing [consumer goods](https://www.investopedia.com/terms/c/consumer-goods.asp) that tempt us to spend our disposable cash.
You can guard this temptation by treating your retirement savings as a recurring expense, similar to paying rent, [mortgage](https://www.investopedia.com/terms/m/mortgage.asp), or a car loan. This is even easier if the amount is automatically debited from your paycheck by your employer.
###
If the amount is deducted from your paycheck on a pre-tax basis, it helps to reduce the amount of [income taxes](https://www.investopedia.com/terms/i/incometax.asp) owed on your salary*.*
Alternatively (or in addition), you may have your salary direct-deposited to a checking or [savings account](https://www.investopedia.com/terms/s/savingsaccount.asp). You can also have the designated savings amount scheduled for automatic [debit](https://www.investopedia.com/terms/d/debit.asp) to be credited to the retirement savings account on the same day the salary is credited.
## 3. Save in a Tax-Deferred Account
Contributing amounts earmarked for your retirement to a tax-deferred retirement account deters you from spending those amounts on impulse because you are likely to face tax consequences and penalties.
For instance, any amount distributed from a traditional retirement account may be subject to income taxes the year in which the distribution occurs, and if you are under age 59½ when the distribution occurs, the amount could be subject to a 10% early distribution penalty ([excise tax](https://www.investopedia.com/terms/e/excisetax.asp)).
If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts. For instance, in addition to saving in an employer-sponsored retirement plan, think about whether you can also afford to contribute to an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp), and whether the IRA should be a [Roth IRA or a traditional IRA](https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/).
## 4. Diversify Your Portfolio
The old adage that tells us that we shouldn't put all of our eggs in one [basket](https://www.investopedia.com/terms/b/basket.asp) holds true for retirement assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your [return on investment (ROI)](https://www.investopedia.com/terms/r/returnoninvestment.asp). As such, [asset allocation is a key part](https://www.investopedia.com/investing/6-asset-allocation-strategies-work/) of managing your retirement assets. Proper asset allocation considers factors such as the following:
* **Your age**: This is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you're younger and fewer the closer you get to retirement age.
* **Your risk tolerance**: This helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated.
* **Whether you need to have your assets grow** or produce income.
## 5. Consider All Potential Expenses
When [planning for retirement](https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp), some of us make the mistake of not considering expenses for medical and dental costs, [long-term care](https://www.investopedia.com/terms/l/longterm-care-ombudsman.asp), and income taxes.
When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. This will help you to make realistic projections and plan accordingly.
## 6. Retirement Savings Is a Must
Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use high-interest loans to pay your living expenses.
Therefore, preparing and [working within a budget is essential](https://www.investopedia.com/best-budgeting-apps-5085405). Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your [disposable income](https://www.investopedia.com/terms/d/disposableincome.asp) is calculated accurately.
### Retirement Age
According to a Gallup poll in 2023, the average American expects to retire at age 66. Life expectancy is 76.4 years, according to the National Center for Health Statistics.
## 7. Periodically Reassess Your Portfolio
As you get closer to retirement and your financial needs, expenses, and risk tolerance change, [strategic asset allocation](https://www.investopedia.com/terms/s/strategicassetallocation.asp) must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your [retirement planning](https://www.investopedia.com/terms/r/retirement-planning.asp) is on target.
## 8. Optimize Your Expenses
If your lifestyle, income, or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg. For instance, you may have finished [paying off your mortgage](https://www.investopedia.com/articles/pf/05/payoffmortgage.asp) or the loan for your car, or the number of individuals for whom you are financially responsible may have changed.
A [reassessment](https://www.investopedia.com/terms/r/reassessment.asp) of your income, expenses, and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis.
## 9. Consider Your Spouse
If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years. If your spouse hasn't been saving, you need to determine whether your retirement savings can cover not only your expenses but those of your spouse as well.
## 10. Work With a Financial Planner
Unless you are experienced in the field of financial planning and [portfolio management](https://www.investopedia.com/terms/p/portfoliomanagement.asp), engaging the services of an experienced and qualified [financial planner](https://www.investopedia.com/terms/f/financialplanner.asp) will be necessary. Choosing the one who is right for you will be one of the most important decisions you make.
## Financial Security FAQs
### How Much Money Do You Need To Be Financially Secure?
That depends on your age, income needs, and financial objectives. But generally speaking, the "[4% rule](https://www.investopedia.com/terms/f/four-percent-rule.asp)" is a good measure of financial security. In other words, if you're able to safely withdraw 4% from your investment accounts every year and never run out of money, it's probably safe to say you are financially secure.
### What Is the Difference Between Financial Security and Financial Stability?
Broadly speaking, financial stability means being free of debt and being able to comfortably pay off monthly expenses (with plenty left over for savings).
Financial security, on the other hand, means having enough money to cover your expenses, emergencies, *and* retirement without the fear of running out.
### How Can You Protect Your Financial Security?
The best ways to protect your financial security include:
* Continuing to live well below your means
* Remaining prudent when it comes to investing
* Establishing different streams of income
* Capitalizing on opportunities when they arise
### How Can I Be Financially Free in Five Years?
In order to be financially free in five years, consider the following steps:
1. Figure out your baseline level of revenue and expenses
2. Cut your expenses as aggressively as possible
3. Pay down as much debt as possible
4. Boost your income with a second job or side business
5. Ratchet up your monthly savings rate to 75% or greater
6. Invest in a way that prioritizes growth assets
## The Bottom Line
What we've discussed here are just a few of the factors that may affect the success of your retirement plan and determine whether you enjoy a financially secure retirement. Your financial planner will help you to determine whether you should consider other factors.
As we said above, starting early will definitely make the task ahead easier, but it is [not too late to adopt some of these practices](https://www.investopedia.com/articles/personal-finance/110315/4-phases-retirement-and-how-budget-them.asp), even if you are already retired.
|
Are you financially secure?
Extensive research in 2023 shows that most individuals are unable to demonstrate financial security, particularly for their retirement years. This only underlines the fact that achieving financial security is a challenging process that requires careful planning and follow-through.
To be sure, financial security means different things to different people. But we'll use a simple definition: having enough financial assets to cover your expenses, emergencies, and retirement without having any concern of running out.
Below, we review some helpful tips that should help you on your way to achieving financial security.
Key Takeaways
It is obvious that it is better to start saving at an early age, but it is never too late to start.In order to make saving easier, try treating your retirement savings as a recurring expense, similar to paying rent, mortgage, or a car loan.If your lifestyle, income, or fiscal responsibilities have changed, it's a good idea to reassess your financial profile and make adjustments where possible.If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts.Proper asset allocation considers factors such as age, risk tolerance, and whether you need to have your assets grow or produce income.If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years.Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary.
1. Start As Soon As You Can
It is obvious that it is better to start saving at an early age, but it is never too late to start—even if you are already close to your retirement years—because every penny saved helps to cover your expenses.
If you save $200 every month for 40 years at a 5% interest rate, you will have saved significantly more than an individual who saves at the same rate for 10 years. However, the amount saved over a shorter period can go a long way in helping to cover expenses during retirement.
Also, keep in mind that other areas of financial planning, such as asset allocation, will become increasingly important as you get closer to retirement. This is because your risk tolerance generally decreases as the number of years in which you can recuperate any losses goes down.
2. View Savings Deposits As a Bill
Saving on a regular basis can be a challenge, especially when you consider the many regular expenses we all face, not to mention the enticing consumer goods that tempt us to spend our disposable cash.
You can guard this temptation by treating your retirement savings as a recurring expense, similar to paying rent, mortgage, or a car loan. This is even easier if the amount is automatically debited from your paycheck by your employer.
If the amount is deducted from your paycheck on a pre-tax basis, it helps to reduce the amount of income taxes owed on your salary.
Alternatively (or in addition), you may have your salary direct-deposited to a checking or savings account. You can also have the designated savings amount scheduled for automatic debit to be credited to the retirement savings account on the same day the salary is credited.
3. Save in a Tax-Deferred Account
Contributing amounts earmarked for your retirement to a tax-deferred retirement account deters you from spending those amounts on impulse because you are likely to face tax consequences and penalties.
For instance, any amount distributed from a traditional retirement account may be subject to income taxes the year in which the distribution occurs, and if you are under age 59½ when the distribution occurs, the amount could be subject to a 10% early distribution penalty (excise tax).
If you have enough income, consider whether you can increase the amount you save in tax-deferred accounts. For instance, in addition to saving in an employer-sponsored retirement plan, think about whether you can also afford to contribute to an individual retirement account (IRA), and whether the IRA should be a Roth IRA or a traditional IRA.
4. Diversify Your Portfolio
The old adage that tells us that we shouldn't put all of our eggs in one basket holds true for retirement assets. Putting all your savings into one form of investment increases the risk of losing all your investments, and it may limit your return on investment (ROI). As such, asset allocation is a key part of managing your retirement assets. Proper asset allocation considers factors such as the following:
Your age: This is usually reflected in the aggressiveness of your portfolio, which will likely take more risks when you're younger and fewer the closer you get to retirement age.Your risk tolerance: This helps to ensure that, should any losses occur, they occur at a time when the losses can still be recuperated.Whether you need to have your assets grow or produce income.
5. Consider All Potential Expenses
When planning for retirement, some of us make the mistake of not considering expenses for medical and dental costs, long-term care, and income taxes.
When deciding how much you need to save for retirement, make a list of all the expenses you may incur during your retirement years. This will help you to make realistic projections and plan accordingly.
6. Retirement Savings Is a Must
Saving a lot of money is great, but the benefits are eroded or even nullified if it means you have to use high-interest loans to pay your living expenses.
Therefore, preparing and working within a budget is essential. Your retirement savings should be counted among your budgeted recurring expenses in order to ensure that your disposable income is calculated accurately.
Retirement Age
According to a Gallup poll in 2023, the average American expects to retire at age 66. Life expectancy is 76.4 years, according to the National Center for Health Statistics.
7. Periodically Reassess Your Portfolio
As you get closer to retirement and your financial needs, expenses, and risk tolerance change, strategic asset allocation must be performed on your portfolio to allow for any necessary adjustments. This will help you ensure that your retirement planning is on target.
8. Optimize Your Expenses
If your lifestyle, income, or fiscal responsibilities have changed, it may be a good idea to reassess your financial profile and make adjustments where possible, so as to change the amounts you add to your retirement nest egg. For instance, you may have finished paying off your mortgage or the loan for your car, or the number of individuals for whom you are financially responsible may have changed.
A reassessment of your income, expenses, and financial obligations will help to determine if you need to increase or decrease the amount you save on a regular basis.
9. Consider Your Spouse
If you are married, consider whether your spouse is also saving and whether certain expenses can be shared during your retirement years. If your spouse hasn't been saving, you need to determine whether your retirement savings can cover not only your expenses but those of your spouse as well.
10. Work With a Financial Planner
Unless you are experienced in the field of financial planning and portfolio management, engaging the services of an experienced and qualified financial planner will be necessary. Choosing the one who is right for you will be one of the most important decisions you make.
Financial Security FAQs
How Much Money Do You Need To Be Financially Secure?
That depends on your age, income needs, and financial objectives. But generally speaking, the "4% rule" is a good measure of financial security. In other words, if you're able to safely withdraw 4% from your investment accounts every year and never run out of money, it's probably safe to say you are financially secure.
What Is the Difference Between Financial Security and Financial Stability?
Broadly speaking, financial stability means being free of debt and being able to comfortably pay off monthly expenses (with plenty left over for savings).
Financial security, on the other hand, means having enough money to cover your expenses, emergencies, and retirement without the fear of running out.
How Can You Protect Your Financial Security?
The best ways to protect your financial security include:
Continuing to live well below your meansRemaining prudent when it comes to investing Establishing different streams of incomeCapitalizing on opportunities when they arise
How Can I Be Financially Free in Five Years?
In order to be financially free in five years, consider the following steps:
Figure out your baseline level of revenue and expensesCut your expenses as aggressively as possiblePay down as much debt as possibleBoost your income with a second job or side businessRatchet up your monthly savings rate to 75% or greaterInvest in a way that prioritizes growth assets
The Bottom Line
What we've discussed here are just a few of the factors that may affect the success of your retirement plan and determine whether you enjoy a financially secure retirement. Your financial planner will help you to determine whether you should consider other factors.
As we said above, starting early will definitely make the task ahead easier, but it is not too late to adopt some of these practices, even if you are already retired.
|
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] |
https://www.investopedia.com/lgbtq-elder-care-in-retirement-5176588
|
Finding LGBTQ+ Friendly Retirement Options
|
<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 are an older LGBTQ+ person, planning for retirement involves more than just ensuring you have enough income to meet your needs and enjoy your lifestyle. It’s also about making sure you will have a safe and welcoming living environment.
</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"> For the estimated 3 million LGBTQ+ people over 50, many of whom may have dealt with discrimination over the course of their lives, finding a welcoming place to retire can be particularly difficult. With the older LGBTQ+ generation expected to more than double to 7 million by 2030, the challenges facing retirees will likely only grow.<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 increasing number of LGBTQ+ friendly retirement communities and resources now help address the unique needs of LGBTQ+ retirees. In addition, the LGBTQ+ legal landscape, especially for same-sex couples, has made strides in recent years.<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 LGBTQ+ community hasn’t kept pace with the overall population in saving for retirement.</li><li>Retirement planning for LGBTQ+ people involves more than just getting their finances in order.</li><li>LGBTQ+ retirees also often face challenges, such as a lack of social and family support.</li><li>Those nearing retirement need to consider looking for communities that offer social support and acceptance.</li><li>The number of LGBTQ+ friendly retirement communities is increasing.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-need-for-lgbtq-retirement-options"></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"> The Need for LGBTQ Retirement Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The LGBTQ+ rights movement has made tremendous progress since the police raid on the Stonewall Inn sparked days of protests in 1969, and societal attitudes and legal protections continue to evolve.<span class="ql-inline-citation" data-cite="3"></span> Marriage equality and laws that protect LGBTQ+ people where they live and work have been accompanied by growing public support.<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"> Still, the LGBTQ+ community has faced decades of discrimination. The result is that many older LGBTQ+ people may feel isolated from society or lack the support of family members who would typically help with caregiving.<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"> In fact, about 75% of older LGBTQ+ people surveyed by <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aarp.asp">AARP</a> expressed concern about having family and social support systems they can rely on as they age. About a third worried about having to hide their identity to get access to senior housing, including more than half of transgender and other gender-expansive respondents.<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"> A history of discrimination in areas as broad as education, employment, and housing has also had a cumulative impact on the financial well-being of many LGBTQ+ people. Poverty rates tend to be higher among members of the LGBTQ+ community, while income levels tend to be lower.<span class="ql-inline-citation" data-cite="8"></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_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> When it comes to saving for retirement, meanwhile, the LGBTQ+ community hasn’t kept pace with the overall population. In general, earning less means saving less. Same-sex couples have put away about a quarter less toward retirement, on average, according to an analysis of Federal Reserve data by the AP-NORC Center for Public Affairs Research.<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_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_2-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>LGBTQ+ respondents in a study by Prudential were less likely to have a retirement account such as 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)</a> or IRA.<span class="ql-inline-citation" data-cite="16"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-to-find-a-safe-and-healthy-living-environment"></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"> How to Find a Safe and Healthy Living Environment </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Entering retirement should mean achieving a comfortable existence in which you have the care you need to live safely. However, finding a welcoming living situation can seem daunting for older LGBTQ+ people, especially if they’ve experienced discrimination in housing or healthcare situations in the past. Indeed, more than six in 10 respondents to the AARP survey expressed concern about neglect, abuse, or harassment in a long-term care environment.<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_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The search for a new home environment can itself be fraught. An investigation by the Equal Rights Center found that nearly half of same-sex couples exploring senior housing in 10 states experienced unfavorable treatment in the form of less favorable housing options, costs, and financial incentives.<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_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 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>LGBTQ+ friendly communities are becoming increasingly popular. Nearly nine out of 10 respondents in the AARP survey said they would feel more comfortable in a long-term care facility if the staff had received training about their needs.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> To meet their needs, SAGE has been developing welcoming living communities that combine affordable housing with community centers.<span class="ql-inline-citation" data-cite="26"></span> Meanwhile, the group has also joined with the Human Rights Campaign to create the Long-Term Care Equality Index, an assessment tool to help care facilities provide a welcoming environment for older LGBTQ+ people.<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_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"> What to consider with housing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> To make sure that a place you are considering is<strong><em> </em></strong>safe and friendly, here are some things to consider:
</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>Find out if the facility has anti-discrimination policies and training.</li>
<li>Look for places that host LGBTQ+ community organizations or events.</li>
<li>Make sure you designate someone you trust as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/managing-wealth/042216/medical-vs-financial-power-attorney-reasons-separate-them.asp">medical power of attorney</a>, authorizing them to make medical decisions in case you’re incapacitated.</li>
<li>If you do experience discrimination, complain to facility staff or management. You can also file a complaint with the U.S. Department of Housing and Urban Development if you’re in federally supported housing, or with the state or local government.<span class="ql-inline-citation" data-cite="28"></span></li>
</ul>
<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"> LGBTQ+ organizations can also help with everything from finding housing and care to advocating on your behalf. The Equality Federation has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.equalityfederation.org/members/">local advocacy groups</a> in most states, while <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="http://www.lgbtcenters.org/Centers/find-a-center.aspx">CenterLink</a> lists LGBTQ+ community centers around the country.<strong> </strong>SAGE’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.lgbtagingcenter.org/state/index.cfm">National Resource Center on LGBT Aging</a> also tracks legal and financial resources in each state.<br/>
</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-callout mntl-block" id="mntl-sc-block_38-0"><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_39-0"><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>Know your rights, including local laws. More than a third of states don’t have explicit laws banning discrimination on the basis of sexual orientation or gender identity.<span class="ql-inline-citation" data-cite="27"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-to-prepare-financially-for-retirement"></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"> How to Prepare Financially for Retirement </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The good news is that it’s never too late to save for retirement. Moreover, the legal landscape has become significantly friendlier to the LGBTQ+ community in recent years, especially for same-sex couples.
</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 2015, the landmark Supreme Court ruling in <em>Obergefell v. Hodges</em> made <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lgbtq-marriage-and-personal-finance-5176477">same-sex marriage</a> legal across the country.<span class="ql-inline-citation" data-cite="17"></span> That ensured married same-sex couples could get access to all of the federal program benefits other married couples do, such as being able to leverage their spouse’s work history when <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/social-security-benefit-equality-for-same-sex-couples-5220053">claiming Social Security</a>, as well as tax and estate planning advantages.<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_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Many people have taken advantage of marriage equality, with the number of married same-sex pairs more than doubling to more than half a million couples since the ruling.<span class="ql-inline-citation" data-cite="12"></span> But for unmarried LGBTQ+ couples, benefits often won’t transfer<strong> </strong>to surviving partners<strong> </strong>without some legal and estate planning efforts.<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_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 with-title" id="mntl-sc-block-callout-heading_5-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>Unmarried partners don't receive <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/081915/how-are-spousal-benefits-calculated-social-security.asp">Social Security spousal benefits</a>. In addition, when they inherit an IRA or 401(k), they are given less favorable tax treatment than spouses receive.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Another key Supreme Court win for the LGBTQ+ community was<em> Bostock v. Clayton County</em> in 2020, which banned employment discrimination on the basis of sexual orientation and gender identity.<span class="ql-inline-citation" data-cite="18"></span> In January 2021, President Joe Biden issued an executive order ensuring the protections cover other areas where sex discrimination is outlawed, such as in housing, education, and healthcare.<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_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Yet despite the expanding rights, planning for retirement for older LGBTQ+ people can be challenging, especially for those who lack a family support network. Here are some tips for preparing financially for retirement:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0">
<li>Review important documents such as your will, life insurance policy, and 401(k) to make sure the beneficiaries are included.</li>
<li>If married, consider ways to maximize newfound benefits, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spousal-ira.asp">spousal IRA</a>.</li>
<li>Seek professional advice to develop a plan that meets your unique retirement needs.</li>
</ul>
<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-tip" 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" 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>SAGE, an organization that advocates for older LGBTQ+ people, launched <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://sageusa.org/sagecents">SAGECents</a>, a digital platform that provides financial information and tools as a resource.</p></div></div></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-where-should-you-retire-as-an-lgbtq-person"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Should You Retire as an LGBTQ Person?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Because discrimination persists, LGBTQ+ people nearing retirement can start looking for communities that offer more than just affordable housing and healthcare. Social support and acceptance are also essential. The number of LGBTQ+ friendly retirement communities is increasing.</p></div>
</div>
<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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_59-0"><span class="heading-toc" id="toc-what-is-a-retirement-community"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Retirement Community?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Retirement communities are designed for people who are in their mid-50s and older. They are often also called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-cost-of-living-in-a-retirement-community-5069448">independent living communities</a>. Depending on the community, they offer different amenities, such as a pool or on-site dining. Housing in a retirement community might include single-family homes, apartments or both.</p></div>
</div>
<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-how-does-discrimination-impact-the-financial-wellbeing-of-lgbtq-people"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Discrimination Impact the Financial Wellbeing of LGBTQ+ People?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Discrimination can lead to less job opportunities <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lgbtq-income-inequality-and-unemployment-5120591">and lower wages</a>. As a result, many older LGBTQ+ adults lag behind their heterosexual counterparts when it comes to saving for retirement. When you earn less, you save less. If you get a late start, saving enough for a comfortable retirement becomes even more difficult.</p><p><br/></p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Despite progress in addressing various forms of discrimination, older LGBTQ+ people continue to face challenges even after they retire. The more that people are aware of the potential obstacles and come up with a plan to address them, the better chance they’ll have to enjoy their retirement years in comfort, companionship, and peace.
</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"> Knowing your rights and seeking out LGBTQ+ friendly resources and retirement communities are among the ways to overcome some of the obstacles that the LGBTQ+ community faces.
</p></div>
|
If you are an older LGBTQ+ person, planning for retirement involves more than just ensuring you have enough income to meet your needs and enjoy your lifestyle. It’s also about making sure you will have a safe and welcoming living environment.
For the estimated 3 million LGBTQ+ people over 50, many of whom may have dealt with discrimination over the course of their lives, finding a welcoming place to retire can be particularly difficult. With the older LGBTQ+ generation expected to more than double to 7 million by 2030, the challenges facing retirees will likely only grow.
An increasing number of LGBTQ+ friendly retirement communities and resources now help address the unique needs of LGBTQ+ retirees. In addition, the LGBTQ+ legal landscape, especially for same-sex couples, has made strides in recent years.
### Key Takeaways
* The LGBTQ+ community hasn’t kept pace with the overall population in saving for retirement.
* Retirement planning for LGBTQ+ people involves more than just getting their finances in order.
* LGBTQ+ retirees also often face challenges, such as a lack of social and family support.
* Those nearing retirement need to consider looking for communities that offer social support and acceptance.
* The number of LGBTQ+ friendly retirement communities is increasing.
## The Need for LGBTQ Retirement Options
The LGBTQ+ rights movement has made tremendous progress since the police raid on the Stonewall Inn sparked days of protests in 1969, and societal attitudes and legal protections continue to evolve. Marriage equality and laws that protect LGBTQ+ people where they live and work have been accompanied by growing public support.
Still, the LGBTQ+ community has faced decades of discrimination. The result is that many older LGBTQ+ people may feel isolated from society or lack the support of family members who would typically help with caregiving.
In fact, about 75% of older LGBTQ+ people surveyed by [AARP](https://www.investopedia.com/terms/a/aarp.asp) expressed concern about having family and social support systems they can rely on as they age. About a third worried about having to hide their identity to get access to senior housing, including more than half of transgender and other gender-expansive respondents.
A history of discrimination in areas as broad as education, employment, and housing has also had a cumulative impact on the financial well-being of many LGBTQ+ people. Poverty rates tend to be higher among members of the LGBTQ+ community, while income levels tend to be lower.
When it comes to saving for retirement, meanwhile, the LGBTQ+ community hasn’t kept pace with the overall population. In general, earning less means saving less. Same-sex couples have put away about a quarter less toward retirement, on average, according to an analysis of Federal Reserve data by the AP-NORC Center for Public Affairs Research.
### Note
LGBTQ+ respondents in a study by Prudential were less likely to have a retirement account such as a [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or IRA.
## How to Find a Safe and Healthy Living Environment
Entering retirement should mean achieving a comfortable existence in which you have the care you need to live safely. However, finding a welcoming living situation can seem daunting for older LGBTQ+ people, especially if they’ve experienced discrimination in housing or healthcare situations in the past. Indeed, more than six in 10 respondents to the AARP survey expressed concern about neglect, abuse, or harassment in a long-term care environment.
The search for a new home environment can itself be fraught. An investigation by the Equal Rights Center found that nearly half of same-sex couples exploring senior housing in 10 states experienced unfavorable treatment in the form of less favorable housing options, costs, and financial incentives.
### Note
LGBTQ+ friendly communities are becoming increasingly popular. Nearly nine out of 10 respondents in the AARP survey said they would feel more comfortable in a long-term care facility if the staff had received training about their needs.
To meet their needs, SAGE has been developing welcoming living communities that combine affordable housing with community centers. Meanwhile, the group has also joined with the Human Rights Campaign to create the Long-Term Care Equality Index, an assessment tool to help care facilities provide a welcoming environment for older LGBTQ+ people.
### What to consider with housing
To make sure that a place you are considering issafe and friendly, here are some things to consider:
* Find out if the facility has anti-discrimination policies and training.
* Look for places that host LGBTQ+ community organizations or events.
* Make sure you designate someone you trust as a [medical power of attorney](https://www.investopedia.com/articles/managing-wealth/042216/medical-vs-financial-power-attorney-reasons-separate-them.asp), authorizing them to make medical decisions in case you’re incapacitated.
* If you do experience discrimination, complain to facility staff or management. You can also file a complaint with the U.S. Department of Housing and Urban Development if you’re in federally supported housing, or with the state or local government.
LGBTQ+ organizations can also help with everything from finding housing and care to advocating on your behalf. The Equality Federation has [local advocacy groups](http://www.equalityfederation.org/members/) in most states, while [CenterLink](http://www.lgbtcenters.org/Centers/find-a-center.aspx) lists LGBTQ+ community centers around the country.SAGE’s [National Resource Center on LGBT Aging](https://www.lgbtagingcenter.org/state/index.cfm) also tracks legal and financial resources in each state.
###
Know your rights, including local laws. More than a third of states don’t have explicit laws banning discrimination on the basis of sexual orientation or gender identity.
## How to Prepare Financially for Retirement
The good news is that it’s never too late to save for retirement. Moreover, the legal landscape has become significantly friendlier to the LGBTQ+ community in recent years, especially for same-sex couples.
In 2015, the landmark Supreme Court ruling in *Obergefell v. Hodges* made [same-sex marriage](https://www.investopedia.com/lgbtq-marriage-and-personal-finance-5176477) legal across the country. That ensured married same-sex couples could get access to all of the federal program benefits other married couples do, such as being able to leverage their spouse’s work history when [claiming Social Security](https://www.investopedia.com/social-security-benefit-equality-for-same-sex-couples-5220053), as well as tax and estate planning advantages.
Many people have taken advantage of marriage equality, with the number of married same-sex pairs more than doubling to more than half a million couples since the ruling. But for unmarried LGBTQ+ couples, benefits often won’t transferto surviving partnerswithout some legal and estate planning efforts.
### Note
Unmarried partners don't receive [Social Security spousal benefits](https://www.investopedia.com/ask/answers/081915/how-are-spousal-benefits-calculated-social-security.asp). In addition, when they inherit an IRA or 401(k), they are given less favorable tax treatment than spouses receive.
Another key Supreme Court win for the LGBTQ+ community was *Bostock v. Clayton County* in 2020, which banned employment discrimination on the basis of sexual orientation and gender identity. In January 2021, President Joe Biden issued an executive order ensuring the protections cover other areas where sex discrimination is outlawed, such as in housing, education, and healthcare.
Yet despite the expanding rights, planning for retirement for older LGBTQ+ people can be challenging, especially for those who lack a family support network. Here are some tips for preparing financially for retirement:
* Review important documents such as your will, life insurance policy, and 401(k) to make sure the beneficiaries are included.
* If married, consider ways to maximize newfound benefits, such as a [spousal IRA](https://www.investopedia.com/terms/s/spousal-ira.asp).
* Seek professional advice to develop a plan that meets your unique retirement needs.
###
SAGE, an organization that advocates for older LGBTQ+ people, launched [SAGECents](http://sageusa.org/sagecents), a digital platform that provides financial information and tools as a resource.
## Where Should You Retire as an LGBTQ Person?
Because discrimination persists, LGBTQ+ people nearing retirement can start looking for communities that offer more than just affordable housing and healthcare. Social support and acceptance are also essential. The number of LGBTQ+ friendly retirement communities is increasing.
## What Is a Retirement Community?
Retirement communities are designed for people who are in their mid-50s and older. They are often also called [independent living communities](https://www.investopedia.com/the-cost-of-living-in-a-retirement-community-5069448). Depending on the community, they offer different amenities, such as a pool or on-site dining. Housing in a retirement community might include single-family homes, apartments or both.
## How Does Discrimination Impact the Financial Wellbeing of LGBTQ+ People?
Discrimination can lead to less job opportunities [and lower wages](https://www.investopedia.com/lgbtq-income-inequality-and-unemployment-5120591). As a result, many older LGBTQ+ adults lag behind their heterosexual counterparts when it comes to saving for retirement. When you earn less, you save less. If you get a late start, saving enough for a comfortable retirement becomes even more difficult.
## The Bottom Line
Despite progress in addressing various forms of discrimination, older LGBTQ+ people continue to face challenges even after they retire. The more that people are aware of the potential obstacles and come up with a plan to address them, the better chance they’ll have to enjoy their retirement years in comfort, companionship, and peace.
Knowing your rights and seeking out LGBTQ+ friendly resources and retirement communities are among the ways to overcome some of the obstacles that the LGBTQ+ community faces.
|
If you are an older LGBTQ+ person, planning for retirement involves more than just ensuring you have enough income to meet your needs and enjoy your lifestyle. It’s also about making sure you will have a safe and welcoming living environment.
For the estimated 3 million LGBTQ+ people over 50, many of whom may have dealt with discrimination over the course of their lives, finding a welcoming place to retire can be particularly difficult. With the older LGBTQ+ generation expected to more than double to 7 million by 2030, the challenges facing retirees will likely only grow.
An increasing number of LGBTQ+ friendly retirement communities and resources now help address the unique needs of LGBTQ+ retirees. In addition, the LGBTQ+ legal landscape, especially for same-sex couples, has made strides in recent years.
Key Takeaways
The LGBTQ+ community hasn’t kept pace with the overall population in saving for retirement.Retirement planning for LGBTQ+ people involves more than just getting their finances in order.LGBTQ+ retirees also often face challenges, such as a lack of social and family support.Those nearing retirement need to consider looking for communities that offer social support and acceptance.The number of LGBTQ+ friendly retirement communities is increasing.
The Need for LGBTQ Retirement Options
The LGBTQ+ rights movement has made tremendous progress since the police raid on the Stonewall Inn sparked days of protests in 1969, and societal attitudes and legal protections continue to evolve. Marriage equality and laws that protect LGBTQ+ people where they live and work have been accompanied by growing public support.
Still, the LGBTQ+ community has faced decades of discrimination. The result is that many older LGBTQ+ people may feel isolated from society or lack the support of family members who would typically help with caregiving.
In fact, about 75% of older LGBTQ+ people surveyed by AARP expressed concern about having family and social support systems they can rely on as they age. About a third worried about having to hide their identity to get access to senior housing, including more than half of transgender and other gender-expansive respondents.
A history of discrimination in areas as broad as education, employment, and housing has also had a cumulative impact on the financial well-being of many LGBTQ+ people. Poverty rates tend to be higher among members of the LGBTQ+ community, while income levels tend to be lower.
When it comes to saving for retirement, meanwhile, the LGBTQ+ community hasn’t kept pace with the overall population. In general, earning less means saving less. Same-sex couples have put away about a quarter less toward retirement, on average, according to an analysis of Federal Reserve data by the AP-NORC Center for Public Affairs Research.
Note
LGBTQ+ respondents in a study by Prudential were less likely to have a retirement account such as a 401(k) or IRA.
How to Find a Safe and Healthy Living Environment
Entering retirement should mean achieving a comfortable existence in which you have the care you need to live safely. However, finding a welcoming living situation can seem daunting for older LGBTQ+ people, especially if they’ve experienced discrimination in housing or healthcare situations in the past. Indeed, more than six in 10 respondents to the AARP survey expressed concern about neglect, abuse, or harassment in a long-term care environment.
The search for a new home environment can itself be fraught. An investigation by the Equal Rights Center found that nearly half of same-sex couples exploring senior housing in 10 states experienced unfavorable treatment in the form of less favorable housing options, costs, and financial incentives.
Note
LGBTQ+ friendly communities are becoming increasingly popular. Nearly nine out of 10 respondents in the AARP survey said they would feel more comfortable in a long-term care facility if the staff had received training about their needs.
To meet their needs, SAGE has been developing welcoming living communities that combine affordable housing with community centers. Meanwhile, the group has also joined with the Human Rights Campaign to create the Long-Term Care Equality Index, an assessment tool to help care facilities provide a welcoming environment for older LGBTQ+ people.
What to consider with housing
To make sure that a place you are considering is safe and friendly, here are some things to consider:
Find out if the facility has anti-discrimination policies and training.
Look for places that host LGBTQ+ community organizations or events.
Make sure you designate someone you trust as a medical power of attorney, authorizing them to make medical decisions in case you’re incapacitated.
If you do experience discrimination, complain to facility staff or management. You can also file a complaint with the U.S. Department of Housing and Urban Development if you’re in federally supported housing, or with the state or local government.
LGBTQ+ organizations can also help with everything from finding housing and care to advocating on your behalf. The Equality Federation has local advocacy groups in most states, while CenterLink lists LGBTQ+ community centers around the country. SAGE’s National Resource Center on LGBT Aging also tracks legal and financial resources in each state.
Know your rights, including local laws. More than a third of states don’t have explicit laws banning discrimination on the basis of sexual orientation or gender identity.
How to Prepare Financially for Retirement
The good news is that it’s never too late to save for retirement. Moreover, the legal landscape has become significantly friendlier to the LGBTQ+ community in recent years, especially for same-sex couples.
In 2015, the landmark Supreme Court ruling in Obergefell v. Hodges made same-sex marriage legal across the country. That ensured married same-sex couples could get access to all of the federal program benefits other married couples do, such as being able to leverage their spouse’s work history when claiming Social Security, as well as tax and estate planning advantages.
Many people have taken advantage of marriage equality, with the number of married same-sex pairs more than doubling to more than half a million couples since the ruling. But for unmarried LGBTQ+ couples, benefits often won’t transfer to surviving partners without some legal and estate planning efforts.
Note
Unmarried partners don't receive Social Security spousal benefits. In addition, when they inherit an IRA or 401(k), they are given less favorable tax treatment than spouses receive.
Another key Supreme Court win for the LGBTQ+ community was Bostock v. Clayton County in 2020, which banned employment discrimination on the basis of sexual orientation and gender identity. In January 2021, President Joe Biden issued an executive order ensuring the protections cover other areas where sex discrimination is outlawed, such as in housing, education, and healthcare.
Yet despite the expanding rights, planning for retirement for older LGBTQ+ people can be challenging, especially for those who lack a family support network. Here are some tips for preparing financially for retirement:
Review important documents such as your will, life insurance policy, and 401(k) to make sure the beneficiaries are included.
If married, consider ways to maximize newfound benefits, such as a spousal IRA.
Seek professional advice to develop a plan that meets your unique retirement needs.
SAGE, an organization that advocates for older LGBTQ+ people, launched SAGECents, a digital platform that provides financial information and tools as a resource.
Where Should You Retire as an LGBTQ Person?
Because discrimination persists, LGBTQ+ people nearing retirement can start looking for communities that offer more than just affordable housing and healthcare. Social support and acceptance are also essential. The number of LGBTQ+ friendly retirement communities is increasing.
What Is a Retirement Community?
Retirement communities are designed for people who are in their mid-50s and older. They are often also called independent living communities. Depending on the community, they offer different amenities, such as a pool or on-site dining. Housing in a retirement community might include single-family homes, apartments or both.
How Does Discrimination Impact the Financial Wellbeing of LGBTQ+ People?
Discrimination can lead to less job opportunities and lower wages. As a result, many older LGBTQ+ adults lag behind their heterosexual counterparts when it comes to saving for retirement. When you earn less, you save less. If you get a late start, saving enough for a comfortable retirement becomes even more difficult.
The Bottom Line
Despite progress in addressing various forms of discrimination, older LGBTQ+ people continue to face challenges even after they retire. The more that people are aware of the potential obstacles and come up with a plan to address them, the better chance they’ll have to enjoy their retirement years in comfort, companionship, and peace.
Knowing your rights and seeking out LGBTQ+ friendly resources and retirement communities are among the ways to overcome some of the obstacles that the LGBTQ+ community faces.
|
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] |
https://www.investopedia.com/easiest-personal-loans-approved-7644059
|
What Are the Easiest Personal Loans To Get Approved for?
|
<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 need to borrow money, you may be able to get a fast and easy loan<strong><em> </em></strong>or a cheap loan, but probably not both. The easiest loans to get approved for may help you get the cash you need quickly, but there are pitfalls to avoid as well as fine print that you should read carefully before you move forward. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/emergency-loans-for-bad-credit-5075539">best emergency loans for bad credit</a> offer you fast funding for a car repair, medical bill, or something else.
</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>Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. </li><li>Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.</li><li>Before you apply for an emergency loan, make sure you read the fine print so you know exactly what your costs will be.</li></ul></div></div></div>
<span class="heading-toc" id="toc-1-payday-loans"></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"> 1. Payday Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payday-loans.asp">Payday loans</a> are a type of funding that require you to pay back what you owe on your next payday, hence the name. According to the <a data-component="link" data-ordinal="2" 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>, there are no set rules that govern which loans are considered payday loans, although all loans in this category tend to be short-term in nature and exorbitantly expensive.
</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"> Most payday loans are for $500 or less, and these loans require a postdated check that has you paying off the loan balance the next time you expect to get paid by an employer or through other means like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loans-social-security-8410837">Social Security</a>. The biggest problem with payday loans is the fact that, because they’re often short-term with no <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-inquiry.asp">credit check</a> required, borrowers can wind up paying <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a> of 400% or higher in the end.<span class="ql-inline-citation" data-cite="1"></span> Because of the high costs, payday loan users often get caught in a payday loan “trap,” where they are stuck borrowing over and over again to keep up with expenses and bills.<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_9-0"></div>
<span class="heading-toc" id="toc-2-no-credit-check-loans"></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"> 2. No-Credit-Check Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> No-credit-check loans can also be referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-for-bad-credit-4774349">bad credit loans</a>, mostly because they are taken out by people who couldn’t get approved based on their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a>. Because most lenders require a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/credit-score-needed-personal-loan-7553033">minimum credit score of at least 670</a> for traditional personal loans, this means no-credit-check loans are geared to borrowers with scores below that range.
</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"> Despite the fact that these loans are easy to get approved for, bad credit loans can be punishing due to their incredibly high costs. In fact, interest rates on some no-credit-check loans can be as high as 160% with some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lenders</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-3-unsecured-personal-loans"></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"> 3. Unsecured Personal Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> If you have a fair credit score, which includes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO scores</a> from 580 to 669, you may be able to qualify for an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredloan.asp">unsecured personal loan</a> from a traditional lender.<span class="ql-inline-citation" data-cite="2"></span> However, individuals with scores at the lower end of that range will find fewer available options overall, and they may not like what they see when they check.
</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"> For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/onemain-financial-personal-loans-review-4843162">OneMain Financial</a>, is known for offering unsecured personal loans for individuals with imperfect credit. However, interest rates for their installment loans can be as high as 35.99%, and they charge <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination-fee.asp">origination fees</a> of up to 10% of the loan amount.<span class="ql-inline-citation" data-cite="3"></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_19-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Because unsecured personal loans for fair credit come with less-than-ideal terms, they are often referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/emergency-loans-for-bad-credit-5075539">emergency loans</a>. This means you should only get one in an emergency, if you truly need the money, and if better options aren’t available when you need them.
</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-4-retirement-plan-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"> 4. Retirement Plan Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If you desperately need money and you have some retirement savings built up in a traditional plan, you may be able to borrow from your own assets. With a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp">401(k) loan</a>, for example, you can borrow from your account balance without a credit check. From there, you pay back what you borrowed to your own account, plus <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>, over time.
</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"> That said, 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 some warnings about 401(k) loans:
</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>First off, not paying back the loan according to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/loan-terms-5075341">its terms</a> can mean the money you borrow becomes a distribution from your account.</li>
<li>You also may be required to pay back the loan in full almost immediately if you leave your job.</li>
<li>You’re also siphoning funds from your account that are supposed to be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a> over time to help pay for your retirement.</li>
</ul>
<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"> For all these reasons and others, borrowing from your 401(k) should only be done as a last resort.<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_30-0"></div>
<span class="heading-toc" id="toc-5-pawnshop-loans"></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"> 5. Pawnshop Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Finally, you also can “pawn” items you don’t need at a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112415/how-pawnshops-make-money.asp">pawnshop</a> and get access to cash that way. This move has you agreeing to loan terms that are never in your favor, although the rates and terms of pawnshop loans vary widely.
</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"> When you pawn an item, or let a pawnshop hold it temporarily in exchange for cash, you won’t get anywhere close to the value of your item. The pawnshop also has the right to sell your item if you don’t repay the loan based on the original terms that you agreed to.
</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"> That said, pawnshop loans don’t require a credit check and are easy to get approved for if you have anything of value that you can stand to lose. For example, you could take out a pawnshop loan with old jewelry or electronics as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</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_37-0"></div>
<span class="heading-toc" id="toc-alternatives-to-easy-loans"></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"> Alternatives to Easy Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> If you want to avoid overpaying when you borrow, your best bet is looking for more traditional loan options. Alternatives to easy loans include the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0">
<li><strong>Banks and credit unions</strong>: Local banks and credit unions may offer funding options that you can qualify for, and all you have to do is inquire to find out. That said, you may have better luck getting approved for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">best personal loans</a> if you apply with a bank or credit union that you have an existing relationship with.</li>
<li><strong>Borrow from family or friends</strong>: Ask family members and friends if they will lend you money for emergency use. Keep in mind that you may be putting your relationship on the line if you fail to pay the money back.</li>
<li><strong>Credit cards</strong>: If you need a line of credit that you can use to make purchases or pay bills, a credit card can be a valuable tool. Just remember that the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">best credit card options</a> go to those with good credit, and that credit cards for fair credit and bad credit charge higher interest rates and more fees.<span class="ql-inline-citation" data-cite="9"></span></li>
<li><strong>Online lenders</strong>: A range of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-personal-loans-5071376">online loan companies</a> offer personal loans that can be secured or unsecured. Most also make it easy to apply online, and some let you “check your rate” and gauge your approval odds before you formally apply.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Payment plan</strong>: If you owe money to a lender or any other company, you can always ask about payment plans. For example, it’s not uncommon for hospitals and other medical providers to offer payment plans for services rendered.<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_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-the-lowest-credit-score-required-to-borrow-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Lowest Credit Score Required to Borrow Money?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Some lenders let you borrow money <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/signature-loan-no-credit-check-8413880">with no credit check required</a>, meaning you can get approved with no credit score or a very low score. However, rates and fees for bad credit loans tend to be significantly higher.</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-how-long-does-it-take-to-get-loan-funds"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does It Take to Get Loan Funds?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>How long it will take to get loan funds varies depending on the lender, but some lenders offer fast loan funding in as little as a few business days.</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-is-the-easiest-bank-to-get-a-personal-loan-from"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Easiest Bank to Get a Personal Loan from?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The easiest bank to get a personal loan from varies based on your income, <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>, and where you live. To find out which lenders might approve you, look for companies that let you “check your rate” and gauge your approval odds before you apply.</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-how-do-people-use-personal-loans"></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 Do People Use Personal Loans? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Investopedia commissioned <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574">a national survey</a> of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/are-home-improvements-tax-deductible-8608905">home improvement</a> and other large expenditures.<br/>
</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/T6dEU/9/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="How People Use Personal Loans"></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-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"> The easiest loans to get approved for are rarely the best. You might actually be able to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-many-personal-loans-7482296">get several loans of this type</a>. After all, lenders that don’t require decent credit or even a credit check have to charge higher interest rates and more fees to account for the additional risk they take on, so they likely are benefiting from making a number of such loans available.
</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"> With that in mind, you should <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-you-should-know-before-taking-out-a-personal-loan-5201657">only take out a personal loan</a> if you absolutely have to—and if you know for a fact you can pay the money back, plus interest and fees, in a reasonable amount of time. If you borrow more than you need and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-dont-pay-back-personal-loan-7555464">can’t make payments</a>, you can wind up paying more than you should <em>and</em> ruining your credit score along the way. Ultimately, that’s why you should avoid easy loans and wait it out until you can qualify for more affordable loan options if you possibly can.
</p></div>
|
If you need to borrow money, you may be able to get a fast and easy loanor a cheap loan, but probably not both. The easiest loans to get approved for may help you get the cash you need quickly, but there are pitfalls to avoid as well as fine print that you should read carefully before you move forward. The [best emergency loans for bad credit](https://www.investopedia.com/emergency-loans-for-bad-credit-5075539) offer you fast funding for a car repair, medical bill, or something else.
### Key Takeaways
* Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans.
* Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.
* Before you apply for an emergency loan, make sure you read the fine print so you know exactly what your costs will be.
## 1. Payday Loans
[Payday loans](https://www.investopedia.com/terms/p/payday-loans.asp) are a type of funding that require you to pay back what you owe on your next payday, hence the name. According to the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp), there are no set rules that govern which loans are considered payday loans, although all loans in this category tend to be short-term in nature and exorbitantly expensive.
Most payday loans are for $500 or less, and these loans require a postdated check that has you paying off the loan balance the next time you expect to get paid by an employer or through other means like [Social Security](https://www.investopedia.com/personal-loans-social-security-8410837). The biggest problem with payday loans is the fact that, because they’re often short-term with no [credit check](https://www.investopedia.com/terms/c/credit-inquiry.asp) required, borrowers can wind up paying [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) of 400% or higher in the end. Because of the high costs, payday loan users often get caught in a payday loan “trap,” where they are stuck borrowing over and over again to keep up with expenses and bills.
## 2. No-Credit-Check Loans
No-credit-check loans can also be referred to as [bad credit loans](https://www.investopedia.com/best-personal-loans-for-bad-credit-4774349), mostly because they are taken out by people who couldn’t get approved based on their [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Because most lenders require a [minimum credit score of at least 670](https://www.investopedia.com/credit-score-needed-personal-loan-7553033) for traditional personal loans, this means no-credit-check loans are geared to borrowers with scores below that range.
Despite the fact that these loans are easy to get approved for, bad credit loans can be punishing due to their incredibly high costs. In fact, interest rates on some no-credit-check loans can be as high as 160% with some [lenders](https://www.investopedia.com/terms/l/lender.asp).
## 3. Unsecured Personal Loans
If you have a fair credit score, which includes [FICO scores](https://www.investopedia.com/terms/f/ficoscore.asp) from 580 to 669, you may be able to qualify for an [unsecured personal loan](https://www.investopedia.com/terms/u/unsecuredloan.asp) from a traditional lender. However, individuals with scores at the lower end of that range will find fewer available options overall, and they may not like what they see when they check.
For example, [OneMain Financial](https://www.investopedia.com/onemain-financial-personal-loans-review-4843162), is known for offering unsecured personal loans for individuals with imperfect credit. However, interest rates for their installment loans can be as high as 35.99%, and they charge [origination fees](https://www.investopedia.com/terms/o/origination-fee.asp) of up to 10% of the loan amount.
Because unsecured personal loans for fair credit come with less-than-ideal terms, they are often referred to as [emergency loans](https://www.investopedia.com/emergency-loans-for-bad-credit-5075539). This means you should only get one in an emergency, if you truly need the money, and if better options aren’t available when you need them.
## 4. Retirement Plan Loans
If you desperately need money and you have some retirement savings built up in a traditional plan, you may be able to borrow from your own assets. With a [401(k) loan](https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp), for example, you can borrow from your account balance without a credit check. From there, you pay back what you borrowed to your own account, plus [interest](https://www.investopedia.com/terms/i/interest.asp), over time.
That said, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) has some warnings about 401(k) loans:
* First off, not paying back the loan according to [its terms](https://www.investopedia.com/loan-terms-5075341) can mean the money you borrow becomes a distribution from your account.
* You also may be required to pay back the loan in full almost immediately if you leave your job.
* You’re also siphoning funds from your account that are supposed to be [compounding](https://www.investopedia.com/terms/c/compounding.asp) over time to help pay for your retirement.
For all these reasons and others, borrowing from your 401(k) should only be done as a last resort.
## 5. Pawnshop Loans
Finally, you also can “pawn” items you don’t need at a [pawnshop](https://www.investopedia.com/articles/personal-finance/112415/how-pawnshops-make-money.asp) and get access to cash that way. This move has you agreeing to loan terms that are never in your favor, although the rates and terms of pawnshop loans vary widely.
When you pawn an item, or let a pawnshop hold it temporarily in exchange for cash, you won’t get anywhere close to the value of your item. The pawnshop also has the right to sell your item if you don’t repay the loan based on the original terms that you agreed to.
That said, pawnshop loans don’t require a credit check and are easy to get approved for if you have anything of value that you can stand to lose. For example, you could take out a pawnshop loan with old jewelry or electronics as [collateral](https://www.investopedia.com/terms/c/collateral.asp).
## Alternatives to Easy Loans
If you want to avoid overpaying when you borrow, your best bet is looking for more traditional loan options. Alternatives to easy loans include the following:
* **Banks and credit unions**: Local banks and credit unions may offer funding options that you can qualify for, and all you have to do is inquire to find out. That said, you may have better luck getting approved for the [best personal loans](https://www.investopedia.com/best-personal-loans-4773300) if you apply with a bank or credit union that you have an existing relationship with.
* **Borrow from family or friends**: Ask family members and friends if they will lend you money for emergency use. Keep in mind that you may be putting your relationship on the line if you fail to pay the money back.
* **Credit cards**: If you need a line of credit that you can use to make purchases or pay bills, a credit card can be a valuable tool. Just remember that the [best credit card options](https://www.investopedia.com/best-credit-cards-4801582) go to those with good credit, and that credit cards for fair credit and bad credit charge higher interest rates and more fees.
* **Online lenders**: A range of [online loan companies](https://www.investopedia.com/best-online-personal-loans-5071376) offer personal loans that can be secured or unsecured. Most also make it easy to apply online, and some let you “check your rate” and gauge your approval odds before you formally apply.
* **Payment plan**: If you owe money to a lender or any other company, you can always ask about payment plans. For example, it’s not uncommon for hospitals and other medical providers to offer payment plans for services rendered.
## What Is the Lowest Credit Score Required to Borrow Money?
Some lenders let you borrow money [with no credit check required](https://www.investopedia.com/signature-loan-no-credit-check-8413880), meaning you can get approved with no credit score or a very low score. However, rates and fees for bad credit loans tend to be significantly higher.
## How Long Does It Take to Get Loan Funds?
How long it will take to get loan funds varies depending on the lender, but some lenders offer fast loan funding in as little as a few business days.
## What Is the Easiest Bank to Get a Personal Loan from?
The easiest bank to get a personal loan from varies based on your income, [credit history](https://www.investopedia.com/terms/c/credit-history.asp), and where you live. To find out which lenders might approve you, look for companies that let you “check your rate” and gauge your approval odds before you apply.
## How Do People Use Personal Loans?
Investopedia commissioned [a national survey](https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574) of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by [home improvement](https://www.investopedia.com/are-home-improvements-tax-deductible-8608905) and other large expenditures.
## The Bottom Line
The easiest loans to get approved for are rarely the best. You might actually be able to [get several loans of this type](https://www.investopedia.com/how-many-personal-loans-7482296). After all, lenders that don’t require decent credit or even a credit check have to charge higher interest rates and more fees to account for the additional risk they take on, so they likely are benefiting from making a number of such loans available.
With that in mind, you should [only take out a personal loan](https://www.investopedia.com/what-you-should-know-before-taking-out-a-personal-loan-5201657) if you absolutely have to—and if you know for a fact you can pay the money back, plus interest and fees, in a reasonable amount of time. If you borrow more than you need and [can’t make payments](https://www.investopedia.com/what-happens-dont-pay-back-personal-loan-7555464), you can wind up paying more than you should *and* ruining your credit score along the way. Ultimately, that’s why you should avoid easy loans and wait it out until you can qualify for more affordable loan options if you possibly can.
|
If you need to borrow money, you may be able to get a fast and easy loan or a cheap loan, but probably not both. The easiest loans to get approved for may help you get the cash you need quickly, but there are pitfalls to avoid as well as fine print that you should read carefully before you move forward. The best emergency loans for bad credit offer you fast funding for a car repair, medical bill, or something else.
Key Takeaways
Some of the easiest loans to get approved for if you have bad credit include payday loans, no-credit-check loans, and pawnshop loans. Personal loans with essentially no approval requirements typically charge the highest interest rates and loan fees.Before you apply for an emergency loan, make sure you read the fine print so you know exactly what your costs will be.
1. Payday Loans
Payday loans are a type of funding that require you to pay back what you owe on your next payday, hence the name. According to the Consumer Financial Protection Bureau (CFPB), there are no set rules that govern which loans are considered payday loans, although all loans in this category tend to be short-term in nature and exorbitantly expensive.
Most payday loans are for $500 or less, and these loans require a postdated check that has you paying off the loan balance the next time you expect to get paid by an employer or through other means like Social Security. The biggest problem with payday loans is the fact that, because they’re often short-term with no credit check required, borrowers can wind up paying interest rates of 400% or higher in the end. Because of the high costs, payday loan users often get caught in a payday loan “trap,” where they are stuck borrowing over and over again to keep up with expenses and bills.
2. No-Credit-Check Loans
No-credit-check loans can also be referred to as bad credit loans, mostly because they are taken out by people who couldn’t get approved based on their credit score. Because most lenders require a minimum credit score of at least 670 for traditional personal loans, this means no-credit-check loans are geared to borrowers with scores below that range.
Despite the fact that these loans are easy to get approved for, bad credit loans can be punishing due to their incredibly high costs. In fact, interest rates on some no-credit-check loans can be as high as 160% with some lenders.
3. Unsecured Personal Loans
If you have a fair credit score, which includes FICO scores from 580 to 669, you may be able to qualify for an unsecured personal loan from a traditional lender. However, individuals with scores at the lower end of that range will find fewer available options overall, and they may not like what they see when they check.
For example, OneMain Financial, is known for offering unsecured personal loans for individuals with imperfect credit. However, interest rates for their installment loans can be as high as 35.99%, and they charge origination fees of up to 10% of the loan amount.
Because unsecured personal loans for fair credit come with less-than-ideal terms, they are often referred to as emergency loans. This means you should only get one in an emergency, if you truly need the money, and if better options aren’t available when you need them.
4. Retirement Plan Loans
If you desperately need money and you have some retirement savings built up in a traditional plan, you may be able to borrow from your own assets. With a 401(k) loan, for example, you can borrow from your account balance without a credit check. From there, you pay back what you borrowed to your own account, plus interest, over time.
That said, the Internal Revenue Service (IRS) has some warnings about 401(k) loans:
First off, not paying back the loan according to its terms can mean the money you borrow becomes a distribution from your account.
You also may be required to pay back the loan in full almost immediately if you leave your job.
You’re also siphoning funds from your account that are supposed to be compounding over time to help pay for your retirement.
For all these reasons and others, borrowing from your 401(k) should only be done as a last resort.
5. Pawnshop Loans
Finally, you also can “pawn” items you don’t need at a pawnshop and get access to cash that way. This move has you agreeing to loan terms that are never in your favor, although the rates and terms of pawnshop loans vary widely.
When you pawn an item, or let a pawnshop hold it temporarily in exchange for cash, you won’t get anywhere close to the value of your item. The pawnshop also has the right to sell your item if you don’t repay the loan based on the original terms that you agreed to.
That said, pawnshop loans don’t require a credit check and are easy to get approved for if you have anything of value that you can stand to lose. For example, you could take out a pawnshop loan with old jewelry or electronics as collateral.
Alternatives to Easy Loans
If you want to avoid overpaying when you borrow, your best bet is looking for more traditional loan options. Alternatives to easy loans include the following:
Banks and credit unions: Local banks and credit unions may offer funding options that you can qualify for, and all you have to do is inquire to find out. That said, you may have better luck getting approved for the best personal loans if you apply with a bank or credit union that you have an existing relationship with.
Borrow from family or friends: Ask family members and friends if they will lend you money for emergency use. Keep in mind that you may be putting your relationship on the line if you fail to pay the money back.
Credit cards: If you need a line of credit that you can use to make purchases or pay bills, a credit card can be a valuable tool. Just remember that the best credit card options go to those with good credit, and that credit cards for fair credit and bad credit charge higher interest rates and more fees.
Online lenders: A range of online loan companies offer personal loans that can be secured or unsecured. Most also make it easy to apply online, and some let you “check your rate” and gauge your approval odds before you formally apply.
Payment plan: If you owe money to a lender or any other company, you can always ask about payment plans. For example, it’s not uncommon for hospitals and other medical providers to offer payment plans for services rendered.
What Is the Lowest Credit Score Required to Borrow Money?
Some lenders let you borrow money with no credit check required, meaning you can get approved with no credit score or a very low score. However, rates and fees for bad credit loans tend to be significantly higher.
How Long Does It Take to Get Loan Funds?
How long it will take to get loan funds varies depending on the lender, but some lenders offer fast loan funding in as little as a few business days.
What Is the Easiest Bank to Get a Personal Loan from?
The easiest bank to get a personal loan from varies based on your income, credit history, and where you live. To find out which lenders might approve you, look for companies that let you “check your rate” and gauge your approval odds before you apply.
How Do People Use Personal Loans?
Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.
The Bottom Line
The easiest loans to get approved for are rarely the best. You might actually be able to get several loans of this type. After all, lenders that don’t require decent credit or even a credit check have to charge higher interest rates and more fees to account for the additional risk they take on, so they likely are benefiting from making a number of such loans available.
With that in mind, you should only take out a personal loan if you absolutely have to—and if you know for a fact you can pay the money back, plus interest and fees, in a reasonable amount of time. If you borrow more than you need and can’t make payments, you can wind up paying more than you should and ruining your credit score along the way. Ultimately, that’s why you should avoid easy loans and wait it out until you can qualify for more affordable loan options if you possibly can.
|
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"bad credit loans",
"https://www.investopedia.com/best-personal-loans-for-bad-credit-4774349"
],
[
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],
[
"minimum credit score of at least 670",
"https://www.investopedia.com/credit-score-needed-personal-loan-7553033"
],
[
"lenders",
"https://www.investopedia.com/terms/l/lender.asp"
],
[
"FICO scores",
"https://www.investopedia.com/terms/f/ficoscore.asp"
],
[
"unsecured personal loan",
"https://www.investopedia.com/terms/u/unsecuredloan.asp"
],
[
"OneMain Financial",
"https://www.investopedia.com/onemain-financial-personal-loans-review-4843162"
],
[
"origination fees",
"https://www.investopedia.com/terms/o/origination-fee.asp"
],
[
"emergency loans",
"https://www.investopedia.com/emergency-loans-for-bad-credit-5075539"
],
[
"401(k) loan",
"https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp"
],
[
"interest",
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],
[
"Internal Revenue Service (IRS)",
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[
"its terms",
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],
[
"compounding",
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],
[
"pawnshop",
"https://www.investopedia.com/articles/personal-finance/112415/how-pawnshops-make-money.asp"
],
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],
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"best personal loans",
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],
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"best credit card options",
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] |
https://www.investopedia.com/how-to-freeze-and-unfreeze-your-credit-5075527
|
How to Freeze and Unfreeze Your Credit
|
<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"> Protecting your credit is important since 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 scores</a> can impact your financial life in many ways. A credit freeze is a security measure you might consider if you want to prevent unauthorized people from accessing your credit file. Freezing and unfreezing your credit is a relatively simple process, but it helps to understand how it works to know when it's the right move.
</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 credit freeze can secure your credit reports from unauthorized access.</li><li>It's now free to freeze and unfreeze your credit reports with the three major credit reporting bureaus.</li><li>A credit freeze doesn't prevent people who already have access to your credit history from viewing your credit file. </li><li>In lieu of a credit freeze, you can also place a fraud alert on your credit file.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-a-credit-freeze"></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 Credit Freeze? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> A credit freeze or security freeze allows you to restrict access to your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp" rel="noopener noreferrer">credit reports</a>. Freezing your credit can help prevent identity thieves from applying for new credit in your name if that requires a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hard-inquiry.asp" rel="noopener noreferrer">hard inquiry</a> of your credit reports.
</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"> Freezing your credit doesn't mean your credit history is completely off-limits to everyone, however. Any companies that you have an existing credit relationship with will still be able to see your credit history even with a freeze in place. And government agencies executing a court order or search warrant will also be able to access your credit file.
</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-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">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A credit freeze won't prevent you from getting prescreened credit offers. You'll need to specifically opt-out to stop receiving those. </p></div></div></div>
<span class="heading-toc" id="toc-how-a-credit-freeze-works"></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 a Credit Freeze Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> When you freeze your credit with the three major national <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditbureau.asp">credit bureaus</a>—Equifax, Experian, and TransUnion—you're essentially telling them that you don't want just anyone to be able to access your credit file. Again, there are some exceptions to who can and can't see your credit file while a freeze is in place.
</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"> A credit freeze can stay in place for as long as you want it to; it's up to you to decide when to lift it. Freezing your credit is now completely free, thanks to a 2018 change in the law. Previously, there was a fee to freeze and unfreeze your credit.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Credit freezes don't have a negative impact on your credit score and won't keep you from getting your free annual credit reports. But if you decide to apply for loans or credit cards, you'll need to lift the credit freeze to allow creditors access to your file. You don't, however, have to lift a credit freeze for things like applying for a job or renting an apartment.
</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-how-to-freeze-your-credit"></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"> How to Freeze Your Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If you want to freeze your credit you can do so by contacting each of the three major credit bureaus. Here's how to reach them:
</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><strong>Equifax: </strong>Online at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.equifax.com/personal/credit-report-services/credit-freeze/" rel="noopener noreferrer nofollow">https://www.equifax.com/personal/credit-report-services/credit-freeze/</a> or by phone at 800-685-1111</li>
<li><strong>Experian: </strong>Online at <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.experian.com/freeze/center.html" rel="noopener noreferrer sponsored nofollow">https://www.experian.com/freeze/center.html</a> or by phone at 888-397-3742</li>
<li><strong>TransUnion: </strong>Online at <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.transunion.com/credit-freeze" rel="noopener noreferrer">https://www.transunion.com/credit-freeze</a> or by phone at 888-909-8872</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"> To freeze your credit you'll need to give each credit bureau your name, address, date of birth, Social Security number, and other identifying personal information. Experian and TransUnion require you to set a unique PIN to freeze and unfreeze your credit, though Equifax does not.
</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"> Freezing your credit is free, and you'll need to do it with all three credit bureaus to lock down each of your credit reports. And again, the freeze will stay in place until you lift it.
</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">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Freezing your credit reports won't freeze your credit scores. Your score can still go up or down while a credit freeze is in place, based on the information that's being reported to the credit bureaus. </p></div></div></div>
<span class="heading-toc" id="toc-how-to-unfreeze-your-credit"></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"> How to Unfreeze Your Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> At some point, you may decide that you no longer need the credit freeze. Or you may want to temporarily lift the credit freeze so you can apply for a mortgage, credit card, or other loans.
</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"> If you want to unfreeze one or all three of your credit reports you'll have to contact the credit bureaus individually. With TransUnion and Experian, you'll need to provide the PIN you set up earlier.
</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"> Once you ask a credit bureau to lift your credit freeze, it must do so within a specific time frame. For requests made by phone or online, the freeze must be lifted within one hour. If the request is made by mail, the freeze must be lifted no later than three business days after it's received.
</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-pros-and-cons-of-freezing-your-credit-report"></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"> Pros and Cons of Freezing Your Credit Report </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Freezing your credit reports can have both advantages and disadvantages that are helpful to keep in mind. If you're on the fence about whether to freeze your credit, here's how the pros and cons balance out.
</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"> Pros: </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0">
<li>Secures your credit report to help prevent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/identitytheft.asp" rel="noopener noreferrer">identity theft</a> and fraud</li>
<li>There's no longer a fee required to freeze or unfreeze your credit</li>
<li>You can easily and quickly freeze or unfreeze credit online</li>
<li>A credit freeze won't hurt your credit score</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_43-0"> <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_44-0"> <li>A credit freeze won't completely block access to your credit file</li><li>You'll need to unfreeze your credit before you can apply for loans</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"> A credit freeze could be a good choice if you're concerned about the possibility of identity theft and you don't plan to apply for additional credit anytime soon. It adds an extra layer of security to your credit reports, which can be reassuring as fraud and identity theft continue to rise. And not having to pay a fee to execute a credit freeze or unfreeze is a nice bonus. But there are other ways to protect your credit history against unauthorized access.
</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-credit-freeze-vs-fraud-alert"></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"> Credit Freeze vs. Fraud Alert </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> One alternative to freezing your credit is to place a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-fraud-alert.asp">fraud alert</a> on your credit profile. A fraud alert can protect your credit history from unauthorized access for one year. An extended fraud alert can protect it for seven 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_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Extended fraud alerts may be the better option if you've already been a victim of identity theft. To set up an extended fraud alert, you first need to create an identity theft report, then contact one of the three major credit bureaus to place the fraud alert. The credit bureau you report it to must report it to the other two bureaus.
</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"> A fraud alert or extended fraud alert won't lock your credit reports down completely the way a credit freeze does. But they do require creditors and lenders to take the extra step of verifying your identity before authorizing new lines of credit in your name. This may be a simpler solution if you'd rather not go to the trouble of freezing and unfreezing your credit file.
</p></div>
|
Protecting your credit is important since your [credit scores](https://www.investopedia.com/terms/c/credit_score.asp) can impact your financial life in many ways. A credit freeze is a security measure you might consider if you want to prevent unauthorized people from accessing your credit file. Freezing and unfreezing your credit is a relatively simple process, but it helps to understand how it works to know when it's the right move.
### Key Takeaways
* A credit freeze can secure your credit reports from unauthorized access.
* It's now free to freeze and unfreeze your credit reports with the three major credit reporting bureaus.
* A credit freeze doesn't prevent people who already have access to your credit history from viewing your credit file.
* In lieu of a credit freeze, you can also place a fraud alert on your credit file.
## What Is a Credit Freeze?
A credit freeze or security freeze allows you to restrict access to your [credit reports](https://www.investopedia.com/terms/c/creditreport.asp). Freezing your credit can help prevent identity thieves from applying for new credit in your name if that requires a [hard inquiry](https://www.investopedia.com/terms/h/hard-inquiry.asp) of your credit reports.
Freezing your credit doesn't mean your credit history is completely off-limits to everyone, however. Any companies that you have an existing credit relationship with will still be able to see your credit history even with a freeze in place. And government agencies executing a court order or search warrant will also be able to access your credit file.
### Note
A credit freeze won't prevent you from getting prescreened credit offers. You'll need to specifically opt-out to stop receiving those.
## How a Credit Freeze Works
When you freeze your credit with the three major national [credit bureaus](https://www.investopedia.com/terms/c/creditbureau.asp)—Equifax, Experian, and TransUnion—you're essentially telling them that you don't want just anyone to be able to access your credit file. Again, there are some exceptions to who can and can't see your credit file while a freeze is in place.
A credit freeze can stay in place for as long as you want it to; it's up to you to decide when to lift it. Freezing your credit is now completely free, thanks to a 2018 change in the law. Previously, there was a fee to freeze and unfreeze your credit.
Credit freezes don't have a negative impact on your credit score and won't keep you from getting your free annual credit reports. But if you decide to apply for loans or credit cards, you'll need to lift the credit freeze to allow creditors access to your file. You don't, however, have to lift a credit freeze for things like applying for a job or renting an apartment.
## How to Freeze Your Credit
If you want to freeze your credit you can do so by contacting each of the three major credit bureaus. Here's how to reach them:
* **Equifax:** Online at <https://www.equifax.com/personal/credit-report-services/credit-freeze/> or by phone at 800-685-1111
* **Experian:** Online at <https://www.experian.com/freeze/center.html> or by phone at 888-397-3742
* **TransUnion:** Online at <https://www.transunion.com/credit-freeze> or by phone at 888-909-8872
To freeze your credit you'll need to give each credit bureau your name, address, date of birth, Social Security number, and other identifying personal information. Experian and TransUnion require you to set a unique PIN to freeze and unfreeze your credit, though Equifax does not.
Freezing your credit is free, and you'll need to do it with all three credit bureaus to lock down each of your credit reports. And again, the freeze will stay in place until you lift it.
### Note
Freezing your credit reports won't freeze your credit scores. Your score can still go up or down while a credit freeze is in place, based on the information that's being reported to the credit bureaus.
## How to Unfreeze Your Credit
At some point, you may decide that you no longer need the credit freeze. Or you may want to temporarily lift the credit freeze so you can apply for a mortgage, credit card, or other loans.
If you want to unfreeze one or all three of your credit reports you'll have to contact the credit bureaus individually. With TransUnion and Experian, you'll need to provide the PIN you set up earlier.
Once you ask a credit bureau to lift your credit freeze, it must do so within a specific time frame. For requests made by phone or online, the freeze must be lifted within one hour. If the request is made by mail, the freeze must be lifted no later than three business days after it's received.
## Pros and Cons of Freezing Your Credit Report
Freezing your credit reports can have both advantages and disadvantages that are helpful to keep in mind. If you're on the fence about whether to freeze your credit, here's how the pros and cons balance out.
### Pros:
* Secures your credit report to help prevent [identity theft](https://www.investopedia.com/terms/i/identitytheft.asp) and fraud
* There's no longer a fee required to freeze or unfreeze your credit
* You can easily and quickly freeze or unfreeze credit online
* A credit freeze won't hurt your credit score
### Cons:
* A credit freeze won't completely block access to your credit file
* You'll need to unfreeze your credit before you can apply for loans
A credit freeze could be a good choice if you're concerned about the possibility of identity theft and you don't plan to apply for additional credit anytime soon. It adds an extra layer of security to your credit reports, which can be reassuring as fraud and identity theft continue to rise. And not having to pay a fee to execute a credit freeze or unfreeze is a nice bonus. But there are other ways to protect your credit history against unauthorized access.
## Credit Freeze vs. Fraud Alert
One alternative to freezing your credit is to place a [fraud alert](https://www.investopedia.com/terms/c/credit-fraud-alert.asp) on your credit profile. A fraud alert can protect your credit history from unauthorized access for one year. An extended fraud alert can protect it for seven years.
Extended fraud alerts may be the better option if you've already been a victim of identity theft. To set up an extended fraud alert, you first need to create an identity theft report, then contact one of the three major credit bureaus to place the fraud alert. The credit bureau you report it to must report it to the other two bureaus.
A fraud alert or extended fraud alert won't lock your credit reports down completely the way a credit freeze does. But they do require creditors and lenders to take the extra step of verifying your identity before authorizing new lines of credit in your name. This may be a simpler solution if you'd rather not go to the trouble of freezing and unfreezing your credit file.
|
Protecting your credit is important since your credit scores can impact your financial life in many ways. A credit freeze is a security measure you might consider if you want to prevent unauthorized people from accessing your credit file. Freezing and unfreezing your credit is a relatively simple process, but it helps to understand how it works to know when it's the right move.
Key Takeaways
A credit freeze can secure your credit reports from unauthorized access.It's now free to freeze and unfreeze your credit reports with the three major credit reporting bureaus.A credit freeze doesn't prevent people who already have access to your credit history from viewing your credit file. In lieu of a credit freeze, you can also place a fraud alert on your credit file.
What Is a Credit Freeze?
A credit freeze or security freeze allows you to restrict access to your credit reports. Freezing your credit can help prevent identity thieves from applying for new credit in your name if that requires a hard inquiry of your credit reports.
Freezing your credit doesn't mean your credit history is completely off-limits to everyone, however. Any companies that you have an existing credit relationship with will still be able to see your credit history even with a freeze in place. And government agencies executing a court order or search warrant will also be able to access your credit file.
Note
A credit freeze won't prevent you from getting prescreened credit offers. You'll need to specifically opt-out to stop receiving those.
How a Credit Freeze Works
When you freeze your credit with the three major national credit bureaus—Equifax, Experian, and TransUnion—you're essentially telling them that you don't want just anyone to be able to access your credit file. Again, there are some exceptions to who can and can't see your credit file while a freeze is in place.
A credit freeze can stay in place for as long as you want it to; it's up to you to decide when to lift it. Freezing your credit is now completely free, thanks to a 2018 change in the law. Previously, there was a fee to freeze and unfreeze your credit.
Credit freezes don't have a negative impact on your credit score and won't keep you from getting your free annual credit reports. But if you decide to apply for loans or credit cards, you'll need to lift the credit freeze to allow creditors access to your file. You don't, however, have to lift a credit freeze for things like applying for a job or renting an apartment.
How to Freeze Your Credit
If you want to freeze your credit you can do so by contacting each of the three major credit bureaus. Here's how to reach them:
Equifax: Online at https://www.equifax.com/personal/credit-report-services/credit-freeze/ or by phone at 800-685-1111
Experian: Online at https://www.experian.com/freeze/center.html or by phone at 888-397-3742
TransUnion: Online at https://www.transunion.com/credit-freeze or by phone at 888-909-8872
To freeze your credit you'll need to give each credit bureau your name, address, date of birth, Social Security number, and other identifying personal information. Experian and TransUnion require you to set a unique PIN to freeze and unfreeze your credit, though Equifax does not.
Freezing your credit is free, and you'll need to do it with all three credit bureaus to lock down each of your credit reports. And again, the freeze will stay in place until you lift it.
Note
Freezing your credit reports won't freeze your credit scores. Your score can still go up or down while a credit freeze is in place, based on the information that's being reported to the credit bureaus.
How to Unfreeze Your Credit
At some point, you may decide that you no longer need the credit freeze. Or you may want to temporarily lift the credit freeze so you can apply for a mortgage, credit card, or other loans.
If you want to unfreeze one or all three of your credit reports you'll have to contact the credit bureaus individually. With TransUnion and Experian, you'll need to provide the PIN you set up earlier.
Once you ask a credit bureau to lift your credit freeze, it must do so within a specific time frame. For requests made by phone or online, the freeze must be lifted within one hour. If the request is made by mail, the freeze must be lifted no later than three business days after it's received.
Pros and Cons of Freezing Your Credit Report
Freezing your credit reports can have both advantages and disadvantages that are helpful to keep in mind. If you're on the fence about whether to freeze your credit, here's how the pros and cons balance out.
Pros:
Secures your credit report to help prevent identity theft and fraud
There's no longer a fee required to freeze or unfreeze your credit
You can easily and quickly freeze or unfreeze credit online
A credit freeze won't hurt your credit score
Cons:
A credit freeze won't completely block access to your credit fileYou'll need to unfreeze your credit before you can apply for loans
A credit freeze could be a good choice if you're concerned about the possibility of identity theft and you don't plan to apply for additional credit anytime soon. It adds an extra layer of security to your credit reports, which can be reassuring as fraud and identity theft continue to rise. And not having to pay a fee to execute a credit freeze or unfreeze is a nice bonus. But there are other ways to protect your credit history against unauthorized access.
Credit Freeze vs. Fraud Alert
One alternative to freezing your credit is to place a fraud alert on your credit profile. A fraud alert can protect your credit history from unauthorized access for one year. An extended fraud alert can protect it for seven years.
Extended fraud alerts may be the better option if you've already been a victim of identity theft. To set up an extended fraud alert, you first need to create an identity theft report, then contact one of the three major credit bureaus to place the fraud alert. The credit bureau you report it to must report it to the other two bureaus.
A fraud alert or extended fraud alert won't lock your credit reports down completely the way a credit freeze does. But they do require creditors and lenders to take the extra step of verifying your identity before authorizing new lines of credit in your name. This may be a simpler solution if you'd rather not go to the trouble of freezing and unfreezing your credit file.
|
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https://www.investopedia.com/customer-loyalty-to-insurers-wanes-when-homeowners-become-renters-5202691
|
Rental Boom Sends Many Consumers Shopping for New Insurers
|
<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"> As many Americans swap homeownership for renting, they're also ditching their longtime insurance companies. That’s the latest trendline from consumer analytics firm J.D. Power's newly released 2021 U.S. Home Insurance Study, which measures customer retention in homeowners and renters insurance lines this 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>Many Americans, particularly those 55 and older, are trading homeownership for renting.</li><li>Homeowners insurance policyholders are less likely to stay with their current insurance company if they become renters instead, according to a new J.D. Power study.</li><li>Customer service, not price, currently tops the list of factors that determine whether consumers will keep their current insurers when they transition from homeowners to renters, the study found.</li><li>USAA, Lemonade, State Farm, American Family, Nationwide, and Allstate scored the highest among renters insurance companies for overall satisfaction, according to the J.D. Power study.</li></ul></div></div></div>
<span class="heading-toc" id="toc-renting-is-on-the-upswing-particularly-among-boomers"></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"> Renting Is on the Upswing, Particularly Among Boomers </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The fading consumer loyalty to insurers, the J.D. Power study suggests, could be particularly acute among the growing numbers of baby boomer adults, who are increasingly choosing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/07/buy-rent.asp">renting over homeownership as they approach retirement</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"> A recent housing market analysis by the Joint Center for Housing Studies of Harvard University, for example, found that about two-thirds of all U.S. rental housing growth between 2004 and 2019 was driven by adults age 55 and older—and that group now accounts for 30% of all renter households.<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"> What's more, 84% of renters now believe that renting is more affordable than owning, according to a survey by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freddiemac.asp">Freddie Mac</a>.<span class="ql-inline-citation" data-cite="3"></span> That percentage represents an all-time high for the survey, which has tracked renter and owner perspectives since 2015.
</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"> Boomer renters stood out in the Freddie Mac survey, with 87% saying that renting is more affordable than owning. In addition, boomer renters are more satisfied (50%) with their rental experience as compared with other generations (older Millennials 39%, Gen X 35%, younger Millennials 33%). And growing numbers of boomers (currently 27%) say they will never move from their rental situation.
</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-loyalty-differs-among-generations"></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 Loyalty Differs Among Generations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Only about half (52%) of baby boomers and pre-boomers, as identified by J.D. Power (born before 1946), who move from homeowners to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance/renters-insurance/">renters insurance</a> policies stay loyal to the same insurer, the study found.
</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 generational shift from home ownership to renting represents a significant customer retention risk unless insurers figure out a better way to maintain customer loyalty throughout this critical life phase," says Robert M. Lajdziak, J.D. Power's senior consultant of insurance intelligence. "So far, most insurers are missing that mark."
</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 report called out the boomer population because it had the largest share that made this transition. But J.D. Power data suggest that insurers are struggling to keep other transitioning age groups as customers, as well. The percentage of homeowner-turned-renter policyholders who keep their insurer falls to 44% among Gen X insureds and 36% among insureds in Gens Y and Z. By comparison, the annual retention rate for all homeowners insurance customers is 91.7%, Lajdziak notes.
</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"> "There is a huge opportunity out there for insurers that get the life-stage transition formula right," he says, "but the scale of this generational movement will likely drive a great deal of switching activity in the future."
</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-what-impacts-loyalty-and-retention"></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"> What Impacts Loyalty and Retention? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Along with housing preferences, affordability, and generational trends, there are other factors at play, according to the U.S.-related findings of a recent global insurance consumer survey by Deloitte.<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_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> One reason for high retention rates in the homeowners insurance sector, for instance, might be that 56% of U.S. consumers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/insurance/09/bundle-insurance.asp">bundle</a> their auto and home coverages, far higher than in any other country Deloitte surveyed except Canada. That makes it more likely for customers to stick with their carrier—and harder for insurers to compete for just one of the paired policies at renewal time.
</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"> Another issue behind the retention numbers is the fact that more homeowners than renters either have, or are required by their lenders to have, insurance coverage. The 2020 Triple-I Consumer Poll from the Insurance Information Institute found that 88% of homeowners had homeowners insurance coverage compared to the 57% of renters who carried renters insurance.<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_29-0"></div>
<span class="heading-toc" id="toc-service-now-tops-price-for-importance"></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"> Service Now Tops Price for Importance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> This year’s J.D. Power study also probed retention and overall customer satisfaction with homeowners and renters insurance by focusing on five factors: interaction, policy offerings, price, billing process and policy information, and claims. Based on responses from 11,828 homeowners and renters, the study's additional findings show:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li><strong>Three insurers stand out in the retention race.</strong> Compared with the industry average, USAA, State Farm, and Amica Mutual have especially high rates of retention when their homeowners insurance customers change to renters insurance, Lajdziak says.</li><li><strong>Service, not price, is now the key driver to stay or go.</strong> Among renters who stay with their previous homeowners insurance brand, the most common reasons are good service, brand reputation, bundled products, and convenience. Price is fifth on the list. (In last year’s J.D. Power U.S. Home Insurance Study, 52% of renters insurance customers said price was the main reason they chose a carrier.)<span class="ql-inline-citation" data-cite="6"></span></li>
</ul>
<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-which-home-and-renters-insurance-companies-rank-highest"></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"> Which Home and Renters Insurance Companies Rank Highest? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> In the homeowners insurance category, Amica Mutual ranked highest for overall satisfaction in the J.D. Power study, with a score of 854 (on a 1,000-point scale). Automobile Club of Southern California (840) came in second, while Erie Insurance (835) and State Farm (835) tied for third. Fourth on the list is Automobile Club Group (AAA) with a score of 834, and rounding out the top five is American Family (831). USAA, which is not ranked because it doesn't sell to the general public, scored 882.
</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"> In the renters insurance segment, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lemonade-home-insurance-review-5079482">Lemonade</a> retained its leader spot from last year, ranking highest with an overall satisfaction score of 870. State Farm (866) came in second and American Family (838) was in third place. Nationwide (834) took the fourth spot and Allstate (833) came in fifth. Here, USAA's score reached 893.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
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As many Americans swap homeownership for renting, they're also ditching their longtime insurance companies. That’s the latest trendline from consumer analytics firm J.D. Power's newly released 2021 U.S. Home Insurance Study, which measures customer retention in homeowners and renters insurance lines this year.
### Key Takeaways
* Many Americans, particularly those 55 and older, are trading homeownership for renting.
* Homeowners insurance policyholders are less likely to stay with their current insurance company if they become renters instead, according to a new J.D. Power study.
* Customer service, not price, currently tops the list of factors that determine whether consumers will keep their current insurers when they transition from homeowners to renters, the study found.
* USAA, Lemonade, State Farm, American Family, Nationwide, and Allstate scored the highest among renters insurance companies for overall satisfaction, according to the J.D. Power study.
## Renting Is on the Upswing, Particularly Among Boomers
The fading consumer loyalty to insurers, the J.D. Power study suggests, could be particularly acute among the growing numbers of baby boomer adults, who are increasingly choosing [renting over homeownership as they approach retirement](https://www.investopedia.com/articles/retirement/07/buy-rent.asp).
A recent housing market analysis by the Joint Center for Housing Studies of Harvard University, for example, found that about two-thirds of all U.S. rental housing growth between 2004 and 2019 was driven by adults age 55 and older—and that group now accounts for 30% of all renter households.
What's more, 84% of renters now believe that renting is more affordable than owning, according to a survey by [Freddie Mac](https://www.investopedia.com/terms/f/freddiemac.asp). That percentage represents an all-time high for the survey, which has tracked renter and owner perspectives since 2015.
Boomer renters stood out in the Freddie Mac survey, with 87% saying that renting is more affordable than owning. In addition, boomer renters are more satisfied (50%) with their rental experience as compared with other generations (older Millennials 39%, Gen X 35%, younger Millennials 33%). And growing numbers of boomers (currently 27%) say they will never move from their rental situation.
## How Loyalty Differs Among Generations
Only about half (52%) of baby boomers and pre-boomers, as identified by J.D. Power (born before 1946), who move from homeowners to [renters insurance](https://www.investopedia.com/insurance/renters-insurance/) policies stay loyal to the same insurer, the study found.
"The generational shift from home ownership to renting represents a significant customer retention risk unless insurers figure out a better way to maintain customer loyalty throughout this critical life phase," says Robert M. Lajdziak, J.D. Power's senior consultant of insurance intelligence. "So far, most insurers are missing that mark."
The report called out the boomer population because it had the largest share that made this transition. But J.D. Power data suggest that insurers are struggling to keep other transitioning age groups as customers, as well. The percentage of homeowner-turned-renter policyholders who keep their insurer falls to 44% among Gen X insureds and 36% among insureds in Gens Y and Z. By comparison, the annual retention rate for all homeowners insurance customers is 91.7%, Lajdziak notes.
"There is a huge opportunity out there for insurers that get the life-stage transition formula right," he says, "but the scale of this generational movement will likely drive a great deal of switching activity in the future."
## What Impacts Loyalty and Retention?
Along with housing preferences, affordability, and generational trends, there are other factors at play, according to the U.S.-related findings of a recent global insurance consumer survey by Deloitte.
One reason for high retention rates in the homeowners insurance sector, for instance, might be that 56% of U.S. consumers [bundle](https://www.investopedia.com/articles/insurance/09/bundle-insurance.asp) their auto and home coverages, far higher than in any other country Deloitte surveyed except Canada. That makes it more likely for customers to stick with their carrier—and harder for insurers to compete for just one of the paired policies at renewal time.
Another issue behind the retention numbers is the fact that more homeowners than renters either have, or are required by their lenders to have, insurance coverage. The 2020 Triple-I Consumer Poll from the Insurance Information Institute found that 88% of homeowners had homeowners insurance coverage compared to the 57% of renters who carried renters insurance.
## Service Now Tops Price for Importance
This year’s J.D. Power study also probed retention and overall customer satisfaction with homeowners and renters insurance by focusing on five factors: interaction, policy offerings, price, billing process and policy information, and claims. Based on responses from 11,828 homeowners and renters, the study's additional findings show:
* **Three insurers stand out in the retention race.** Compared with the industry average, USAA, State Farm, and Amica Mutual have especially high rates of retention when their homeowners insurance customers change to renters insurance, Lajdziak says.
* **Service, not price, is now the key driver to stay or go.** Among renters who stay with their previous homeowners insurance brand, the most common reasons are good service, brand reputation, bundled products, and convenience. Price is fifth on the list. (In last year’s J.D. Power U.S. Home Insurance Study, 52% of renters insurance customers said price was the main reason they chose a carrier.)
## Which Home and Renters Insurance Companies Rank Highest?
In the homeowners insurance category, Amica Mutual ranked highest for overall satisfaction in the J.D. Power study, with a score of 854 (on a 1,000-point scale). Automobile Club of Southern California (840) came in second, while Erie Insurance (835) and State Farm (835) tied for third. Fourth on the list is Automobile Club Group (AAA) with a score of 834, and rounding out the top five is American Family (831). USAA, which is not ranked because it doesn't sell to the general public, scored 882.
In the renters insurance segment, [Lemonade](https://www.investopedia.com/lemonade-home-insurance-review-5079482) retained its leader spot from last year, ranking highest with an overall satisfaction score of 870. State Farm (866) came in second and American Family (838) was in third place. Nationwide (834) took the fourth spot and Allstate (833) came in fifth. Here, USAA's score reached 893.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
As many Americans swap homeownership for renting, they're also ditching their longtime insurance companies. That’s the latest trendline from consumer analytics firm J.D. Power's newly released 2021 U.S. Home Insurance Study, which measures customer retention in homeowners and renters insurance lines this year.
Key Takeaways
Many Americans, particularly those 55 and older, are trading homeownership for renting.Homeowners insurance policyholders are less likely to stay with their current insurance company if they become renters instead, according to a new J.D. Power study.Customer service, not price, currently tops the list of factors that determine whether consumers will keep their current insurers when they transition from homeowners to renters, the study found.USAA, Lemonade, State Farm, American Family, Nationwide, and Allstate scored the highest among renters insurance companies for overall satisfaction, according to the J.D. Power study.
Renting Is on the Upswing, Particularly Among Boomers
The fading consumer loyalty to insurers, the J.D. Power study suggests, could be particularly acute among the growing numbers of baby boomer adults, who are increasingly choosing renting over homeownership as they approach retirement.
A recent housing market analysis by the Joint Center for Housing Studies of Harvard University, for example, found that about two-thirds of all U.S. rental housing growth between 2004 and 2019 was driven by adults age 55 and older—and that group now accounts for 30% of all renter households.
What's more, 84% of renters now believe that renting is more affordable than owning, according to a survey by Freddie Mac. That percentage represents an all-time high for the survey, which has tracked renter and owner perspectives since 2015.
Boomer renters stood out in the Freddie Mac survey, with 87% saying that renting is more affordable than owning. In addition, boomer renters are more satisfied (50%) with their rental experience as compared with other generations (older Millennials 39%, Gen X 35%, younger Millennials 33%). And growing numbers of boomers (currently 27%) say they will never move from their rental situation.
How Loyalty Differs Among Generations
Only about half (52%) of baby boomers and pre-boomers, as identified by J.D. Power (born before 1946), who move from homeowners to renters insurance policies stay loyal to the same insurer, the study found.
"The generational shift from home ownership to renting represents a significant customer retention risk unless insurers figure out a better way to maintain customer loyalty throughout this critical life phase," says Robert M. Lajdziak, J.D. Power's senior consultant of insurance intelligence. "So far, most insurers are missing that mark."
The report called out the boomer population because it had the largest share that made this transition. But J.D. Power data suggest that insurers are struggling to keep other transitioning age groups as customers, as well. The percentage of homeowner-turned-renter policyholders who keep their insurer falls to 44% among Gen X insureds and 36% among insureds in Gens Y and Z. By comparison, the annual retention rate for all homeowners insurance customers is 91.7%, Lajdziak notes.
"There is a huge opportunity out there for insurers that get the life-stage transition formula right," he says, "but the scale of this generational movement will likely drive a great deal of switching activity in the future."
What Impacts Loyalty and Retention?
Along with housing preferences, affordability, and generational trends, there are other factors at play, according to the U.S.-related findings of a recent global insurance consumer survey by Deloitte.
One reason for high retention rates in the homeowners insurance sector, for instance, might be that 56% of U.S. consumers bundle their auto and home coverages, far higher than in any other country Deloitte surveyed except Canada. That makes it more likely for customers to stick with their carrier—and harder for insurers to compete for just one of the paired policies at renewal time.
Another issue behind the retention numbers is the fact that more homeowners than renters either have, or are required by their lenders to have, insurance coverage. The 2020 Triple-I Consumer Poll from the Insurance Information Institute found that 88% of homeowners had homeowners insurance coverage compared to the 57% of renters who carried renters insurance.
Service Now Tops Price for Importance
This year’s J.D. Power study also probed retention and overall customer satisfaction with homeowners and renters insurance by focusing on five factors: interaction, policy offerings, price, billing process and policy information, and claims. Based on responses from 11,828 homeowners and renters, the study's additional findings show:
Three insurers stand out in the retention race. Compared with the industry average, USAA, State Farm, and Amica Mutual have especially high rates of retention when their homeowners insurance customers change to renters insurance, Lajdziak says.Service, not price, is now the key driver to stay or go. Among renters who stay with their previous homeowners insurance brand, the most common reasons are good service, brand reputation, bundled products, and convenience. Price is fifth on the list. (In last year’s J.D. Power U.S. Home Insurance Study, 52% of renters insurance customers said price was the main reason they chose a carrier.)
Which Home and Renters Insurance Companies Rank Highest?
In the homeowners insurance category, Amica Mutual ranked highest for overall satisfaction in the J.D. Power study, with a score of 854 (on a 1,000-point scale). Automobile Club of Southern California (840) came in second, while Erie Insurance (835) and State Farm (835) tied for third. Fourth on the list is Automobile Club Group (AAA) with a score of 834, and rounding out the top five is American Family (831). USAA, which is not ranked because it doesn't sell to the general public, scored 882.
In the renters insurance segment, Lemonade retained its leader spot from last year, ranking highest with an overall satisfaction score of 870. State Farm (866) came in second and American Family (838) was in third place. Nationwide (834) took the fourth spot and Allstate (833) came in fifth. Here, USAA's score reached 893.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/investing/what-moves-the-djia/
|
DJIA 101: How Does the Dow Jones Work?
|
<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 daily news just wouldn't be complete without a report about the open and close of this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">market index</a>. But although you've certainly heard reports about the Dow Jones Industrial Average (DJIA) being up or down a certain number of points, do you know what these points represent? Read on to find out how the Dow works and what changes in the index means for investors and the stock market.
</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>The Dow Jones Industrial Average (DJIA) is a stock index of 30 blue-chip industrial and financial companies in the United States.</li><li>The index is used by the media as a barometer of the broader stock market and the economy as a whole.</li><li>The Dow's scope is more limited than the broader S&P 500 because it is composed of only 30 out of thousands of stocks.</li><li>The index is price-weighted and does not account for changes in market capitalization as is the case with other popular indices.</li><li>Since it is price-weighted, the index is calculated using a divisor to normalize the index components.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-dow-jones-and-the-broader-market"></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 Dow Jones and the Broader Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In the United States, there are three major indicators, or indexes, of market movements: the Nasdaq Composite, the DJIA or "the Dow", and the Standard & Poor's 500 (S&P 500).
</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"> Collectively, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp">these market indexes</a> are referred to as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security-market-indicator-series-smis.asp">Security Market Indicator Series</a> (SMIS). They provide a basic signal of how specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed. It is also the easiest to calculate and explain.
</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 table below alphabetically lists the companies included in the DJIA as of March 2021:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<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="width: 88px;"></colgroup>
<colgroup span="1" style="width: 138px;"></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">Dow Jones Industrial Average Components</th>
</tr>
<tr>
<th>Company</th>
<th>Symbol</th>
<th>Year Added</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>3M</td>
<td>MMM</td>
<td>1976</td>
</tr>
<tr>
<td>American Express</td>
<td>AXP</td>
<td>1982</td>
</tr>
<tr>
<td>Amgen</td>
<td>AMGN</td>
<td>2020</td>
</tr>
<tr>
<td>Apple Inc.</td>
<td>AAPL</td>
<td>2015</td>
</tr>
<tr>
<td>Boeing</td>
<td>BA</td>
<td>1987</td>
</tr>
<tr>
<td>Caterpillar</td>
<td>CAT</td>
<td>1991</td>
</tr>
<tr>
<td>Chevron</td>
<td>CVX</td>
<td>2008</td>
</tr>
<tr>
<td>Cisco Systems</td>
<td>CSCO</td>
<td>2009</td>
</tr>
<tr>
<td>The Coca-Cola Company</td>
<td>KO</td>
<td>1987</td>
</tr>
<tr>
<td>Dow Inc.</td>
<td>DOW</td>
<td>2019</td>
</tr>
<tr>
<td>Goldman Sachs</td>
<td>GS</td>
<td>2013</td>
</tr>
<tr>
<td>The Home Depot</td>
<td>HD</td>
<td>1999</td>
</tr>
<tr>
<td>Honeywell</td>
<td>HON</td>
<td>2020</td>
</tr>
<tr>
<td>IBM</td>
<td>IBM</td>
<td>1979</td>
</tr>
<tr>
<td>Intel</td>
<td>INTC</td>
<td>1999</td>
</tr>
<tr>
<td>Johnson & Johnson</td>
<td>JNJ</td>
<td>1997</td>
</tr>
<tr>
<td>JPMorgan Chase</td>
<td>JPM</td>
<td>1991</td>
</tr>
<tr>
<td>McDonald's</td>
<td>MCD</td>
<td>1985</td>
</tr>
<tr>
<td>Merck & Co.</td>
<td>MRK</td>
<td>1979</td>
</tr>
<tr>
<td>Microsoft</td>
<td>MSFT</td>
<td>1999</td>
</tr>
<tr>
<td>NIKE</td>
<td>NKE</td>
<td>2013</td>
</tr>
<tr>
<td>Proctor & Gamble</td>
<td>PG</td>
<td>1932</td>
</tr>
<tr>
<td>Salesforce</td>
<td>CRM</td>
<td>2020</td>
</tr>
<tr>
<td>The Travelers Companies</td>
<td>TRV</td>
<td>2009</td>
</tr>
<tr>
<td>UnitedHealth Group</td>
<td>UNH</td>
<td>2012</td>
</tr>
<tr>
<td>Verizon</td>
<td>VZ</td>
<td>2004</td>
</tr>
<tr>
<td>Visa</td>
<td>V</td>
<td>2013</td>
</tr>
<tr>
<td>Walmart</td>
<td>WMT</td>
<td>1997</td>
</tr>
<tr>
<td>Walgreens Boots Alliance</td>
<td>WBA</td>
<td>2018</td>
</tr>
<tr>
<td>The Walt Disney Company</td>
<td>DIS</td>
<td>1991</td>
</tr>
</tbody>
</table>
<figcaption>30 DJIA companies as of March 2021</figcaption>
</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-history-of-the-djia"></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"> History of the DJIA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser. Despite popular belief, its original indexes were not published in <em>The Wall Street Journal</em> but in its precursor, the <em>Customer's Afternoon Letter</em>. The first industrial averages didn't even include any industrial stocks. The focus was on the growth stocks of the time, mainly transportation companies. This means that the first Dow Jones Index included nine railroad stocks, a steamship line, and a communications company.
</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 average eventually evolved into the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djta.asp">Transportation Average</a>. It wasn't until May 26, 1896, that Dow split transportation and industrials into two different averages, creating what we know now as the Dow Jones Industrial Average.
</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"> Charles Dow had the vision to create a benchmark that would project general market conditions and thus help investors bewildered by fractional dollar changes. It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11—the number of stocks included in the index.
</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"> Today, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/10/introduction-to-the-dow.asp">DJIA is a benchmark that tracks American stocks</a> that are considered to be the leaders of the economy and are on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of <em>The Wall Street Journal</em>.
</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"> Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, none of the initial companies included in the average remain. General Electric holds the longest tenure of 110 years.
</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-note" 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 with-title" id="mntl-sc-block-callout-heading_2-0">12</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The number of companies in the original Dow Jones Industrial Average. The 12 included American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal, Iron and Railroad, U.S. Leather, and U.S. Rubber.</p></div></div></div>
<span class="heading-toc" id="toc-djia-complications"></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"> DJIA Complications </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> As you might have guessed, calculating the DJIA today isn't as simple as adding up the stocks and dividing by 30. Dow lived at a time when <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-stock-split-why-do-stocks-split/">stock splits and stock dividends</a> weren't commonplace, so he didn't foresee how these corporate actions would affect the average.
</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, if a company trading at $100 implements a two-for-one split, the number of its shares doubles, and the price of each share becomes $50. This change in price brings down the average even though there is no fundamental change in the stock. To absorb the effects of price changes from splits, those calculating the DJIA developed the Dow divisor, a number adjusted to account for events like splits and used as the divisor in the calculation of the average.
</p>
<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-callout mntl-block" id="mntl-sc-block_32-0"><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_33-0"><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>General Electric held its spot in the Dow for more than 110 continuous years until June 19, 2018, when the maker of light bulbs and jet engines was removed from the index and replaced by Walgreens Boots Alliance.</p></div></div></div>
<span class="heading-toc" id="toc-how-does-the-dow-divisor-work"></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"> How Does the Dow Divisor Work? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> To calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-are-points-on-the-dow/">Dow divisor, which is constantly modified</a>. To demonstrate how this use of the divisor works, we will create an index, the Investopedia Mock Average (IMA). The IMA is composed of 10 stocks, which total $1,000 when their stock prices are added together. The IMA quoted in the media is, therefore, 100 ($1,000 ÷ 10). Note that the divisor in our example is 10.
</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"> Now, let's say that one of the stocks in the IMA average trades at $100 but undergoes a two-for-one split, reducing its stock price to $50. If our divisor remains unchanged, the calculation for the average would give us 95 ($950 ÷ 10). This would not be accurate because the stock split merely changed the price, not the value of the company.
</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"> To compensate for the effects of the split, we have to adjust the divisor downward to 9.5. This way, the index remains at 100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average. If you are interested in finding the current Dow divisor, you can find it on the website of the Dow Jones Indexes and the Chicago Board of Trade.
</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-djia-as-a-dollar-value"></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 DJIA as a Dollar Value </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> To figure out how a change in any particular stock affects the index, divide the stock's price change by the current divisor. For example, if Walmart (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt" rel="noopener noreferrer">WMT</a>) is up $5, divide five by the current divisor (0.147), which equals 34.01. Thus, if the DJIA was up 100 points on the day, Walmart was responsible for 34.42 points of the movement.
</p>
<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-weighing-the-index"></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"> Weighing the Index </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The DJIA's methodology of calculating an index is known as the price-weighted method. Companies are ranked based on their share prices. On top of having to deal with stock splits, the downside to this method is that it does not reflect the fact that a $1 change for a $10 stock is much more significant (percentage-wise) than a $1 change for a $100 stock.
</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"> Because of the problems associated with price weighting, most other major indexes, such as the S&P 500, are weighted according to market capitalization; that is, companies are ranked by the number of outstanding <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100214/can-you-buy-shares-dow-jones-industrial-average-djia.asp">shares</a> they have, multiplied by the value per share.
</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-the-downside-of-the-dow"></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 Downside of the Dow </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> That is only one drawback of the DJIA. Another reflects the fact that today, the stock market is much more geographically dispersed and fragmented by company size and industry.
</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"> During the early 1900s, the Industrial Revolution spurred the creation of large industrial-type companies, many of which were located in the United States and were representative of the overall economy. But with technological advances and the advent of the world wide web, companies proliferated. The creation of, or the increase in, the number of economically meaningful industries with companies located anywhere in the world, has shaped a market that is almost completely interconnected and interdependent.
</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"> Because of the fragmented, global nature of today’s market, many feel the Dow is not an appropriate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050115/what-does-dow-jones-industrial-average-measure.asp">indicator of the overall economy</a>.
</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-the-dow-and-the-economy"></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 Dow and the Economy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Despite its limitations, the Dow still serves three important functions in today’s marketplace:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0">
<li>The long history of the Dow serves as a reminder of and comparison for today’s market as compared to early markets. Trend analysis is always important when trying to forecast the future, and the longevity of the Dow serves this purpose better than all other indices.</li>
<li>While the Dow tracks only 30 large American companies, these companies are inclusive of all industries except <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/utilities_sector.asp">utilities</a> and transportation, creating a broad overview of the economy. In general, the stock market is a leading indicator, and the trend of the Dow could be construed as representing the trend of the economy over the next year. It may not have predictive power in ascertaining the level of economic activity but should have directional predictability. </li>
<li>The Dow garners an unmistakable and perhaps unwarranted amount of attention from the media. Reporting on how the Dow fared on a particular day is pervasive, and it is used as a proxy for the state of the economy. So even though the Dow is not fully representative of a global, technology-driven market, its psychological connection with the state of the economy is profound.</li>
</ol>
<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-bottom-line"></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 Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> After 137 years as a marker of major market developments, the DJIA is still one of the most recognized and cited of all market indexes. The index may not represent the new market opportunities and early-stage fast-growing companies. Also, it may not be indicative of the overall economic strength of the U.S. economy given most of the companies in the index procure a high percentage of revenue outside the United States. However, it does provide some valuable insights. Despite all its shortcomings, the Dow is still one of the most-watched indicators of stock market performance and the state of the U.S. economy.
</p></div>
|
The daily news just wouldn't be complete without a report about the open and close of this [market index](https://www.investopedia.com/terms/m/marketindex.asp). But although you've certainly heard reports about the Dow Jones Industrial Average (DJIA) being up or down a certain number of points, do you know what these points represent? Read on to find out how the Dow works and what changes in the index means for investors and the stock market.
### Key Takeaways
* The Dow Jones Industrial Average (DJIA) is a stock index of 30 blue-chip industrial and financial companies in the United States.
* The index is used by the media as a barometer of the broader stock market and the economy as a whole.
* The Dow's scope is more limited than the broader S&P 500 because it is composed of only 30 out of thousands of stocks.
* The index is price-weighted and does not account for changes in market capitalization as is the case with other popular indices.
* Since it is price-weighted, the index is calculated using a divisor to normalize the index components.
## The Dow Jones and the Broader Market
In the United States, there are three major indicators, or indexes, of market movements: the Nasdaq Composite, the DJIA or "the Dow", and the Standard & Poor's 500 (S&P 500).
Collectively, [these market indexes](https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp) are referred to as the [Security Market Indicator Series](https://www.investopedia.com/terms/s/security-market-indicator-series-smis.asp) (SMIS). They provide a basic signal of how specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed. It is also the easiest to calculate and explain.
The table below alphabetically lists the companies included in the DJIA as of March 2021:
| Dow Jones Industrial Average Components | | |
| --- | --- | --- |
| Company | Symbol | Year Added |
| 3M | MMM | 1976 |
| American Express | AXP | 1982 |
| Amgen | AMGN | 2020 |
| Apple Inc. | AAPL | 2015 |
| Boeing | BA | 1987 |
| Caterpillar | CAT | 1991 |
| Chevron | CVX | 2008 |
| Cisco Systems | CSCO | 2009 |
| The Coca-Cola Company | KO | 1987 |
| Dow Inc. | DOW | 2019 |
| Goldman Sachs | GS | 2013 |
| The Home Depot | HD | 1999 |
| Honeywell | HON | 2020 |
| IBM | IBM | 1979 |
| Intel | INTC | 1999 |
| Johnson & Johnson | JNJ | 1997 |
| JPMorgan Chase | JPM | 1991 |
| McDonald's | MCD | 1985 |
| Merck & Co. | MRK | 1979 |
| Microsoft | MSFT | 1999 |
| NIKE | NKE | 2013 |
| Proctor & Gamble | PG | 1932 |
| Salesforce | CRM | 2020 |
| The Travelers Companies | TRV | 2009 |
| UnitedHealth Group | UNH | 2012 |
| Verizon | VZ | 2004 |
| Visa | V | 2013 |
| Walmart | WMT | 1997 |
| Walgreens Boots Alliance | WBA | 2018 |
| The Walt Disney Company | DIS | 1991 |
30 DJIA companies as of March 2021
## History of the DJIA
Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser. Despite popular belief, its original indexes were not published in *The Wall Street Journal* but in its precursor, the *Customer's Afternoon Letter*. The first industrial averages didn't even include any industrial stocks. The focus was on the growth stocks of the time, mainly transportation companies. This means that the first Dow Jones Index included nine railroad stocks, a steamship line, and a communications company.
This average eventually evolved into the [Transportation Average](https://www.investopedia.com/terms/d/djta.asp). It wasn't until May 26, 1896, that Dow split transportation and industrials into two different averages, creating what we know now as the Dow Jones Industrial Average.
Charles Dow had the vision to create a benchmark that would project general market conditions and thus help investors bewildered by fractional dollar changes. It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11—the number of stocks included in the index.
Today, the [DJIA is a benchmark that tracks American stocks](https://www.investopedia.com/articles/financial-theory/10/introduction-to-the-dow.asp) that are considered to be the leaders of the economy and are on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of *The Wall Street Journal*.
Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, none of the initial companies included in the average remain. General Electric holds the longest tenure of 110 years.
### 12
The number of companies in the original Dow Jones Industrial Average. The 12 included American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal, Iron and Railroad, U.S. Leather, and U.S. Rubber.
## DJIA Complications
As you might have guessed, calculating the DJIA today isn't as simple as adding up the stocks and dividing by 30. Dow lived at a time when [stock splits and stock dividends](https://www.investopedia.com/ask/answers/what-stock-split-why-do-stocks-split/) weren't commonplace, so he didn't foresee how these corporate actions would affect the average.
For example, if a company trading at $100 implements a two-for-one split, the number of its shares doubles, and the price of each share becomes $50. This change in price brings down the average even though there is no fundamental change in the stock. To absorb the effects of price changes from splits, those calculating the DJIA developed the Dow divisor, a number adjusted to account for events like splits and used as the divisor in the calculation of the average.
###
General Electric held its spot in the Dow for more than 110 continuous years until June 19, 2018, when the maker of light bulbs and jet engines was removed from the index and replaced by Walgreens Boots Alliance.
## How Does the Dow Divisor Work?
To calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the [Dow divisor, which is constantly modified](https://www.investopedia.com/ask/answers/what-are-points-on-the-dow/). To demonstrate how this use of the divisor works, we will create an index, the Investopedia Mock Average (IMA). The IMA is composed of 10 stocks, which total $1,000 when their stock prices are added together. The IMA quoted in the media is, therefore, 100 ($1,000 ÷ 10). Note that the divisor in our example is 10.
Now, let's say that one of the stocks in the IMA average trades at $100 but undergoes a two-for-one split, reducing its stock price to $50. If our divisor remains unchanged, the calculation for the average would give us 95 ($950 ÷ 10). This would not be accurate because the stock split merely changed the price, not the value of the company.
To compensate for the effects of the split, we have to adjust the divisor downward to 9.5. This way, the index remains at 100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average. If you are interested in finding the current Dow divisor, you can find it on the website of the Dow Jones Indexes and the Chicago Board of Trade.
## The DJIA as a Dollar Value
To figure out how a change in any particular stock affects the index, divide the stock's price change by the current divisor. For example, if Walmart ([WMT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wmt)) is up $5, divide five by the current divisor (0.147), which equals 34.01. Thus, if the DJIA was up 100 points on the day, Walmart was responsible for 34.42 points of the movement.
## Weighing the Index
The DJIA's methodology of calculating an index is known as the price-weighted method. Companies are ranked based on their share prices. On top of having to deal with stock splits, the downside to this method is that it does not reflect the fact that a $1 change for a $10 stock is much more significant (percentage-wise) than a $1 change for a $100 stock.
Because of the problems associated with price weighting, most other major indexes, such as the S&P 500, are weighted according to market capitalization; that is, companies are ranked by the number of outstanding [shares](https://www.investopedia.com/ask/answers/100214/can-you-buy-shares-dow-jones-industrial-average-djia.asp) they have, multiplied by the value per share.
## The Downside of the Dow
That is only one drawback of the DJIA. Another reflects the fact that today, the stock market is much more geographically dispersed and fragmented by company size and industry.
During the early 1900s, the Industrial Revolution spurred the creation of large industrial-type companies, many of which were located in the United States and were representative of the overall economy. But with technological advances and the advent of the world wide web, companies proliferated. The creation of, or the increase in, the number of economically meaningful industries with companies located anywhere in the world, has shaped a market that is almost completely interconnected and interdependent.
Because of the fragmented, global nature of today’s market, many feel the Dow is not an appropriate [indicator of the overall economy](https://www.investopedia.com/ask/answers/050115/what-does-dow-jones-industrial-average-measure.asp).
## The Dow and the Economy
Despite its limitations, the Dow still serves three important functions in today’s marketplace:
1. The long history of the Dow serves as a reminder of and comparison for today’s market as compared to early markets. Trend analysis is always important when trying to forecast the future, and the longevity of the Dow serves this purpose better than all other indices.
2. While the Dow tracks only 30 large American companies, these companies are inclusive of all industries except [utilities](https://www.investopedia.com/terms/u/utilities_sector.asp) and transportation, creating a broad overview of the economy. In general, the stock market is a leading indicator, and the trend of the Dow could be construed as representing the trend of the economy over the next year. It may not have predictive power in ascertaining the level of economic activity but should have directional predictability.
3. The Dow garners an unmistakable and perhaps unwarranted amount of attention from the media. Reporting on how the Dow fared on a particular day is pervasive, and it is used as a proxy for the state of the economy. So even though the Dow is not fully representative of a global, technology-driven market, its psychological connection with the state of the economy is profound.
## The Bottom Line
After 137 years as a marker of major market developments, the DJIA is still one of the most recognized and cited of all market indexes. The index may not represent the new market opportunities and early-stage fast-growing companies. Also, it may not be indicative of the overall economic strength of the U.S. economy given most of the companies in the index procure a high percentage of revenue outside the United States. However, it does provide some valuable insights. Despite all its shortcomings, the Dow is still one of the most-watched indicators of stock market performance and the state of the U.S. economy.
|
The daily news just wouldn't be complete without a report about the open and close of this market index. But although you've certainly heard reports about the Dow Jones Industrial Average (DJIA) being up or down a certain number of points, do you know what these points represent? Read on to find out how the Dow works and what changes in the index means for investors and the stock market.
Key Takeaways
The Dow Jones Industrial Average (DJIA) is a stock index of 30 blue-chip industrial and financial companies in the United States.The index is used by the media as a barometer of the broader stock market and the economy as a whole.The Dow's scope is more limited than the broader S&P 500 because it is composed of only 30 out of thousands of stocks.The index is price-weighted and does not account for changes in market capitalization as is the case with other popular indices.Since it is price-weighted, the index is calculated using a divisor to normalize the index components.
The Dow Jones and the Broader Market
In the United States, there are three major indicators, or indexes, of market movements: the Nasdaq Composite, the DJIA or "the Dow", and the Standard & Poor's 500 (S&P 500).
Collectively, these market indexes are referred to as the Security Market Indicator Series (SMIS). They provide a basic signal of how specific markets perform during the day. Of these three, the DJIA is the most widely publicized and discussed. It is also the easiest to calculate and explain.
The table below alphabetically lists the companies included in the DJIA as of March 2021:
Dow Jones Industrial Average Components
Company
Symbol
Year Added
3M
MMM
1976
American Express
AXP
1982
Amgen
AMGN
2020
Apple Inc.
AAPL
2015
Boeing
BA
1987
Caterpillar
CAT
1991
Chevron
CVX
2008
Cisco Systems
CSCO
2009
The Coca-Cola Company
KO
1987
Dow Inc.
DOW
2019
Goldman Sachs
GS
2013
The Home Depot
HD
1999
Honeywell
HON
2020
IBM
IBM
1979
Intel
INTC
1999
Johnson & Johnson
JNJ
1997
JPMorgan Chase
JPM
1991
McDonald's
MCD
1985
Merck & Co.
MRK
1979
Microsoft
MSFT
1999
NIKE
NKE
2013
Proctor & Gamble
PG
1932
Salesforce
CRM
2020
The Travelers Companies
TRV
2009
UnitedHealth Group
UNH
2012
Verizon
VZ
2004
Visa
V
2013
Walmart
WMT
1997
Walgreens Boots Alliance
WBA
2018
The Walt Disney Company
DIS
1991
30 DJIA companies as of March 2021
History of the DJIA
Dow Jones & Co. was founded in 1882 by Charles Dow, Edward Jones, and Charles Bergstresser. Despite popular belief, its original indexes were not published in The Wall Street Journal but in its precursor, the Customer's Afternoon Letter. The first industrial averages didn't even include any industrial stocks. The focus was on the growth stocks of the time, mainly transportation companies. This means that the first Dow Jones Index included nine railroad stocks, a steamship line, and a communications company.
This average eventually evolved into the Transportation Average. It wasn't until May 26, 1896, that Dow split transportation and industrials into two different averages, creating what we know now as the Dow Jones Industrial Average.
Charles Dow had the vision to create a benchmark that would project general market conditions and thus help investors bewildered by fractional dollar changes. It was a revolutionary idea at the time, but its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by 11—the number of stocks included in the index.
Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy and are on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of The Wall Street Journal.
Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, none of the initial companies included in the average remain. General Electric holds the longest tenure of 110 years.
12
The number of companies in the original Dow Jones Industrial Average. The 12 included American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal, Iron and Railroad, U.S. Leather, and U.S. Rubber.
DJIA Complications
As you might have guessed, calculating the DJIA today isn't as simple as adding up the stocks and dividing by 30. Dow lived at a time when stock splits and stock dividends weren't commonplace, so he didn't foresee how these corporate actions would affect the average.
For example, if a company trading at $100 implements a two-for-one split, the number of its shares doubles, and the price of each share becomes $50. This change in price brings down the average even though there is no fundamental change in the stock. To absorb the effects of price changes from splits, those calculating the DJIA developed the Dow divisor, a number adjusted to account for events like splits and used as the divisor in the calculation of the average.
General Electric held its spot in the Dow for more than 110 continuous years until June 19, 2018, when the maker of light bulbs and jet engines was removed from the index and replaced by Walgreens Boots Alliance.
How Does the Dow Divisor Work?
To calculate the DJIA, the current prices of the 30 stocks that make up the index are added and then divided by the Dow divisor, which is constantly modified. To demonstrate how this use of the divisor works, we will create an index, the Investopedia Mock Average (IMA). The IMA is composed of 10 stocks, which total $1,000 when their stock prices are added together. The IMA quoted in the media is, therefore, 100 ($1,000 ÷ 10). Note that the divisor in our example is 10.
Now, let's say that one of the stocks in the IMA average trades at $100 but undergoes a two-for-one split, reducing its stock price to $50. If our divisor remains unchanged, the calculation for the average would give us 95 ($950 ÷ 10). This would not be accurate because the stock split merely changed the price, not the value of the company.
To compensate for the effects of the split, we have to adjust the divisor downward to 9.5. This way, the index remains at 100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average. If you are interested in finding the current Dow divisor, you can find it on the website of the Dow Jones Indexes and the Chicago Board of Trade.
The DJIA as a Dollar Value
To figure out how a change in any particular stock affects the index, divide the stock's price change by the current divisor. For example, if Walmart (WMT) is up $5, divide five by the current divisor (0.147), which equals 34.01. Thus, if the DJIA was up 100 points on the day, Walmart was responsible for 34.42 points of the movement.
Weighing the Index
The DJIA's methodology of calculating an index is known as the price-weighted method. Companies are ranked based on their share prices. On top of having to deal with stock splits, the downside to this method is that it does not reflect the fact that a $1 change for a $10 stock is much more significant (percentage-wise) than a $1 change for a $100 stock.
Because of the problems associated with price weighting, most other major indexes, such as the S&P 500, are weighted according to market capitalization; that is, companies are ranked by the number of outstanding shares they have, multiplied by the value per share.
The Downside of the Dow
That is only one drawback of the DJIA. Another reflects the fact that today, the stock market is much more geographically dispersed and fragmented by company size and industry.
During the early 1900s, the Industrial Revolution spurred the creation of large industrial-type companies, many of which were located in the United States and were representative of the overall economy. But with technological advances and the advent of the world wide web, companies proliferated. The creation of, or the increase in, the number of economically meaningful industries with companies located anywhere in the world, has shaped a market that is almost completely interconnected and interdependent.
Because of the fragmented, global nature of today’s market, many feel the Dow is not an appropriate indicator of the overall economy.
The Dow and the Economy
Despite its limitations, the Dow still serves three important functions in today’s marketplace:
The long history of the Dow serves as a reminder of and comparison for today’s market as compared to early markets. Trend analysis is always important when trying to forecast the future, and the longevity of the Dow serves this purpose better than all other indices.
While the Dow tracks only 30 large American companies, these companies are inclusive of all industries except utilities and transportation, creating a broad overview of the economy. In general, the stock market is a leading indicator, and the trend of the Dow could be construed as representing the trend of the economy over the next year. It may not have predictive power in ascertaining the level of economic activity but should have directional predictability.
The Dow garners an unmistakable and perhaps unwarranted amount of attention from the media. Reporting on how the Dow fared on a particular day is pervasive, and it is used as a proxy for the state of the economy. So even though the Dow is not fully representative of a global, technology-driven market, its psychological connection with the state of the economy is profound.
The Bottom Line
After 137 years as a marker of major market developments, the DJIA is still one of the most recognized and cited of all market indexes. The index may not represent the new market opportunities and early-stage fast-growing companies. Also, it may not be indicative of the overall economic strength of the U.S. economy given most of the companies in the index procure a high percentage of revenue outside the United States. However, it does provide some valuable insights. Despite all its shortcomings, the Dow is still one of the most-watched indicators of stock market performance and the state of the U.S. economy.
|
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https://www.investopedia.com/articles/04/071304.asp
|
Getting to Know the Money 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Chances are you've heard the term before, but what exactly is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money market</a>? It is the organized exchange on which participants can lend and borrow large sums of money for a period of one year or less. While it is an extremely efficient arena for businesses, governments, banks, and other large institutions to transact funds, the money market also provides an important service to individuals who want to invest smaller amounts while enjoying the best <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> and safety found anywhere.
</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>The money market is the organized exchange where participants lend and borrow large sums of money for one year or less.</li><li>Investors are drawn to short-term money market instruments because of superior safety and liquidity. </li><li>Short-term investment pools include money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments.</li><li>Money market mutual funds are the most accessible to individuals.</li><li>Treasury bills are regularly issued by the U.S. Treasury to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits. </li></ul></div></div></div>
<span class="heading-toc" id="toc-purposes-of-the-money-market"></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"> Purposes of the Money Market </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Individuals invest in the money market for much the same reason that a business or government lends or borrows funds in the money market: Sometimes having funds does not coincide with the need for them.
</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 example, if you find you have a certain sum of money that you do not immediately need, you may choose to invest those funds temporarily until you need them to make some longer-term <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment.asp">investments</a> or a purchase. If you decide to hold these funds in cash, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/opportunitycost.asp">opportunity cost</a> you incur is the interest you could have received by investing your funds.
</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 major attributes that draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, although they are most often three months or less.
</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"> Because these investments are associated with massive and actively traded <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondarymarket.asp">secondary markets</a>, you can almost always sell them prior to maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity.
</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 secondary money market has no centralized location. The closest thing the money market has to a physical presence is an arbitrary association with the city of New York, even though the money market is accessible from anywhere by telephone or internet. Most individual investors participate in the money market with the assistance—and experience—of their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisor</a>, accountant, or banking institution.
</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-types-of-money-market-instruments"></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"> Types of Money Market Instruments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A large number of financial instruments have been created for the purposes of short-term lending and borrowing. Many of these money market instruments are quite specialized, and they are typically traded only by those with intimate knowledge of the money market, such as banks and large financial institutions.
</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"> Some examples of these specialized instruments are federal funds, the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountwindow.asp">discount window</a>, negotiable certificates of deposit (NCDs), eurodollar time deposits, repurchase agreements, government-sponsored enterprise securities, shares in money market instruments, futures contracts, futures options, and swaps.
</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"> Aside from these specialized instruments on the money market are the investment vehicles with which individual investors will be more familiar, such as short-term investment pools (STIPs) and money market mutual funds, Treasury bills, short-term municipal securities, <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialpaper.asp">commercial paper</a>, and bankers' acceptances.
</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-short-term-investment-pools-stips"></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"> Short-Term Investment Pools (STIPs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Short-term investment pools (STIPs) include money market mutual funds, local government investment pools, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stif.asp">short-term investment funds</a> of bank trust departments. All STIPs are sold as shares in very large pools of money market instruments, which may include any or all of the money market instruments mentioned above.
</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"> In other words, STIPs are a convenient means of cumulating various money market products into one product, just as an equity or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-incomesecurity.asp">fixed income</a> mutual fund brings together a variety of stocks, bonds, and so forth.
</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"> STIPs make specialized money market instruments accessible to individual investors without requiring intimate knowledge of the various instruments contained within the pool. STIPs also alleviate the large minimum investment amounts required to purchase most money market instruments, which generally equal or exceed $100,000.
</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"> Of the three main types of STIPs, money market mutual funds are the most accessible to individuals. These funds are offered by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-company.asp">brokerage companies</a> and mutual fund firms, which sell shares in these funds to their individual, corporate and institutional investors. Short-term investment funds are operated by bank trust departments for their various trust accounts.
</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"> Local government investment pools are established by state governments on behalf of their local governments, allowing investors to purchase shares of local government investment funds.
</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"> Money Market Mutual Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Money market mutual funds are further divided into two categories—taxable funds and tax-exempt funds. Taxable funds place investments in securities such as Treasury bills and commercial papers that pay interest income subject to federal taxation once it is paid to the fund purchaser.
</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"> Tax-exempt funds invest in securities issued by state and local governments that are exempt from federal taxation. These two categories of money market mutual funds provide different patterns of growth, each of which attracts different types of investors.
</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-treasury-bills"></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"> Treasury Bills </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Treasury bills—commonly known as T-bills—are short-term securities issued by the U.S. Treasury on a regular basis to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits.<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_41-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Due to their short-term maturities, T-bills have the largest trading volume and liquidity, with nearly $300 billion of notional value issued by the Fed as of October 2022.<span class="ql-inline-citation" data-cite="12"></span> In addition to scheduling regular sales of T-Bills, the Treasury also sells instruments called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cmb.asp">cash management bills</a> on an irregular basis, by reopening the sales of bills that mature on the same date as an outstanding issue of bills.
</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"> When T-bills were initially conceived, they were given three-month maturities exclusively. Bills with six-month and one-year maturities were subsequently added.<span class="ql-inline-citation" data-cite="4"></span> Three-month and six-month bills sell in the regular weekly auctions, and another <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bill-auction.asp">bill auction</a> takes place every four weeks for the sale of one-year bills.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> T-bills are sold through the commercial book-entry system to large investors and institutions, which then distribute those bills to their own clients, which may include individual investors. An alternative is Treasury Direct, which is run as a non-competitive holding system designed for small investors who plan to hold their securities until maturity.
</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"> Individual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bidder.asp">bidders</a> on Treasury Direct have their ownership recorded directly in book-entry accounts at the Department of the Treasury. If an investor purchases T-bills through the Treasury Direct system and wishes to sell them prior to maturity, they must transfer them to the commercial book-entry system.<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_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The transfer can be arranged only through a depository institution that holds an account at a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve Bank</a>—the person making the transfer is required to pay applicable transfer fees.<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>
<span class="heading-toc" id="toc-money-market-accounts"></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"> Money Market Accounts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> We can't write about the money market without devoting a little time to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarketaccount.asp">money market accounts</a>. These are deposit accounts, just like checking and traditional savings accounts that are insured by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corporation (FDIC)</a>, and are different from money market funds.<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_54-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> They may give the account holder some checking account-like privileges, such as the ability to write checks and/or debit card transactions. But they act like a savings account with a minimum balance requirement and certain restrictions.
</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"> As part of Regulation D, the federal government restricted the number of debit transactions for this kind of account to six per month—anything above that incurred a fee. During 2020, amid the pandemic, the restriction was lifted, with no date set for putting the limit back in place. However, some banks may still limit the number of monthly withdrawals.<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_58-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Account-holders of money market accounts also earn interest. Because many accounts have a minimum balance requirement, the return is usually higher than a normal savings account. Money market accounts are generally safe, low-risk investments. Institutions offer higher interest rates because they use the funds in money market accounts to invest in short-term assets with short-term maturities, as noted above.
</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-why-is-it-called-the-money-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is It Called the Money Market?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The money market refers to its ability to exchange money on very short notices. The investments in this market are considered cash equivalents and very liquid. <br/><br/></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-can-money-market-accounts-lose-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Money Market Accounts Lose Money?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, money market accounts can lose money. Notably, commercial paper, which includes foreign currency certificates of deposit (CDs) and corporate debt.<br/></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-there-downsides-to-money-market-accounts"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Downsides to Money Market Accounts?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, there are some downsides to investing in money market accounts, including the fact that certain money market investments are not covered by Federal Deposit Insurance Corporation (FDIC) insurance.<span class="ql-inline-citation" data-cite="11"></span> As well, the other downsides include the lower returns compared to other investments.</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"> When an individual investor builds a portfolio of financial instruments and securities, they typically allocate a certain percentage of funds towards the safest and most liquid vehicle available: Cash. This cash component may sit in their investment account in purely liquid funds, just as it would if deposited into a bank savings or checking account. However, investors are much better off placing the cash component of their portfolios into the money market, which offers interest income while still retaining the safety and liquidity of cash.
</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"> Many money market instruments are available to investors, most simply through well-diversified money market mutual funds. Should investors be willing to go it alone, there are other money market investment opportunities, most notably in purchasing T-bills through Treasury Direct.
</p></div>
|
Chances are you've heard the term before, but what exactly is the [money market](https://www.investopedia.com/terms/m/moneymarket.asp)? It is the organized exchange on which participants can lend and borrow large sums of money for a period of one year or less. While it is an extremely efficient arena for businesses, governments, banks, and other large institutions to transact funds, the money market also provides an important service to individuals who want to invest smaller amounts while enjoying the best [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) and safety found anywhere.
### Key Takeaways
* The money market is the organized exchange where participants lend and borrow large sums of money for one year or less.
* Investors are drawn to short-term money market instruments because of superior safety and liquidity.
* Short-term investment pools include money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments.
* Money market mutual funds are the most accessible to individuals.
* Treasury bills are regularly issued by the U.S. Treasury to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits.
## Purposes of the Money Market
Individuals invest in the money market for much the same reason that a business or government lends or borrows funds in the money market: Sometimes having funds does not coincide with the need for them.
For example, if you find you have a certain sum of money that you do not immediately need, you may choose to invest those funds temporarily until you need them to make some longer-term [investments](https://www.investopedia.com/terms/i/investment.asp) or a purchase. If you decide to hold these funds in cash, the [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) you incur is the interest you could have received by investing your funds.
The major attributes that draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, although they are most often three months or less.
Because these investments are associated with massive and actively traded [secondary markets](https://www.investopedia.com/terms/s/secondarymarket.asp), you can almost always sell them prior to maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity.
The secondary money market has no centralized location. The closest thing the money market has to a physical presence is an arbitrary association with the city of New York, even though the money market is accessible from anywhere by telephone or internet. Most individual investors participate in the money market with the assistance—and experience—of their [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp), accountant, or banking institution.
## Types of Money Market Instruments
A large number of financial instruments have been created for the purposes of short-term lending and borrowing. Many of these money market instruments are quite specialized, and they are typically traded only by those with intimate knowledge of the money market, such as banks and large financial institutions.
Some examples of these specialized instruments are federal funds, the [discount window](https://www.investopedia.com/terms/d/discountwindow.asp), negotiable certificates of deposit (NCDs), eurodollar time deposits, repurchase agreements, government-sponsored enterprise securities, shares in money market instruments, futures contracts, futures options, and swaps.
Aside from these specialized instruments on the money market are the investment vehicles with which individual investors will be more familiar, such as short-term investment pools (STIPs) and money market mutual funds, Treasury bills, short-term municipal securities, [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp), and bankers' acceptances.
## Short-Term Investment Pools (STIPs)
Short-term investment pools (STIPs) include money market mutual funds, local government investment pools, and [short-term investment funds](https://www.investopedia.com/terms/s/stif.asp) of bank trust departments. All STIPs are sold as shares in very large pools of money market instruments, which may include any or all of the money market instruments mentioned above.
In other words, STIPs are a convenient means of cumulating various money market products into one product, just as an equity or [fixed income](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp) mutual fund brings together a variety of stocks, bonds, and so forth.
STIPs make specialized money market instruments accessible to individual investors without requiring intimate knowledge of the various instruments contained within the pool. STIPs also alleviate the large minimum investment amounts required to purchase most money market instruments, which generally equal or exceed $100,000.
Of the three main types of STIPs, money market mutual funds are the most accessible to individuals. These funds are offered by [brokerage companies](https://www.investopedia.com/terms/b/brokerage-company.asp) and mutual fund firms, which sell shares in these funds to their individual, corporate and institutional investors. Short-term investment funds are operated by bank trust departments for their various trust accounts.
Local government investment pools are established by state governments on behalf of their local governments, allowing investors to purchase shares of local government investment funds.
### Money Market Mutual Funds
Money market mutual funds are further divided into two categories—taxable funds and tax-exempt funds. Taxable funds place investments in securities such as Treasury bills and commercial papers that pay interest income subject to federal taxation once it is paid to the fund purchaser.
Tax-exempt funds invest in securities issued by state and local governments that are exempt from federal taxation. These two categories of money market mutual funds provide different patterns of growth, each of which attracts different types of investors.
## Treasury Bills
Treasury bills—commonly known as T-bills—are short-term securities issued by the U.S. Treasury on a regular basis to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits.
Due to their short-term maturities, T-bills have the largest trading volume and liquidity, with nearly $300 billion of notional value issued by the Fed as of October 2022. In addition to scheduling regular sales of T-Bills, the Treasury also sells instruments called [cash management bills](https://www.investopedia.com/terms/c/cmb.asp) on an irregular basis, by reopening the sales of bills that mature on the same date as an outstanding issue of bills.
When T-bills were initially conceived, they were given three-month maturities exclusively. Bills with six-month and one-year maturities were subsequently added. Three-month and six-month bills sell in the regular weekly auctions, and another [bill auction](https://www.investopedia.com/terms/b/bill-auction.asp) takes place every four weeks for the sale of one-year bills.
T-bills are sold through the commercial book-entry system to large investors and institutions, which then distribute those bills to their own clients, which may include individual investors. An alternative is Treasury Direct, which is run as a non-competitive holding system designed for small investors who plan to hold their securities until maturity.
Individual [bidders](https://www.investopedia.com/terms/b/bidder.asp) on Treasury Direct have their ownership recorded directly in book-entry accounts at the Department of the Treasury. If an investor purchases T-bills through the Treasury Direct system and wishes to sell them prior to maturity, they must transfer them to the commercial book-entry system.
The transfer can be arranged only through a depository institution that holds an account at a [Federal Reserve Bank](https://www.investopedia.com/terms/f/federalreservebank.asp)—the person making the transfer is required to pay applicable transfer fees.
## Money Market Accounts
We can't write about the money market without devoting a little time to [money market accounts](https://www.investopedia.com/terms/m/moneymarketaccount.asp). These are deposit accounts, just like checking and traditional savings accounts that are insured by the [Federal Deposit Insurance Corporation (FDIC)](https://www.investopedia.com/terms/f/fdic.asp), and are different from money market funds.
They may give the account holder some checking account-like privileges, such as the ability to write checks and/or debit card transactions. But they act like a savings account with a minimum balance requirement and certain restrictions.
As part of Regulation D, the federal government restricted the number of debit transactions for this kind of account to six per month—anything above that incurred a fee. During 2020, amid the pandemic, the restriction was lifted, with no date set for putting the limit back in place. However, some banks may still limit the number of monthly withdrawals.
Account-holders of money market accounts also earn interest. Because many accounts have a minimum balance requirement, the return is usually higher than a normal savings account. Money market accounts are generally safe, low-risk investments. Institutions offer higher interest rates because they use the funds in money market accounts to invest in short-term assets with short-term maturities, as noted above.
## Why Is It Called the Money Market?
The money market refers to its ability to exchange money on very short notices. The investments in this market are considered cash equivalents and very liquid.
## Can Money Market Accounts Lose Money?
Yes, money market accounts can lose money. Notably, commercial paper, which includes foreign currency certificates of deposit (CDs) and corporate debt.
## Are There Downsides to Money Market Accounts?
Yes, there are some downsides to investing in money market accounts, including the fact that certain money market investments are not covered by Federal Deposit Insurance Corporation (FDIC) insurance. As well, the other downsides include the lower returns compared to other investments.
## The Bottom Line
When an individual investor builds a portfolio of financial instruments and securities, they typically allocate a certain percentage of funds towards the safest and most liquid vehicle available: Cash. This cash component may sit in their investment account in purely liquid funds, just as it would if deposited into a bank savings or checking account. However, investors are much better off placing the cash component of their portfolios into the money market, which offers interest income while still retaining the safety and liquidity of cash.
Many money market instruments are available to investors, most simply through well-diversified money market mutual funds. Should investors be willing to go it alone, there are other money market investment opportunities, most notably in purchasing T-bills through Treasury Direct.
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Chances are you've heard the term before, but what exactly is the money market? It is the organized exchange on which participants can lend and borrow large sums of money for a period of one year or less. While it is an extremely efficient arena for businesses, governments, banks, and other large institutions to transact funds, the money market also provides an important service to individuals who want to invest smaller amounts while enjoying the best liquidity and safety found anywhere.
Key Takeaways
The money market is the organized exchange where participants lend and borrow large sums of money for one year or less.Investors are drawn to short-term money market instruments because of superior safety and liquidity. Short-term investment pools include money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments.Money market mutual funds are the most accessible to individuals.Treasury bills are regularly issued by the U.S. Treasury to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits.
Purposes of the Money Market
Individuals invest in the money market for much the same reason that a business or government lends or borrows funds in the money market: Sometimes having funds does not coincide with the need for them.
For example, if you find you have a certain sum of money that you do not immediately need, you may choose to invest those funds temporarily until you need them to make some longer-term investments or a purchase. If you decide to hold these funds in cash, the opportunity cost you incur is the interest you could have received by investing your funds.
The major attributes that draw an investor to short-term money market instruments are superior safety and liquidity. Money market instruments have maturities that range from one day to one year, although they are most often three months or less.
Because these investments are associated with massive and actively traded secondary markets, you can almost always sell them prior to maturity, albeit at the price of forgoing the interest you would have gained by holding them until maturity.
The secondary money market has no centralized location. The closest thing the money market has to a physical presence is an arbitrary association with the city of New York, even though the money market is accessible from anywhere by telephone or internet. Most individual investors participate in the money market with the assistance—and experience—of their financial advisor, accountant, or banking institution.
Types of Money Market Instruments
A large number of financial instruments have been created for the purposes of short-term lending and borrowing. Many of these money market instruments are quite specialized, and they are typically traded only by those with intimate knowledge of the money market, such as banks and large financial institutions.
Some examples of these specialized instruments are federal funds, the discount window, negotiable certificates of deposit (NCDs), eurodollar time deposits, repurchase agreements, government-sponsored enterprise securities, shares in money market instruments, futures contracts, futures options, and swaps.
Aside from these specialized instruments on the money market are the investment vehicles with which individual investors will be more familiar, such as short-term investment pools (STIPs) and money market mutual funds, Treasury bills, short-term municipal securities, commercial paper, and bankers' acceptances.
Short-Term Investment Pools (STIPs)
Short-term investment pools (STIPs) include money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments. All STIPs are sold as shares in very large pools of money market instruments, which may include any or all of the money market instruments mentioned above.
In other words, STIPs are a convenient means of cumulating various money market products into one product, just as an equity or fixed income mutual fund brings together a variety of stocks, bonds, and so forth.
STIPs make specialized money market instruments accessible to individual investors without requiring intimate knowledge of the various instruments contained within the pool. STIPs also alleviate the large minimum investment amounts required to purchase most money market instruments, which generally equal or exceed $100,000.
Of the three main types of STIPs, money market mutual funds are the most accessible to individuals. These funds are offered by brokerage companies and mutual fund firms, which sell shares in these funds to their individual, corporate and institutional investors. Short-term investment funds are operated by bank trust departments for their various trust accounts.
Local government investment pools are established by state governments on behalf of their local governments, allowing investors to purchase shares of local government investment funds.
Money Market Mutual Funds
Money market mutual funds are further divided into two categories—taxable funds and tax-exempt funds. Taxable funds place investments in securities such as Treasury bills and commercial papers that pay interest income subject to federal taxation once it is paid to the fund purchaser.
Tax-exempt funds invest in securities issued by state and local governments that are exempt from federal taxation. These two categories of money market mutual funds provide different patterns of growth, each of which attracts different types of investors.
Treasury Bills
Treasury bills—commonly known as T-bills—are short-term securities issued by the U.S. Treasury on a regular basis to refinance earlier T-bill issues reaching maturity and to help finance federal government deficits.
Due to their short-term maturities, T-bills have the largest trading volume and liquidity, with nearly $300 billion of notional value issued by the Fed as of October 2022. In addition to scheduling regular sales of T-Bills, the Treasury also sells instruments called cash management bills on an irregular basis, by reopening the sales of bills that mature on the same date as an outstanding issue of bills.
When T-bills were initially conceived, they were given three-month maturities exclusively. Bills with six-month and one-year maturities were subsequently added. Three-month and six-month bills sell in the regular weekly auctions, and another bill auction takes place every four weeks for the sale of one-year bills.
T-bills are sold through the commercial book-entry system to large investors and institutions, which then distribute those bills to their own clients, which may include individual investors. An alternative is Treasury Direct, which is run as a non-competitive holding system designed for small investors who plan to hold their securities until maturity.
Individual bidders on Treasury Direct have their ownership recorded directly in book-entry accounts at the Department of the Treasury. If an investor purchases T-bills through the Treasury Direct system and wishes to sell them prior to maturity, they must transfer them to the commercial book-entry system.
The transfer can be arranged only through a depository institution that holds an account at a Federal Reserve Bank—the person making the transfer is required to pay applicable transfer fees.
Money Market Accounts
We can't write about the money market without devoting a little time to money market accounts. These are deposit accounts, just like checking and traditional savings accounts that are insured by the Federal Deposit Insurance Corporation (FDIC), and are different from money market funds.
They may give the account holder some checking account-like privileges, such as the ability to write checks and/or debit card transactions. But they act like a savings account with a minimum balance requirement and certain restrictions.
As part of Regulation D, the federal government restricted the number of debit transactions for this kind of account to six per month—anything above that incurred a fee. During 2020, amid the pandemic, the restriction was lifted, with no date set for putting the limit back in place. However, some banks may still limit the number of monthly withdrawals.
Account-holders of money market accounts also earn interest. Because many accounts have a minimum balance requirement, the return is usually higher than a normal savings account. Money market accounts are generally safe, low-risk investments. Institutions offer higher interest rates because they use the funds in money market accounts to invest in short-term assets with short-term maturities, as noted above.
Why Is It Called the Money Market?
The money market refers to its ability to exchange money on very short notices. The investments in this market are considered cash equivalents and very liquid.
Can Money Market Accounts Lose Money?
Yes, money market accounts can lose money. Notably, commercial paper, which includes foreign currency certificates of deposit (CDs) and corporate debt.
Are There Downsides to Money Market Accounts?
Yes, there are some downsides to investing in money market accounts, including the fact that certain money market investments are not covered by Federal Deposit Insurance Corporation (FDIC) insurance. As well, the other downsides include the lower returns compared to other investments.
The Bottom Line
When an individual investor builds a portfolio of financial instruments and securities, they typically allocate a certain percentage of funds towards the safest and most liquid vehicle available: Cash. This cash component may sit in their investment account in purely liquid funds, just as it would if deposited into a bank savings or checking account. However, investors are much better off placing the cash component of their portfolios into the money market, which offers interest income while still retaining the safety and liquidity of cash.
Many money market instruments are available to investors, most simply through well-diversified money market mutual funds. Should investors be willing to go it alone, there are other money market investment opportunities, most notably in purchasing T-bills through Treasury Direct.
|
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https://www.investopedia.com/ask/answers/12/what-is-done-when-shares-are-bought-and-sold.asp
|
What Happens When You Buy or Sell 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"> Most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock.asp">stocks</a> are traded on physical or virtual exchanges. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange (NYSE),</a> for example, is a physical exchange where some trades are placed manually on a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trading_floor.asp">trading floor</a>—other trading activity is conducted electronically.<span class="ql-inline-citation" data-cite="1"></span> <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">NASDAQ</a>, on the other hand, is a fully electronic exchange where all trading activity occurs over an extensive computer network, matching investors from around the world with each other in the blink of an eye.<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_2-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">Investors</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trader.asp">traders</a> submit orders to buy and sell shares, either through a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">broker</a> or by using an online platform such as E*Trade.<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_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> A buyer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid.asp">bids</a> to purchase shares at a specified price (or at the best available price), and a seller <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ask.asp">asks</a> to sell the stock at a specified price (or at the best available price). <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-stock-trading-7109934">When a bid and an ask match</a>, a transaction occurs, and both orders will be filled. In a very <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidmarket.asp">liquid market</a>, the orders will be filled almost instantaneously. In a thinly traded market, however, the order may not be filled quickly or at all.
</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-physical-exchange"></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"> Physical Exchange </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> At a physical exchange, such as the NYSE, orders are sent to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/floorbroker.asp">floor broker</a> who, in turn, brings the order to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/specialist.asp">specialist</a> for that particular stock. The specialist facilitates the trading of a given stock and maintains a fair and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/orderlymarket.asp">orderly market</a>.<span class="ql-inline-citation" data-cite="1"></span> If necessary, the specialist will use his or her own inventory to meet the demands of the trade orders.
</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-electronic-exchange"></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"> Electronic Exchange </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> On an electronic exchange, such as NASDAQ, buyers and sellers are matched electronically. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp">Market makers</a> (similar in function to the specialists at the physical exchanges) provide bid and ask prices, facilitate trading in certain security, match buy and sell orders, and use their own inventory of shares, if necessary.
</p></div>
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Most [stocks](https://www.investopedia.com/terms/s/stock.asp) are traded on physical or virtual exchanges. The [New York Stock Exchange (NYSE),](https://www.investopedia.com/terms/n/nyse.asp) for example, is a physical exchange where some trades are placed manually on a [trading floor](https://www.investopedia.com/terms/t/trading_floor.asp)—other trading activity is conducted electronically. [NASDAQ](https://www.investopedia.com/terms/n/nasdaq.asp), on the other hand, is a fully electronic exchange where all trading activity occurs over an extensive computer network, matching investors from around the world with each other in the blink of an eye.
[Investors](https://www.investopedia.com/terms/i/investor.asp) and [traders](https://www.investopedia.com/terms/t/trader.asp) submit orders to buy and sell shares, either through a [broker](https://www.investopedia.com/terms/b/broker.asp) or by using an online platform such as E\*Trade.
A buyer [bids](https://www.investopedia.com/terms/b/bid.asp) to purchase shares at a specified price (or at the best available price), and a seller [asks](https://www.investopedia.com/terms/a/ask.asp) to sell the stock at a specified price (or at the best available price). [When a bid and an ask match](https://www.investopedia.com/what-is-stock-trading-7109934), a transaction occurs, and both orders will be filled. In a very [liquid market](https://www.investopedia.com/terms/l/liquidmarket.asp), the orders will be filled almost instantaneously. In a thinly traded market, however, the order may not be filled quickly or at all.
## Physical Exchange
At a physical exchange, such as the NYSE, orders are sent to a [floor broker](https://www.investopedia.com/terms/f/floorbroker.asp) who, in turn, brings the order to a [specialist](https://www.investopedia.com/terms/s/specialist.asp) for that particular stock. The specialist facilitates the trading of a given stock and maintains a fair and [orderly market](https://www.investopedia.com/terms/o/orderlymarket.asp). If necessary, the specialist will use his or her own inventory to meet the demands of the trade orders.
## Electronic Exchange
On an electronic exchange, such as NASDAQ, buyers and sellers are matched electronically. [Market makers](https://www.investopedia.com/terms/m/marketmaker.asp) (similar in function to the specialists at the physical exchanges) provide bid and ask prices, facilitate trading in certain security, match buy and sell orders, and use their own inventory of shares, if necessary.
|
Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange where some trades are placed manually on a trading floor—other trading activity is conducted electronically. NASDAQ, on the other hand, is a fully electronic exchange where all trading activity occurs over an extensive computer network, matching investors from around the world with each other in the blink of an eye.
Investors and traders submit orders to buy and sell shares, either through a broker or by using an online platform such as E*Trade.
A buyer bids to purchase shares at a specified price (or at the best available price), and a seller asks to sell the stock at a specified price (or at the best available price). When a bid and an ask match, a transaction occurs, and both orders will be filled. In a very liquid market, the orders will be filled almost instantaneously. In a thinly traded market, however, the order may not be filled quickly or at all.
Physical Exchange
At a physical exchange, such as the NYSE, orders are sent to a floor broker who, in turn, brings the order to a specialist for that particular stock. The specialist facilitates the trading of a given stock and maintains a fair and orderly market. If necessary, the specialist will use his or her own inventory to meet the demands of the trade orders.
Electronic Exchange
On an electronic exchange, such as NASDAQ, buyers and sellers are matched electronically. Market makers (similar in function to the specialists at the physical exchanges) provide bid and ask prices, facilitate trading in certain security, match buy and sell orders, and use their own inventory of shares, if necessary.
|
[
[
"stocks",
"https://www.investopedia.com/terms/s/stock.asp"
],
[
"New York Stock Exchange (NYSE),",
"https://www.investopedia.com/terms/n/nyse.asp"
],
[
"trading floor",
"https://www.investopedia.com/terms/t/trading_floor.asp"
],
[
"NASDAQ",
"https://www.investopedia.com/terms/n/nasdaq.asp"
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[
"Investors",
"https://www.investopedia.com/terms/i/investor.asp"
],
[
"traders",
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[
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],
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"asks",
"https://www.investopedia.com/terms/a/ask.asp"
],
[
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"https://www.investopedia.com/what-is-stock-trading-7109934"
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[
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[
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[
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"https://www.investopedia.com/terms/s/specialist.asp"
],
[
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],
[
"Market makers",
"https://www.investopedia.com/terms/m/marketmaker.asp"
]
] |
https://www.investopedia.com/terms/f/financial-innovation.asp
|
Financial Innovation: Definition, Role, Categories, 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-financial-innovation"></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 Financial Innovation? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Financial innovation is the process of creating new financial products, services, or processes. Financial innovation has come via advances in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialinstrument.asp">financial instruments</a>, technology, and payment systems. Digital technology has helped to transform the financial services industry, changing how we save, borrow, invest, and pay for goods.
</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"> While large banks continue to invest in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mobile-banking.asp">mobile banking</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fintech.asp">FinTech</a> companies, like <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/021715/square-vs-stripe.asp">Stripe</a>, help small businesses conduct online payments, and investment broker <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/robinhood-review-4587919">Robinhood</a> seeks to democratize investing and finance. These innovations have increased the number of financial providers available to consumers, borrowers, and businesses.
</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>Financial innovation refers to the process of creating new financial or investment products, services, or processes.</li><li>These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations.</li><li>Recent financial innovations have included crowdfunding, mobile banking technology, and remittance technology.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-financial-innovation"></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 Financial Innovation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Financial innovation is a general term and can be broken down into specific categories based on updates to various spheres of the financial system. While the following is not an exhaustive list, major financial innovations have come in the raising of equity capital, remittances, and mobile banking.
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<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"> Investment Crowdfunding </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-crowdfunding.asp">Investment crowdfunding</a> has begun to open up and make the process of raising equity capital more democratic. While investing in early and growth-stage companies used to be reserved for a privileged few (generally institutional investors), new infrastructure and regulations have allowed individual retail investors to invest in projects they are passionate about and/or have other connections to for a small sum. Individuals receive shares of the new company commensurate with the amount they have invested.
</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"> Two popular platforms for equity crowdfunding are SeedInvest and FundersClub. In addition, micro-lending platforms such as LendingClub and Prosper allow for debt financing similar to crowdfunding. In this asset class, instead of owning part of the company, individuals become creditors and receive regular interest payments until the loan is eventually paid back in full. Also, P2P lending marketplaces enable both people and companies to buy whole or fractional loans.
</p>
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<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"> Remittances </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Remittances are another area that financial innovation is transforming. Remittances are funds that expatriates send back to their country of origin via wire, mail, or online transfer. Given the volume of these transfers worldwide, remittances are economically significant for many countries that receive them.
</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"> In the early 2000s, the World Bank established a database where people could compare the prices of different transfer services. The Gates Foundation subsequently began tracking remittances in 2011. Western Union and Moneygram once monopolized remittances; however, in recent years, startups such as Transferwise and Wave have competed with their lower-cost apps.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Given the onset of Bitcoin, Ethereum, Stablecoins, and Blockchain technology, remittances are becoming more affordable. The lower costs are in line with the Sustainable Development Goals (SDG) of the World Bank to reduce the cost of remittances from 7% to 3% by 2030.<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>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-subheading__text"> Mobile Banking </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Finally, mobile banking has made major innovations for retail customers. Today, many banks like T.D. Bank offer comprehensive apps with options to deposit checks, pay for merchandise, transfer money to a friend, or find an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">ATM</a> instantly. It is still important for customers to establish a secure connection before logging into a mobile banking app in order to avoid their personal information being compromised.
</p></div>
|
## What Is Financial Innovation?
Financial innovation is the process of creating new financial products, services, or processes. Financial innovation has come via advances in [financial instruments](https://www.investopedia.com/terms/f/financialinstrument.asp), technology, and payment systems. Digital technology has helped to transform the financial services industry, changing how we save, borrow, invest, and pay for goods.
While large banks continue to invest in [mobile banking](https://www.investopedia.com/terms/m/mobile-banking.asp), [FinTech](https://www.investopedia.com/terms/f/fintech.asp) companies, like [Stripe](https://www.investopedia.com/articles/personal-finance/021715/square-vs-stripe.asp), help small businesses conduct online payments, and investment broker [Robinhood](https://www.investopedia.com/robinhood-review-4587919) seeks to democratize investing and finance. These innovations have increased the number of financial providers available to consumers, borrowers, and businesses.
### Key Takeaways
* Financial innovation refers to the process of creating new financial or investment products, services, or processes.
* These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations.
* Recent financial innovations have included crowdfunding, mobile banking technology, and remittance technology.
## Understanding Financial Innovation
Financial innovation is a general term and can be broken down into specific categories based on updates to various spheres of the financial system. While the following is not an exhaustive list, major financial innovations have come in the raising of equity capital, remittances, and mobile banking.
### Investment Crowdfunding
[Investment crowdfunding](https://www.investopedia.com/terms/i/investment-crowdfunding.asp) has begun to open up and make the process of raising equity capital more democratic. While investing in early and growth-stage companies used to be reserved for a privileged few (generally institutional investors), new infrastructure and regulations have allowed individual retail investors to invest in projects they are passionate about and/or have other connections to for a small sum. Individuals receive shares of the new company commensurate with the amount they have invested.
Two popular platforms for equity crowdfunding are SeedInvest and FundersClub. In addition, micro-lending platforms such as LendingClub and Prosper allow for debt financing similar to crowdfunding. In this asset class, instead of owning part of the company, individuals become creditors and receive regular interest payments until the loan is eventually paid back in full. Also, P2P lending marketplaces enable both people and companies to buy whole or fractional loans.
### Remittances
Remittances are another area that financial innovation is transforming. Remittances are funds that expatriates send back to their country of origin via wire, mail, or online transfer. Given the volume of these transfers worldwide, remittances are economically significant for many countries that receive them.
In the early 2000s, the World Bank established a database where people could compare the prices of different transfer services. The Gates Foundation subsequently began tracking remittances in 2011. Western Union and Moneygram once monopolized remittances; however, in recent years, startups such as Transferwise and Wave have competed with their lower-cost apps.
Given the onset of Bitcoin, Ethereum, Stablecoins, and Blockchain technology, remittances are becoming more affordable. The lower costs are in line with the Sustainable Development Goals (SDG) of the World Bank to reduce the cost of remittances from 7% to 3% by 2030.
### Mobile Banking
Finally, mobile banking has made major innovations for retail customers. Today, many banks like T.D. Bank offer comprehensive apps with options to deposit checks, pay for merchandise, transfer money to a friend, or find an [ATM](https://www.investopedia.com/terms/a/atm.asp) instantly. It is still important for customers to establish a secure connection before logging into a mobile banking app in order to avoid their personal information being compromised.
|
What Is Financial Innovation?
Financial innovation is the process of creating new financial products, services, or processes. Financial innovation has come via advances in financial instruments, technology, and payment systems. Digital technology has helped to transform the financial services industry, changing how we save, borrow, invest, and pay for goods.
While large banks continue to invest in mobile banking, FinTech companies, like Stripe, help small businesses conduct online payments, and investment broker Robinhood seeks to democratize investing and finance. These innovations have increased the number of financial providers available to consumers, borrowers, and businesses.
Key Takeaways
Financial innovation refers to the process of creating new financial or investment products, services, or processes.These changes can include updated technology, risk management, risk transfer, credit and equity generation, as well as many other innovations.Recent financial innovations have included crowdfunding, mobile banking technology, and remittance technology.
Understanding Financial Innovation
Financial innovation is a general term and can be broken down into specific categories based on updates to various spheres of the financial system. While the following is not an exhaustive list, major financial innovations have come in the raising of equity capital, remittances, and mobile banking.
Investment Crowdfunding
Investment crowdfunding has begun to open up and make the process of raising equity capital more democratic. While investing in early and growth-stage companies used to be reserved for a privileged few (generally institutional investors), new infrastructure and regulations have allowed individual retail investors to invest in projects they are passionate about and/or have other connections to for a small sum. Individuals receive shares of the new company commensurate with the amount they have invested.
Two popular platforms for equity crowdfunding are SeedInvest and FundersClub. In addition, micro-lending platforms such as LendingClub and Prosper allow for debt financing similar to crowdfunding. In this asset class, instead of owning part of the company, individuals become creditors and receive regular interest payments until the loan is eventually paid back in full. Also, P2P lending marketplaces enable both people and companies to buy whole or fractional loans.
Remittances
Remittances are another area that financial innovation is transforming. Remittances are funds that expatriates send back to their country of origin via wire, mail, or online transfer. Given the volume of these transfers worldwide, remittances are economically significant for many countries that receive them.
In the early 2000s, the World Bank established a database where people could compare the prices of different transfer services. The Gates Foundation subsequently began tracking remittances in 2011. Western Union and Moneygram once monopolized remittances; however, in recent years, startups such as Transferwise and Wave have competed with their lower-cost apps.
Given the onset of Bitcoin, Ethereum, Stablecoins, and Blockchain technology, remittances are becoming more affordable. The lower costs are in line with the Sustainable Development Goals (SDG) of the World Bank to reduce the cost of remittances from 7% to 3% by 2030.
Mobile Banking
Finally, mobile banking has made major innovations for retail customers. Today, many banks like T.D. Bank offer comprehensive apps with options to deposit checks, pay for merchandise, transfer money to a friend, or find an ATM instantly. It is still important for customers to establish a secure connection before logging into a mobile banking app in order to avoid their personal information being compromised.
|
[
[
"financial instruments",
"https://www.investopedia.com/terms/f/financialinstrument.asp"
],
[
"mobile banking",
"https://www.investopedia.com/terms/m/mobile-banking.asp"
],
[
"FinTech",
"https://www.investopedia.com/terms/f/fintech.asp"
],
[
"Stripe",
"https://www.investopedia.com/articles/personal-finance/021715/square-vs-stripe.asp"
],
[
"Robinhood",
"https://www.investopedia.com/robinhood-review-4587919"
],
[
"Investment crowdfunding",
"https://www.investopedia.com/terms/i/investment-crowdfunding.asp"
],
[
"ATM",
"https://www.investopedia.com/terms/a/atm.asp"
]
] |
https://www.investopedia.com/terms/c/chattelmortgage.asp
|
Chattel Mortgage: Definition, Types, 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-a-chattel-mortgage"></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 Chattel Mortgage? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A chattel mortgage is a loan to purchase movable personal property, such as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112814/fha-loans-option-manufactured-homes-too.asp">manufactured home</a> or construction equipment. The property, or chattel, secures the loan, and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conditional-sales-agreement.asp">lender holds an ownership interest</a>.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Chattel loans are commonly referred to as security agreements. The terms “personal property security,” “lien on personal property,” or even “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hypothecation.asp">movable hypothecation</a>” are other synonyms for a chattel mortgage.
</p>
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<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 chattel mortgage is a loan to purchase movable personal property, such as construction equipment.</li><li>Mobile or manufactured homes, where the homeowner buys the residential unit but not the land it occupies, are financed with chattel mortgages.</li><li>Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages.</li></ul></div></div></div>
<span class="heading-toc" id="toc-types-of-chattel-mortgages"></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"> Types of Chattel Mortgages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Borrowers secure chattel mortgages to purchase moveable property. These loans tend to have shorter terms than regular mortgages. If a borrower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">defaults</a> on a chattel mortgage, the creditor or lender can take possession of the financed property and sell it to pay off the loan.
</p>
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<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"> Mobile/Manufactured Home Loans </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Chattel mortgages finance mobile or manufactured homes on leased land. Borrowers cannot opt for a traditional mortgage since the land does not belong to the homeowner. Instead, the mobile or manufactured home is considered “personal movable property” and security for a chattel mortgage. The financing arrangement remains in effect even if the mobile home is moved to a different location.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The <a data-component="link" data-ordinal="1" 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>, 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 Veterans Affairs (VA)</a>, and the U.S. Department of Agriculture’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rhs.asp">Rural Housing Service</a> all have programs to guarantee manufactured home loans issued by approved private lenders to eligible borrowers.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="9"></span> A HUD entity. the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhaloan.asp">Federal Housing Administration (FHA)</a> Manufactured Home Loan Insurance program, guarantees loans for manufactured homes without land.<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>
<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"> Equipment Loans </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Businesses use chattel mortgages to purchase new or used heavy equipment for construction, farming, or other purposes. A chattel mortgage allows the buyer to use the equipment while the lender retains an ownership interest. The lender can repossess the equipment and sell it to pay off the loan balance if the buyer defaults.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-business-administration.asp">Small Business Administration</a> provides low-cost financing for business-related equipment. Like other government agencies, it doesn’t issue loans but guarantees eligible loans issued by an approved list of commercial lenders. Its 504 loans provide funding for long-term machinery and equipment purchases.<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_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>See our picks for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-equipment-financing-companies-5083500">best equipment financing companies</a>.</p></div></div></div>
<span class="heading-toc" id="toc-chattel-mortgage-vs-traditional-mortgage"></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"> Chattel Mortgage vs. Traditional Mortgage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> A chattel mortgage differs from a traditional mortgage in that the lender owns the property until the borrower has fully paid the loan. With a regular mortgage, the lender isn’t the owner but holds a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/property-lien.asp">lien</a> on the property, allowing it to take possession in the event of a default. With a chattel mortgage, ownership transfers to the buyer at the end of the mortgage term, assuming all the payments have been made.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages.<span class="ql-inline-citation" data-cite="2"></span> They also have shorter terms, so monthly payments may be higher.
</p>
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<span class="heading-toc" id="toc-examples-of-chattel-loans"></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"> Examples of Chattel Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Vehicles, airplanes, boats, farm equipment, and manufactured homes are common examples of assets often financed with a chattel loan. Approximately 42% of the loans used to purchase manufactured homes are chattel loans, 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>.<span class="ql-inline-citation" data-cite="2"></span> Chattel loans have specific rules, which vary according to the property and state or federal law.
</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 Florida, chattel home loans must be listed in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers who want to put up the property as security for another loan.<span class="ql-inline-citation" data-cite="7"></span> For security agreements associated with aircraft, chattel mortgages must be recorded with the Aircraft Registration Branch of the Federal Aviation Administration.<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_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-important" 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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Mortgages on personal property like chattel loans typically carry higher interest rates than traditional mortgages and come with shorter terms.</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_35-0"><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_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-where-can-borrowers-get-a-chattel-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Can Borrowers Get a Chattel Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Chattel loans are offered in person at lending institutions and through online lenders, some of which specialize in a particular type of property, such as mobile homes, aircraft, or construction equipment.</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-how-much-down-payment-is-required-for-a-chattel-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Down Payment Is Required for a Chattel Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>That can depend on the loan, the lender, and your credit score. With the FHA’s Title I loans, for example, borrowers with a credit score above 500 are required to make at least a 5% down payment, while those with lower scores must put down at least 10%.<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_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-is-interest-on-a-chattel-mortgage-tax-deductible"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Interest on a Chattel Mortgage Tax Deductible?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The interest paid on a chattel mortgage may be deductible, just like interest paid on a conventional mortgage. When financing a manufactured or modular home fixed to the ground, borrowers may also be able to take advantage of property tax deductions.<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_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"> A chattel mortgage is a loan to purchase movable personal property, such as construction equipment or a mobile home. Chattel mortgages often carry higher interest rates and have fewer consumer protections than traditional mortgages. If a borrower defaults on a chattel mortgage, the lender can repossess the property or equipment.
</p>
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## What Is a Chattel Mortgage?
A chattel mortgage is a loan to purchase movable personal property, such as a [manufactured home](https://www.investopedia.com/articles/personal-finance/112814/fha-loans-option-manufactured-homes-too.asp) or construction equipment. The property, or chattel, secures the loan, and the [lender holds an ownership interest](https://www.investopedia.com/terms/c/conditional-sales-agreement.asp).
Chattel loans are commonly referred to as security agreements. The terms “personal property security,” “lien on personal property,” or even “[movable hypothecation](https://www.investopedia.com/terms/h/hypothecation.asp)” are other synonyms for a chattel mortgage.
### Key Takeaways
* A chattel mortgage is a loan to purchase movable personal property, such as construction equipment.
* Mobile or manufactured homes, where the homeowner buys the residential unit but not the land it occupies, are financed with chattel mortgages.
* Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages.
## Types of Chattel Mortgages
Borrowers secure chattel mortgages to purchase moveable property. These loans tend to have shorter terms than regular mortgages. If a borrower [defaults](https://www.investopedia.com/terms/d/default2.asp) on a chattel mortgage, the creditor or lender can take possession of the financed property and sell it to pay off the loan.
### Mobile/Manufactured Home Loans
Chattel mortgages finance mobile or manufactured homes on leased land. Borrowers cannot opt for a traditional mortgage since the land does not belong to the homeowner. Instead, the mobile or manufactured home is considered “personal movable property” and security for a chattel mortgage. The financing arrangement remains in effect even if the mobile home is moved to a different location.
The [U.S. Department of Housing and Urban Development (HUD)](https://www.investopedia.com/terms/u/us-department-housing-urban-development-hud.asp), the [U.S. Department of Veterans Affairs (VA)](https://www.investopedia.com/terms/u/us-department-veterans-affairs.asp), and the U.S. Department of Agriculture’s [Rural Housing Service](https://www.investopedia.com/terms/r/rhs.asp) all have programs to guarantee manufactured home loans issued by approved private lenders to eligible borrowers. A HUD entity. the [Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/fhaloan.asp) Manufactured Home Loan Insurance program, guarantees loans for manufactured homes without land.
### Equipment Loans
Businesses use chattel mortgages to purchase new or used heavy equipment for construction, farming, or other purposes. A chattel mortgage allows the buyer to use the equipment while the lender retains an ownership interest. The lender can repossess the equipment and sell it to pay off the loan balance if the buyer defaults.
The U.S. [Small Business Administration](https://www.investopedia.com/terms/s/small-business-administration.asp) provides low-cost financing for business-related equipment. Like other government agencies, it doesn’t issue loans but guarantees eligible loans issued by an approved list of commercial lenders. Its 504 loans provide funding for long-term machinery and equipment purchases.
###
See our picks for [best equipment financing companies](https://www.investopedia.com/best-equipment-financing-companies-5083500).
## Chattel Mortgage vs. Traditional Mortgage
A chattel mortgage differs from a traditional mortgage in that the lender owns the property until the borrower has fully paid the loan. With a regular mortgage, the lender isn’t the owner but holds a [lien](https://www.investopedia.com/terms/p/property-lien.asp) on the property, allowing it to take possession in the event of a default. With a chattel mortgage, ownership transfers to the buyer at the end of the mortgage term, assuming all the payments have been made.
Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages. They also have shorter terms, so monthly payments may be higher.
## Examples of Chattel Loans
Vehicles, airplanes, boats, farm equipment, and manufactured homes are common examples of assets often financed with a chattel loan. Approximately 42% of the loans used to purchase manufactured homes are chattel loans, according to the [Consumer Financial Protection Bureau (CFPB)](https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp). Chattel loans have specific rules, which vary according to the property and state or federal law.
In Florida, chattel home loans must be listed in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers who want to put up the property as security for another loan. For security agreements associated with aircraft, chattel mortgages must be recorded with the Aircraft Registration Branch of the Federal Aviation Administration.
###
Mortgages on personal property like chattel loans typically carry higher interest rates than traditional mortgages and come with shorter terms.
## Where Can Borrowers Get a Chattel Loan?
Chattel loans are offered in person at lending institutions and through online lenders, some of which specialize in a particular type of property, such as mobile homes, aircraft, or construction equipment.
## How Much Down Payment Is Required for a Chattel Loan?
That can depend on the loan, the lender, and your credit score. With the FHA’s Title I loans, for example, borrowers with a credit score above 500 are required to make at least a 5% down payment, while those with lower scores must put down at least 10%.
## Is Interest on a Chattel Mortgage Tax Deductible?
The interest paid on a chattel mortgage may be deductible, just like interest paid on a conventional mortgage. When financing a manufactured or modular home fixed to the ground, borrowers may also be able to take advantage of property tax deductions.
## The Bottom Line
A chattel mortgage is a loan to purchase movable personal property, such as construction equipment or a mobile home. Chattel mortgages often carry higher interest rates and have fewer consumer protections than traditional mortgages. If a borrower defaults on a chattel mortgage, the lender can repossess the property or equipment.
|
What Is a Chattel Mortgage?
A chattel mortgage is a loan to purchase movable personal property, such as a manufactured home or construction equipment. The property, or chattel, secures the loan, and the lender holds an ownership interest.
Chattel loans are commonly referred to as security agreements. The terms “personal property security,” “lien on personal property,” or even “movable hypothecation” are other synonyms for a chattel mortgage.
Key Takeaways
A chattel mortgage is a loan to purchase movable personal property, such as construction equipment.Mobile or manufactured homes, where the homeowner buys the residential unit but not the land it occupies, are financed with chattel mortgages.Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages.
Types of Chattel Mortgages
Borrowers secure chattel mortgages to purchase moveable property. These loans tend to have shorter terms than regular mortgages. If a borrower defaults on a chattel mortgage, the creditor or lender can take possession of the financed property and sell it to pay off the loan.
Mobile/Manufactured Home Loans
Chattel mortgages finance mobile or manufactured homes on leased land. Borrowers cannot opt for a traditional mortgage since the land does not belong to the homeowner. Instead, the mobile or manufactured home is considered “personal movable property” and security for a chattel mortgage. The financing arrangement remains in effect even if the mobile home is moved to a different location.
The U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture’s Rural Housing Service all have programs to guarantee manufactured home loans issued by approved private lenders to eligible borrowers. A HUD entity. the Federal Housing Administration (FHA) Manufactured Home Loan Insurance program, guarantees loans for manufactured homes without land.
Equipment Loans
Businesses use chattel mortgages to purchase new or used heavy equipment for construction, farming, or other purposes. A chattel mortgage allows the buyer to use the equipment while the lender retains an ownership interest. The lender can repossess the equipment and sell it to pay off the loan balance if the buyer defaults.
The U.S. Small Business Administration provides low-cost financing for business-related equipment. Like other government agencies, it doesn’t issue loans but guarantees eligible loans issued by an approved list of commercial lenders. Its 504 loans provide funding for long-term machinery and equipment purchases.
See our picks for best equipment financing companies.
Chattel Mortgage vs. Traditional Mortgage
A chattel mortgage differs from a traditional mortgage in that the lender owns the property until the borrower has fully paid the loan. With a regular mortgage, the lender isn’t the owner but holds a lien on the property, allowing it to take possession in the event of a default. With a chattel mortgage, ownership transfers to the buyer at the end of the mortgage term, assuming all the payments have been made.
Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages. They also have shorter terms, so monthly payments may be higher.
Examples of Chattel Loans
Vehicles, airplanes, boats, farm equipment, and manufactured homes are common examples of assets often financed with a chattel loan. Approximately 42% of the loans used to purchase manufactured homes are chattel loans, according to the Consumer Financial Protection Bureau (CFPB). Chattel loans have specific rules, which vary according to the property and state or federal law.
In Florida, chattel home loans must be listed in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers who want to put up the property as security for another loan. For security agreements associated with aircraft, chattel mortgages must be recorded with the Aircraft Registration Branch of the Federal Aviation Administration.
Mortgages on personal property like chattel loans typically carry higher interest rates than traditional mortgages and come with shorter terms.
Where Can Borrowers Get a Chattel Loan?
Chattel loans are offered in person at lending institutions and through online lenders, some of which specialize in a particular type of property, such as mobile homes, aircraft, or construction equipment.
How Much Down Payment Is Required for a Chattel Loan?
That can depend on the loan, the lender, and your credit score. With the FHA’s Title I loans, for example, borrowers with a credit score above 500 are required to make at least a 5% down payment, while those with lower scores must put down at least 10%.
Is Interest on a Chattel Mortgage Tax Deductible?
The interest paid on a chattel mortgage may be deductible, just like interest paid on a conventional mortgage. When financing a manufactured or modular home fixed to the ground, borrowers may also be able to take advantage of property tax deductions.
The Bottom Line
A chattel mortgage is a loan to purchase movable personal property, such as construction equipment or a mobile home. Chattel mortgages often carry higher interest rates and have fewer consumer protections than traditional mortgages. If a borrower defaults on a chattel mortgage, the lender can repossess the property or equipment.
|
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] |
https://www.investopedia.com/before-student-loan-deferment-ends-5323241
|
Uses for Your Money Before Student Loan Payments Resume
|
<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"> Measures taken by the government to help relieve financial pressures on student loan borrowers met resistance from lawmakers and private parties. This resistance made the near future somewhat uncertain for those with student loan debt.
</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 paying off a student loan, you might wonder what to do with the money you may have budgeted to make payments. Read on to learn how you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100314/it-legal-invest-my-student-loan-money.asp">use your extra cash</a> until you're required to begin making payments.
</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 U.S. Department of Education worked with the federal government to enact emergency forbearance of eligible federal student loans due to the COVID-19 pandemic.</li><li>Measures proposed by the Biden administration in August 2022 included payment suspensions, 0% interest, cessation of collection activity, and loan forgiveness of up to $20,000.</li><li>The original forbearance period began in March 2020 but was extended six times.</li><li>Student loan forgiveness was blocked by federal courts in November 2022, resulting in the Department of Education placing a hold on all payments until the Supreme Court resolved the issue or 60 days after the final extension of forbearance, which was June 30, 2023.</li><li>On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 federal student debt per borrower, a decision the administration countered with the SAVE plan, activated on Aug. 22, 2023.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-what-happened-to-student-loan-forbearance"></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 Happened to Student Loan Forbearance? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In March 2020, the U.S. Department of Education extended an array of relief measures aimed at helping borrowers with federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loans</a> get through the COVID-19 pandemic. The original forbearance period was only expected to last several months but was extended six times before August 2022.<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_9-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In August 2022, President Biden announced another extension to student loan forbearance. The temporary forbearance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defermentperiod.asp">period</a> applied to eligible federal student loans and included the following:
</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>A suspension of payments</li>
<li>A fixed 0% <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></li>
<li>A temporary halt to collections on defaulted loans</li>
<li>Loan forgiveness of up to $20,000 for those that received Pell Grants and $10,000 for those that did not, subject to an income limit of $125,000 ($250,000 for couples).<span class="ql-inline-citation" data-cite="17"></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"> In November, the extension was blocked by lower federal courts. In response, the Department of Education issued a hold on federal student loan payments until 60 days after it received permission to continue loan forgiveness or 60 days after June 30, 2023, whichever came first.<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_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower.<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"> The SAVE Plan </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> On the same day, President Biden announced new plans to reduce student loan payments through an initiative called the Saving on a Valuable Education (SAVE) plan. This plan initially raises protected income to 225% of the federal poverty level, essentially dropping student loan payments to zero for borrowers who make under $32,805 ($67,500 for a family of four).
</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"> It also stops monthly interest from accumulating on interest amounts not paid. Additionally, it discontinues the practice of including the income of spouses who do not file jointly in calculating IDR payments.
</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 July 2024, the new plan will cut payments in half and forgive loans for borrowers who had a principal balance of $12,000 (after making 120 payments). For each $1,000 over that amount borrowed, forgiveness will be granted after making 12 more payments for each $1,000, for up to 20 or 25 years.<span class="ql-inline-citation" data-cite="14"></span><br/>
</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>On Aug. 22, 2023, the administration activated the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/idr/">application process</a> for the SAVE Plan.<span class="ql-inline-citation" data-cite="20"></span></p></div></div></div>
<span class="heading-toc" id="toc-pay-off-high-interest-debt"></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"> Pay Off High-Interest Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you carry credit card balances that charge a high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rate (APR)</a>, paying these down might make more sense because federal student loan payments are on hold. If you have a credit card that hovers close to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-card-interest-rate-5076674">average credit card interest rate</a> of 22.16%, paying it down can save you a lot of money in the long run.<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_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, paying $100 per month toward a $5,000 credit card balance with a 19% APR would cost you $4,718 in interest payments over the 98 months it would take you to become debt free. However, if you were to boost that payment to $400 per month, you'd pay off your debt in 14 months, and your total interest payments would only add up to $523.
</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-save-up-to-pay-your-federal-student-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"> Save Up to Pay Your Federal Student Loan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Hopefully, during the past few years, you were able to put money toward savings that normally would have gone toward federal student loan payments. If so, you might have saved enough in the interim to either pay off a significant portion of your other consumer debt or use the saved money to fund payments toward your remaining student loan balance.<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-pay-off-private-student-loans"></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"> Pay Off Private Student Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Most borrowers with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loans</a> knew that the prospect of loan forgiveness or federal assistance only applied to eligible federal student loans. This means that private student loan borrowers have been on the hook for payments and accruing interest on their loans throughout the pandemic and the following period. In contrast, those with only federal student loans have had payment relief.<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_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> If you have a combination of private and federal student loans, it might make sense to use the money you had set aside for your federal loans and pay it towards reducing your private student loan until federal student loan forbearance expires.
</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-tip" 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" 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>By funneling your extra cash toward your private student loan, you can save on interest and pay down these loans faster without impacting your federal loan status.</p></div></div></div>
<span class="heading-toc" id="toc-build-an-emergency-fund"></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"> Build an Emergency Fund </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> If you don't have any other debts to focus on, you can always start putting some money away in 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>. Doing so could help you <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/">build an emergency fund</a>, which most experts say should hold three to six months' worth of expenses.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> This type of fund may seem unnecessary, but your emergency fund is crucial if you want to prepare for unexpected expenses like car repairs or unforeseen events like a job loss or a severe illness.
</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"> Also, remember that you can use your extra savings to pay down student debt later once you're ready. Either way, stashing your extra cash in a savings account will ensure that your money is actually there when you need it.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-will-student-loans-be-paused-again-in-2023"></span> <h2 class="mntl-sc-block-questionandanswer__question">Will Student Loans Be Paused Again in 2023?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower.<span class="ql-inline-citation" data-cite="12"></span> However, the President announced more efforts to help those in student loan debt with the SAVE plan.<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_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-are-student-loans-really-going-to-start-again"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Student Loans Really Going to Start Again?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. The last extension of student loan forbearance was set on August 24, 2022. However, the SAVE plan raised income limits and announced other benefits for student loan borrowers.<span class="ql-inline-citation" data-cite="14"></span><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>
<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-student-loans-for-rent"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Use Student Loans for Rent?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Student loans can be used to pay for room and board, including off-campus housing like an apartment. However, when you factor in the cost of furnishing, meals, utilities, a security deposit, and other housing-related expenses, an apartment can cost significantly more than an on-campus dorm.<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_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"> If you have federal student loans, you have several options for applying any saved money from the period of payment forbearance and before you'll need to make any loan payments.
</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"> Until that time, you could make progress in other areas of your financial life. You could pay off your high-interest debts, but you could also focus on paying down private student loans or saving for the eventual return of federal student loan payments.
</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"> If you have no other debt to focus on, you could also place the money not going toward your student debt 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 account</a> to earn a little interest before you need it again.
</p></div>
|
Measures taken by the government to help relieve financial pressures on student loan borrowers met resistance from lawmakers and private parties. This resistance made the near future somewhat uncertain for those with student loan debt.
If you're paying off a student loan, you might wonder what to do with the money you may have budgeted to make payments. Read on to learn how you can [use your extra cash](https://www.investopedia.com/ask/answers/100314/it-legal-invest-my-student-loan-money.asp) until you're required to begin making payments.
### Key Takeaways
* The U.S. Department of Education worked with the federal government to enact emergency forbearance of eligible federal student loans due to the COVID-19 pandemic.
* Measures proposed by the Biden administration in August 2022 included payment suspensions, 0% interest, cessation of collection activity, and loan forgiveness of up to $20,000.
* The original forbearance period began in March 2020 but was extended six times.
* Student loan forgiveness was blocked by federal courts in November 2022, resulting in the Department of Education placing a hold on all payments until the Supreme Court resolved the issue or 60 days after the final extension of forbearance, which was June 30, 2023.
* On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 federal student debt per borrower, a decision the administration countered with the SAVE plan, activated on Aug. 22, 2023.
## What Happened to Student Loan Forbearance?
In March 2020, the U.S. Department of Education extended an array of relief measures aimed at helping borrowers with federal [student loans](https://www.investopedia.com/student-loans-4689727) get through the COVID-19 pandemic. The original forbearance period was only expected to last several months but was extended six times before August 2022.
In August 2022, President Biden announced another extension to student loan forbearance. The temporary forbearance [period](https://www.investopedia.com/terms/d/defermentperiod.asp) applied to eligible federal student loans and included the following:
* A suspension of payments
* A fixed 0% [interest rate](https://www.investopedia.com/terms/i/interestrate.asp)
* A temporary halt to collections on defaulted loans
* Loan forgiveness of up to $20,000 for those that received Pell Grants and $10,000 for those that did not, subject to an income limit of $125,000 ($250,000 for couples).
In November, the extension was blocked by lower federal courts. In response, the Department of Education issued a hold on federal student loan payments until 60 days after it received permission to continue loan forgiveness or 60 days after June 30, 2023, whichever came first.
On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower.
### The SAVE Plan
On the same day, President Biden announced new plans to reduce student loan payments through an initiative called the Saving on a Valuable Education (SAVE) plan. This plan initially raises protected income to 225% of the federal poverty level, essentially dropping student loan payments to zero for borrowers who make under $32,805 ($67,500 for a family of four).
It also stops monthly interest from accumulating on interest amounts not paid. Additionally, it discontinues the practice of including the income of spouses who do not file jointly in calculating IDR payments.
In July 2024, the new plan will cut payments in half and forgive loans for borrowers who had a principal balance of $12,000 (after making 120 payments). For each $1,000 over that amount borrowed, forgiveness will be granted after making 12 more payments for each $1,000, for up to 20 or 25 years.
###
On Aug. 22, 2023, the administration activated the [application process](https://studentaid.gov/idr/) for the SAVE Plan.
## Pay Off High-Interest Debt
If you carry credit card balances that charge a high [annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp), paying these down might make more sense because federal student loan payments are on hold. If you have a credit card that hovers close to the [average credit card interest rate](https://www.investopedia.com/average-credit-card-interest-rate-5076674) of 22.16%, paying it down can save you a lot of money in the long run.
For example, paying $100 per month toward a $5,000 credit card balance with a 19% APR would cost you $4,718 in interest payments over the 98 months it would take you to become debt free. However, if you were to boost that payment to $400 per month, you'd pay off your debt in 14 months, and your total interest payments would only add up to $523.
## Save Up to Pay Your Federal Student Loan
Hopefully, during the past few years, you were able to put money toward savings that normally would have gone toward federal student loan payments. If so, you might have saved enough in the interim to either pay off a significant portion of your other consumer debt or use the saved money to fund payments toward your remaining student loan balance.
## Pay Off Private Student Loans
Most borrowers with [student loans](https://www.investopedia.com/student-loans-4689727) knew that the prospect of loan forgiveness or federal assistance only applied to eligible federal student loans. This means that private student loan borrowers have been on the hook for payments and accruing interest on their loans throughout the pandemic and the following period. In contrast, those with only federal student loans have had payment relief.
If you have a combination of private and federal student loans, it might make sense to use the money you had set aside for your federal loans and pay it towards reducing your private student loan until federal student loan forbearance expires.
###
By funneling your extra cash toward your private student loan, you can save on interest and pay down these loans faster without impacting your federal loan status.
## Build an Emergency Fund
If you don't have any other debts to focus on, you can always start putting some money away in a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp). Doing so could help you [build an emergency fund](https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/), which most experts say should hold three to six months' worth of expenses.
This type of fund may seem unnecessary, but your emergency fund is crucial if you want to prepare for unexpected expenses like car repairs or unforeseen events like a job loss or a severe illness.
Also, remember that you can use your extra savings to pay down student debt later once you're ready. Either way, stashing your extra cash in a savings account will ensure that your money is actually there when you need it.
## Will Student Loans Be Paused Again in 2023?
No. On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower. However, the President announced more efforts to help those in student loan debt with the SAVE plan.
## Are Student Loans Really Going to Start Again?
Yes. The last extension of student loan forbearance was set on August 24, 2022. However, the SAVE plan raised income limits and announced other benefits for student loan borrowers.
## Can I Use Student Loans for Rent?
Student loans can be used to pay for room and board, including off-campus housing like an apartment. However, when you factor in the cost of furnishing, meals, utilities, a security deposit, and other housing-related expenses, an apartment can cost significantly more than an on-campus dorm.
## The Bottom Line
If you have federal student loans, you have several options for applying any saved money from the period of payment forbearance and before you'll need to make any loan payments.
Until that time, you could make progress in other areas of your financial life. You could pay off your high-interest debts, but you could also focus on paying down private student loans or saving for the eventual return of federal student loan payments.
If you have no other debt to focus on, you could also place the money not going toward your student debt in a [high-yield savings account](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) to earn a little interest before you need it again.
|
Measures taken by the government to help relieve financial pressures on student loan borrowers met resistance from lawmakers and private parties. This resistance made the near future somewhat uncertain for those with student loan debt.
If you're paying off a student loan, you might wonder what to do with the money you may have budgeted to make payments. Read on to learn how you can use your extra cash until you're required to begin making payments.
Key Takeaways
The U.S. Department of Education worked with the federal government to enact emergency forbearance of eligible federal student loans due to the COVID-19 pandemic.Measures proposed by the Biden administration in August 2022 included payment suspensions, 0% interest, cessation of collection activity, and loan forgiveness of up to $20,000.The original forbearance period began in March 2020 but was extended six times.Student loan forgiveness was blocked by federal courts in November 2022, resulting in the Department of Education placing a hold on all payments until the Supreme Court resolved the issue or 60 days after the final extension of forbearance, which was June 30, 2023.On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 federal student debt per borrower, a decision the administration countered with the SAVE plan, activated on Aug. 22, 2023.
What Happened to Student Loan Forbearance?
In March 2020, the U.S. Department of Education extended an array of relief measures aimed at helping borrowers with federal student loans get through the COVID-19 pandemic. The original forbearance period was only expected to last several months but was extended six times before August 2022.
In August 2022, President Biden announced another extension to student loan forbearance. The temporary forbearance period applied to eligible federal student loans and included the following:
A suspension of payments
A fixed 0% interest rate
A temporary halt to collections on defaulted loans
Loan forgiveness of up to $20,000 for those that received Pell Grants and $10,000 for those that did not, subject to an income limit of $125,000 ($250,000 for couples).
In November, the extension was blocked by lower federal courts. In response, the Department of Education issued a hold on federal student loan payments until 60 days after it received permission to continue loan forgiveness or 60 days after June 30, 2023, whichever came first.
On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower.
The SAVE Plan
On the same day, President Biden announced new plans to reduce student loan payments through an initiative called the Saving on a Valuable Education (SAVE) plan. This plan initially raises protected income to 225% of the federal poverty level, essentially dropping student loan payments to zero for borrowers who make under $32,805 ($67,500 for a family of four).
It also stops monthly interest from accumulating on interest amounts not paid. Additionally, it discontinues the practice of including the income of spouses who do not file jointly in calculating IDR payments.
In July 2024, the new plan will cut payments in half and forgive loans for borrowers who had a principal balance of $12,000 (after making 120 payments). For each $1,000 over that amount borrowed, forgiveness will be granted after making 12 more payments for each $1,000, for up to 20 or 25 years.
On Aug. 22, 2023, the administration activated the application process for the SAVE Plan.
Pay Off High-Interest Debt
If you carry credit card balances that charge a high annual percentage rate (APR), paying these down might make more sense because federal student loan payments are on hold. If you have a credit card that hovers close to the average credit card interest rate of 22.16%, paying it down can save you a lot of money in the long run.
For example, paying $100 per month toward a $5,000 credit card balance with a 19% APR would cost you $4,718 in interest payments over the 98 months it would take you to become debt free. However, if you were to boost that payment to $400 per month, you'd pay off your debt in 14 months, and your total interest payments would only add up to $523.
Save Up to Pay Your Federal Student Loan
Hopefully, during the past few years, you were able to put money toward savings that normally would have gone toward federal student loan payments. If so, you might have saved enough in the interim to either pay off a significant portion of your other consumer debt or use the saved money to fund payments toward your remaining student loan balance.
Pay Off Private Student Loans
Most borrowers with student loans knew that the prospect of loan forgiveness or federal assistance only applied to eligible federal student loans. This means that private student loan borrowers have been on the hook for payments and accruing interest on their loans throughout the pandemic and the following period. In contrast, those with only federal student loans have had payment relief.
If you have a combination of private and federal student loans, it might make sense to use the money you had set aside for your federal loans and pay it towards reducing your private student loan until federal student loan forbearance expires.
By funneling your extra cash toward your private student loan, you can save on interest and pay down these loans faster without impacting your federal loan status.
Build an Emergency Fund
If you don't have any other debts to focus on, you can always start putting some money away in a high-yield savings account. Doing so could help you build an emergency fund, which most experts say should hold three to six months' worth of expenses.
This type of fund may seem unnecessary, but your emergency fund is crucial if you want to prepare for unexpected expenses like car repairs or unforeseen events like a job loss or a severe illness.
Also, remember that you can use your extra savings to pay down student debt later once you're ready. Either way, stashing your extra cash in a savings account will ensure that your money is actually there when you need it.
Will Student Loans Be Paused Again in 2023?
No. On June 30, 2023, the Supreme Court ruled that the Biden administration lacked the authority to cancel up to $20,000 in federal student debt per borrower. However, the President announced more efforts to help those in student loan debt with the SAVE plan.
Are Student Loans Really Going to Start Again?
Yes. The last extension of student loan forbearance was set on August 24, 2022. However, the SAVE plan raised income limits and announced other benefits for student loan borrowers.
Can I Use Student Loans for Rent?
Student loans can be used to pay for room and board, including off-campus housing like an apartment. However, when you factor in the cost of furnishing, meals, utilities, a security deposit, and other housing-related expenses, an apartment can cost significantly more than an on-campus dorm.
The Bottom Line
If you have federal student loans, you have several options for applying any saved money from the period of payment forbearance and before you'll need to make any loan payments.
Until that time, you could make progress in other areas of your financial life. You could pay off your high-interest debts, but you could also focus on paying down private student loans or saving for the eventual return of federal student loan payments.
If you have no other debt to focus on, you could also place the money not going toward your student debt in a high-yield savings account to earn a little interest before you need it again.
|
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"use your extra cash",
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],
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"https://studentaid.gov/idr/"
],
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"annual percentage rate (APR)",
"https://www.investopedia.com/terms/a/apr.asp"
],
[
"average credit card interest rate",
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],
[
"student loans",
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],
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]
] |
https://www.investopedia.com/comparing-fractional-trading-offerings-at-online-brokers-4847173
|
Comparing Fractional Trading Offerings
|
<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"> As younger investors enter the trading scene and find themselves looking at popular stocks that trade for over $1,000 per share, the popularity of trading fractional shares has risen considerably. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fractionalshare.asp" rel="noopener noreferrer">fractional share</a> is a portion of an equity stock that is less than one full share. In the past, investors have found themselves with fractional shares in their portfolios as a result of dividend reinvestment, stock splits, or mergers and acquisition. You could hold a fractional share in your account, or sell it, but until fairly recently it’s been extremely difficult to buy part of a share.
</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 were a few fractional share offerings during the dot-com buildup, but they have disappeared. Several major online brokers have started to re-introduce fractional share trading, made more friendly for their customers in the wake of cutting commissions to $0. Interactive Brokers kicked it off in November 2019, and now Fidelity, Charles Schwab and Robinhood have also enabled fractional share trading. Most robo-advisors feature fractional share trading so that their clients can maximize the assets held and put all of their cash to work. There are additional brokerages working to make fractional share trading available to their customers; we will update this article as the services are launched.
</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"> This market exists because the longtime tradition of splitting shares when the price settled above $100 has evaporated, with some companies considering their extremely high share prices as an ego boost. High share prices have unfortunately made some companies an impossible investment for individual investors, taking them out of the retail market and making them available to institutions instead. Fractional shares allow some retail involvement.
</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>Online brokers are introducing programs that allow purchases of fractional shares of stock</li><li>There are key differences between the broker offerings, including minimum purchases and the universe of available stocks</li><li>Zero-commission trading makes fractional share programs affordable</li><li>Younger investors are participating at a higher rate than other age groups</li></ul></div></div></div>
<span class="heading-toc" id="toc-history-of-fractional-shares"></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"> History of Fractional Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> There were a few scattered offerings of fractional shares starting in 1999 with the November launch of BuyandHold, which is now long gone. For a subscription of $1-3 per month, you could buy shares in small dollar amounts. The site encouraged its customers to make regular purchases on a monthly basis, building up a nest egg over time. In 1999, there were a few no-fee brokers around, but they didn’t last long. Most other online brokers charged $9.99-24.99 per transaction, so it was nearly impossible to develop a profitable trading strategy by purchasing a share or two at a time. That monthly fee, which sounds outrageous now, was actually a good deal.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Large online brokers, once they cut fees to $0 for equity trades, enabled odd lot trading that didn’t penalize their customers with commissions on small trades. In November 2019, Interactive Brokers launched its fractional share trading capability of U.S. stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million. Others followed suit, and now there are four major brokers and several automated trading services that allow trading of fractional shares in real time. Most robo-advisors have fractional share trading enabled for balancing portfolios, though the timing of those trades is not set by investors. For example, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.stockpile.com/" rel="noopener noreferrer nofollow">Stockpile</a> places all the trades that customers have requested during the day at market close. We included M1 Finance in this table because they also allow real-time trading of fractional shares.
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<span class="heading-toc" id="toc-new-investors-latch-on-to-fractional-shares"></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"> New Investors Latch on to Fractional Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Fidelity tells us that their fractional trading program, which launched in January 2020, has been a hit with younger investors. Nearly half (45%) of Fidelity’s fractional trading clients are between 18-35 years of age. Through the first three quarters of 2020, approximately 630,000 Fidelity accounts have traded fractional shares with the majority of the trades made in the<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/faang-stocks.asp" rel="noopener noreferrer"> FAANG stocks</a> as well as Microsoft (MSFT) and Tesla (TSLA).
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Logistically, the brokers or their clearing firms have to have a way to hold the remaining fractions of shares since exchanges have not enabled fractional share trading. So if you are a Schwab client and you buy 0.2 shares of Apple, the other 0.8 shares are held by Schwab in an internal inventory account. That fraction may be used to fulfill another customer’s order, or it is liquidated at the end of the trading day.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Another complexity of holding fractional shares comes if you move a brokerage account to another firm. Only full shares of stock can be transferred, so any fractional shares you hold will be liquidated, which may create a taxable event for the investor due to capital gains. The cash from those transactions can then be transferred to the new brokerage along with any full shares that you hold. An additional downside to holding fractional shares is that they cannot be hedged, and they don’t allow for basis improvement through writing covered calls.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Here are the services currently available for real-time trading of fractional shares.
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<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_23-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/UN1ql/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Fractional Share Comparisons"></iframe></div>
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<span class="heading-toc" id="toc-charles-schwab-stock-slices"></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"> Charles Schwab “Stock Slices” </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Schwab’s “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.aboutschwab.com/stock-slices" rel="noopener noreferrer nofollow">Stock Slices</a>” program was launched on June 2, 2020. The program enables clients to purchase any S&P 500 stock for a minimum of $5 per stock. Clients can queue up a group of 10 stocks and place a single transaction, dividing their investment evenly among the 10 symbols. Customers can hold fractional shares of all 500 S&P stocks if they’d like, but only 10 at a time can be purchased. If you set up four stocks to purchase and committed $50 to this group, you would hold the fractional equivalent of $12.50 of each stock once the transaction completed.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Schwab Stock Slices are available in retail Schwab brokerage, custodial, and individual retirement accounts (IRAs). A Schwab spokesperson says, “Many new investors see this environment as an opportunity to get into the market, and this is another vehicle for them to do so.” The program is new enough that Schwab was unable to give us participation statistics.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Schwab’s offering is the most restricted in terms of the universe of stocks available and also has the highest minimum purchase.
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<span class="heading-toc" id="toc-fidelitys-stocks-by-the-slice"></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"> Fidelity’s “Stocks by the Slice” </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Fidelity launched its fractional trading program, “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fidelity.com/trading/fractional-shares" rel="noopener noreferrer nofollow">Stocks By The Slice,</a>” at the end of January 2020. A new trade ticket was added to Fidelity’s native iOS and Android mobile apps, allowing a customer to purchase a certain dollar amount or fraction of a share of any exchange-listed stock (except for Berkshire-Hathaway type A stock, ticker BRK.A). Fidelity added fractional share trading to its web platform in fall 2020.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> As of the end of Q3 2020, over 80% of participants in the fractional share program chose to make a dollar-based purchase while the rest entered orders in pieces of a share. The minimum purchase must be $1.00 or more as long as it comprises at least one one-hundredth (0.001) of a share. Trades are executed in real-time, and clients can specify a market or limit order.
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<img alt="Fidelity fractional share order entry" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/IFp67QK6e6ZmXKwo86bw4qnchas=/831x0/filters:no_upscale():max_bytes(150000):strip_icc()/Fidelityfractionalorderticket-db84836d39be4bbdaa9bcc2d775a65ca.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/OXioeS_FY1fPy_Vld70M_CCWXBc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Fidelityfractionalorderticket-db84836d39be4bbdaa9bcc2d775a65ca.jpg" data-srcset="https://www.investopedia.com/thmb/dGxkAtzELCqPw47PCes_D1hSj2I=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Fidelityfractionalorderticket-db84836d39be4bbdaa9bcc2d775a65ca.jpg 750w" data-tracking-container="true" height="901" id="mntl-sc-block-image_1-0" width="831"/>
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<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">Entering an order for a fractional share of stock on Fidelity's mobile app.</span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Fidelity offers “Stocks by the Slice” in brokerage, HSA, IRAs, and custodial accounts. It is also available to customers with a self-directed brokerage account within their 401(K) plan. Prior to entering your first fractional share order, you’ll be prompted to review your customer agreement.
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<span class="heading-toc" id="toc-interactive-brokers"></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"> Interactive Brokers </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Interactive Brokers<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/en/index.php?f=45718" rel="noopener noreferrer nofollow"> Fractional Trading,</a> with access to all U.S. listed stocks, is available on all of the firm’s platforms for IBKR Lite and IBKR Pro customers as well as clients of financial advisors, except those who reside in Israel or have Canadian RRSP/TFSA accounts. Eligible clients must enable fractional share trading in Client Portal/Account Management prior to placing their first trade. Fractional share purchases can be made in dollar amounts or share amounts once the account has been enabled. Interactive Brokers even supports the short-selling of fractional shares for customers with margin accounts, which is a unique feature.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> This is by far the most flexible of all of the fractional share programs, both in terms of the breadth of the stocks available as well as the order types available. The current list of available stock can be found at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.ibkr.com/download/fracshare_stk.csv" rel="noopener noreferrer">this link</a>, which opens an Excel spreadsheet.
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<span class="heading-toc" id="toc-m1-finance"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-heading__text"> M1 Finance </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Fractional share buying is a built-in component of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.m1finance.com/how-it-works/invest/" rel="noopener noreferrer nofollow">M1’s Invest</a> product, which launched in 2016. M1 offers most NYSE, NASDAQ and BATs traded stocks and ETFs, comprising over 6,000 exchange-listed securities. Fractional share trading is enabled for every available security. M1 aggregates all clients’ trades and executes them together during a trade window though clients can also place individual fractional share trades in real-time for an additional fee. The remainder of what’s left over after being allocated to customers’ accounts goes into an account owned by M1.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> CEO Brian Barnes believes that M1 is the biggest trader of fractional shares in among U.S.-based brokers. “Every day, we do about 200,000 fractional share trades for our customers. To put that in perspective, E*TRADE did ~44,000 trades per day for all of its customers in the month of April,” states Barnes. Barnes says that M1 owns between 0 and 1 share of the entire universe of stocks and ETFs that customers can trade. When the number of shares held by M1 exceeds 1, the full share is sold.
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<span class="heading-toc" id="toc-robinhood"></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"> Robinhood </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Fractional share trading is available to all Robinhood customers, having rolled out throughout 2020. Stocks and ETFs worth over $1.00 per share with a market capitalization over $25,000,000 are eligible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://robinhood.com/us/en/support/articles/fractional-shares/" rel="noopener noreferrer nofollow">for fractional share</a> orders. In addition, Robinhood clients can trade fractional shares of Alibaba and Nintendo ADRs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> If a stock or ETF isn't supported, Robinhood lets you know when you're entering the order. The minimum order size is $1 and/or 1/1000000 of a share. A Robinhood spokesperson estimates that there are just under 7,000 stocks eligible for fractional share trading.
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<span class="heading-toc" id="toc-opportunities-and-risks-for-brokers"></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"> Opportunities and Risks for Brokers </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Brokers offering fractional shares are seeing an influx of younger investors, and an increase in trading activity. Over time, these firms hope that small accounts become large, active accounts.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> But for the brokers themselves, offering fractional share trading comes with a number of challenges and risks. There is the bookkeeping nightmare of keeping track of these tiny slices of stocks and ETFs, which requires some investment on the part of the brokers and their clearing firms in information services and inventory management. Then there is the financial commitment since the brokerage house itself holds the remaining fractions. In a rising market, that could generate some additional profits for the brokers, but should we see another crash, the brokers will lose money along with their clients.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Any new brokerage that launches in the next couple of years will need to consider offering fractional shares in order to compete. The new firms are already locked in to zero commissions due to what has become an industry standard. Fractional share features could be another barrier to entry to new brokerage firms.
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<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>
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As younger investors enter the trading scene and find themselves looking at popular stocks that trade for over $1,000 per share, the popularity of trading fractional shares has risen considerably. A [fractional share](https://www.investopedia.com/terms/f/fractionalshare.asp) is a portion of an equity stock that is less than one full share. In the past, investors have found themselves with fractional shares in their portfolios as a result of dividend reinvestment, stock splits, or mergers and acquisition. You could hold a fractional share in your account, or sell it, but until fairly recently it’s been extremely difficult to buy part of a share.
There were a few fractional share offerings during the dot-com buildup, but they have disappeared. Several major online brokers have started to re-introduce fractional share trading, made more friendly for their customers in the wake of cutting commissions to $0. Interactive Brokers kicked it off in November 2019, and now Fidelity, Charles Schwab and Robinhood have also enabled fractional share trading. Most robo-advisors feature fractional share trading so that their clients can maximize the assets held and put all of their cash to work. There are additional brokerages working to make fractional share trading available to their customers; we will update this article as the services are launched.
This market exists because the longtime tradition of splitting shares when the price settled above $100 has evaporated, with some companies considering their extremely high share prices as an ego boost. High share prices have unfortunately made some companies an impossible investment for individual investors, taking them out of the retail market and making them available to institutions instead. Fractional shares allow some retail involvement.
### Key Takeaways
* Online brokers are introducing programs that allow purchases of fractional shares of stock
* There are key differences between the broker offerings, including minimum purchases and the universe of available stocks
* Zero-commission trading makes fractional share programs affordable
* Younger investors are participating at a higher rate than other age groups
## History of Fractional Shares
There were a few scattered offerings of fractional shares starting in 1999 with the November launch of BuyandHold, which is now long gone. For a subscription of $1-3 per month, you could buy shares in small dollar amounts. The site encouraged its customers to make regular purchases on a monthly basis, building up a nest egg over time. In 1999, there were a few no-fee brokers around, but they didn’t last long. Most other online brokers charged $9.99-24.99 per transaction, so it was nearly impossible to develop a profitable trading strategy by purchasing a share or two at a time. That monthly fee, which sounds outrageous now, was actually a good deal.
Large online brokers, once they cut fees to $0 for equity trades, enabled odd lot trading that didn’t penalize their customers with commissions on small trades. In November 2019, Interactive Brokers launched its fractional share trading capability of U.S. stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million. Others followed suit, and now there are four major brokers and several automated trading services that allow trading of fractional shares in real time. Most robo-advisors have fractional share trading enabled for balancing portfolios, though the timing of those trades is not set by investors. For example, [Stockpile](https://www.stockpile.com/) places all the trades that customers have requested during the day at market close. We included M1 Finance in this table because they also allow real-time trading of fractional shares.
## New Investors Latch on to Fractional Shares
Fidelity tells us that their fractional trading program, which launched in January 2020, has been a hit with younger investors. Nearly half (45%) of Fidelity’s fractional trading clients are between 18-35 years of age. Through the first three quarters of 2020, approximately 630,000 Fidelity accounts have traded fractional shares with the majority of the trades made in the [FAANG stocks](https://www.investopedia.com/terms/f/faang-stocks.asp) as well as Microsoft (MSFT) and Tesla (TSLA).
Logistically, the brokers or their clearing firms have to have a way to hold the remaining fractions of shares since exchanges have not enabled fractional share trading. So if you are a Schwab client and you buy 0.2 shares of Apple, the other 0.8 shares are held by Schwab in an internal inventory account. That fraction may be used to fulfill another customer’s order, or it is liquidated at the end of the trading day.
Another complexity of holding fractional shares comes if you move a brokerage account to another firm. Only full shares of stock can be transferred, so any fractional shares you hold will be liquidated, which may create a taxable event for the investor due to capital gains. The cash from those transactions can then be transferred to the new brokerage along with any full shares that you hold. An additional downside to holding fractional shares is that they cannot be hedged, and they don’t allow for basis improvement through writing covered calls.
Here are the services currently available for real-time trading of fractional shares.
## Charles Schwab “Stock Slices”
Schwab’s “[Stock Slices](https://www.aboutschwab.com/stock-slices)” program was launched on June 2, 2020. The program enables clients to purchase any S&P 500 stock for a minimum of $5 per stock. Clients can queue up a group of 10 stocks and place a single transaction, dividing their investment evenly among the 10 symbols. Customers can hold fractional shares of all 500 S&P stocks if they’d like, but only 10 at a time can be purchased. If you set up four stocks to purchase and committed $50 to this group, you would hold the fractional equivalent of $12.50 of each stock once the transaction completed.
Schwab Stock Slices are available in retail Schwab brokerage, custodial, and individual retirement accounts (IRAs). A Schwab spokesperson says, “Many new investors see this environment as an opportunity to get into the market, and this is another vehicle for them to do so.” The program is new enough that Schwab was unable to give us participation statistics.
Schwab’s offering is the most restricted in terms of the universe of stocks available and also has the highest minimum purchase.
## Fidelity’s “Stocks by the Slice”
Fidelity launched its fractional trading program, “[Stocks By The Slice,](https://www.fidelity.com/trading/fractional-shares)” at the end of January 2020. A new trade ticket was added to Fidelity’s native iOS and Android mobile apps, allowing a customer to purchase a certain dollar amount or fraction of a share of any exchange-listed stock (except for Berkshire-Hathaway type A stock, ticker BRK.A). Fidelity added fractional share trading to its web platform in fall 2020.
As of the end of Q3 2020, over 80% of participants in the fractional share program chose to make a dollar-based purchase while the rest entered orders in pieces of a share. The minimum purchase must be $1.00 or more as long as it comprises at least one one-hundredth (0.001) of a share. Trades are executed in real-time, and clients can specify a market or limit order.
![Fidelity fractional share order entry]()
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Entering an order for a fractional share of stock on Fidelity's mobile app.
Fidelity offers “Stocks by the Slice” in brokerage, HSA, IRAs, and custodial accounts. It is also available to customers with a self-directed brokerage account within their 401(K) plan. Prior to entering your first fractional share order, you’ll be prompted to review your customer agreement.
## Interactive Brokers
Interactive Brokers [Fractional Trading,](https://www.interactivebrokers.com/en/index.php?f=45718) with access to all U.S. listed stocks, is available on all of the firm’s platforms for IBKR Lite and IBKR Pro customers as well as clients of financial advisors, except those who reside in Israel or have Canadian RRSP/TFSA accounts. Eligible clients must enable fractional share trading in Client Portal/Account Management prior to placing their first trade. Fractional share purchases can be made in dollar amounts or share amounts once the account has been enabled. Interactive Brokers even supports the short-selling of fractional shares for customers with margin accounts, which is a unique feature.
This is by far the most flexible of all of the fractional share programs, both in terms of the breadth of the stocks available as well as the order types available. The current list of available stock can be found at [this link](http://www.ibkr.com/download/fracshare_stk.csv), which opens an Excel spreadsheet.
## M1 Finance
Fractional share buying is a built-in component of [M1’s Invest](https://www.m1finance.com/how-it-works/invest/) product, which launched in 2016. M1 offers most NYSE, NASDAQ and BATs traded stocks and ETFs, comprising over 6,000 exchange-listed securities. Fractional share trading is enabled for every available security. M1 aggregates all clients’ trades and executes them together during a trade window though clients can also place individual fractional share trades in real-time for an additional fee. The remainder of what’s left over after being allocated to customers’ accounts goes into an account owned by M1.
CEO Brian Barnes believes that M1 is the biggest trader of fractional shares in among U.S.-based brokers. “Every day, we do about 200,000 fractional share trades for our customers. To put that in perspective, E\*TRADE did ~44,000 trades per day for all of its customers in the month of April,” states Barnes. Barnes says that M1 owns between 0 and 1 share of the entire universe of stocks and ETFs that customers can trade. When the number of shares held by M1 exceeds 1, the full share is sold.
## Robinhood
Fractional share trading is available to all Robinhood customers, having rolled out throughout 2020. Stocks and ETFs worth over $1.00 per share with a market capitalization over $25,000,000 are eligible [for fractional share](https://robinhood.com/us/en/support/articles/fractional-shares/) orders. In addition, Robinhood clients can trade fractional shares of Alibaba and Nintendo ADRs.
If a stock or ETF isn't supported, Robinhood lets you know when you're entering the order. The minimum order size is $1 and/or 1/1000000 of a share. A Robinhood spokesperson estimates that there are just under 7,000 stocks eligible for fractional share trading.
## Opportunities and Risks for Brokers
Brokers offering fractional shares are seeing an influx of younger investors, and an increase in trading activity. Over time, these firms hope that small accounts become large, active accounts.
But for the brokers themselves, offering fractional share trading comes with a number of challenges and risks. There is the bookkeeping nightmare of keeping track of these tiny slices of stocks and ETFs, which requires some investment on the part of the brokers and their clearing firms in information services and inventory management. Then there is the financial commitment since the brokerage house itself holds the remaining fractions. In a rising market, that could generate some additional profits for the brokers, but should we see another crash, the brokers will lose money along with their clients.
Any new brokerage that launches in the next couple of years will need to consider offering fractional shares in order to compete. The new firms are already locked in to zero commissions due to what has become an industry standard. Fractional share features could be another barrier to entry to new brokerage firms.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
As younger investors enter the trading scene and find themselves looking at popular stocks that trade for over $1,000 per share, the popularity of trading fractional shares has risen considerably. A fractional share is a portion of an equity stock that is less than one full share. In the past, investors have found themselves with fractional shares in their portfolios as a result of dividend reinvestment, stock splits, or mergers and acquisition. You could hold a fractional share in your account, or sell it, but until fairly recently it’s been extremely difficult to buy part of a share.
There were a few fractional share offerings during the dot-com buildup, but they have disappeared. Several major online brokers have started to re-introduce fractional share trading, made more friendly for their customers in the wake of cutting commissions to $0. Interactive Brokers kicked it off in November 2019, and now Fidelity, Charles Schwab and Robinhood have also enabled fractional share trading. Most robo-advisors feature fractional share trading so that their clients can maximize the assets held and put all of their cash to work. There are additional brokerages working to make fractional share trading available to their customers; we will update this article as the services are launched.
This market exists because the longtime tradition of splitting shares when the price settled above $100 has evaporated, with some companies considering their extremely high share prices as an ego boost. High share prices have unfortunately made some companies an impossible investment for individual investors, taking them out of the retail market and making them available to institutions instead. Fractional shares allow some retail involvement.
Key Takeaways
Online brokers are introducing programs that allow purchases of fractional shares of stockThere are key differences between the broker offerings, including minimum purchases and the universe of available stocksZero-commission trading makes fractional share programs affordableYounger investors are participating at a higher rate than other age groups
History of Fractional Shares
There were a few scattered offerings of fractional shares starting in 1999 with the November launch of BuyandHold, which is now long gone. For a subscription of $1-3 per month, you could buy shares in small dollar amounts. The site encouraged its customers to make regular purchases on a monthly basis, building up a nest egg over time. In 1999, there were a few no-fee brokers around, but they didn’t last long. Most other online brokers charged $9.99-24.99 per transaction, so it was nearly impossible to develop a profitable trading strategy by purchasing a share or two at a time. That monthly fee, which sounds outrageous now, was actually a good deal.
Large online brokers, once they cut fees to $0 for equity trades, enabled odd lot trading that didn’t penalize their customers with commissions on small trades. In November 2019, Interactive Brokers launched its fractional share trading capability of U.S. stocks listed on NYSE, AMEX, NASDAQ, ARCA, or BATS, as well as OTC Pink U.S. penny stocks with average daily volume above $10 million and market cap above $400 million. Others followed suit, and now there are four major brokers and several automated trading services that allow trading of fractional shares in real time. Most robo-advisors have fractional share trading enabled for balancing portfolios, though the timing of those trades is not set by investors. For example, Stockpile places all the trades that customers have requested during the day at market close. We included M1 Finance in this table because they also allow real-time trading of fractional shares.
New Investors Latch on to Fractional Shares
Fidelity tells us that their fractional trading program, which launched in January 2020, has been a hit with younger investors. Nearly half (45%) of Fidelity’s fractional trading clients are between 18-35 years of age. Through the first three quarters of 2020, approximately 630,000 Fidelity accounts have traded fractional shares with the majority of the trades made in the FAANG stocks as well as Microsoft (MSFT) and Tesla (TSLA).
Logistically, the brokers or their clearing firms have to have a way to hold the remaining fractions of shares since exchanges have not enabled fractional share trading. So if you are a Schwab client and you buy 0.2 shares of Apple, the other 0.8 shares are held by Schwab in an internal inventory account. That fraction may be used to fulfill another customer’s order, or it is liquidated at the end of the trading day.
Another complexity of holding fractional shares comes if you move a brokerage account to another firm. Only full shares of stock can be transferred, so any fractional shares you hold will be liquidated, which may create a taxable event for the investor due to capital gains. The cash from those transactions can then be transferred to the new brokerage along with any full shares that you hold. An additional downside to holding fractional shares is that they cannot be hedged, and they don’t allow for basis improvement through writing covered calls.
Here are the services currently available for real-time trading of fractional shares.
Charles Schwab “Stock Slices”
Schwab’s “Stock Slices” program was launched on June 2, 2020. The program enables clients to purchase any S&P 500 stock for a minimum of $5 per stock. Clients can queue up a group of 10 stocks and place a single transaction, dividing their investment evenly among the 10 symbols. Customers can hold fractional shares of all 500 S&P stocks if they’d like, but only 10 at a time can be purchased. If you set up four stocks to purchase and committed $50 to this group, you would hold the fractional equivalent of $12.50 of each stock once the transaction completed.
Schwab Stock Slices are available in retail Schwab brokerage, custodial, and individual retirement accounts (IRAs). A Schwab spokesperson says, “Many new investors see this environment as an opportunity to get into the market, and this is another vehicle for them to do so.” The program is new enough that Schwab was unable to give us participation statistics.
Schwab’s offering is the most restricted in terms of the universe of stocks available and also has the highest minimum purchase.
Fidelity’s “Stocks by the Slice”
Fidelity launched its fractional trading program, “Stocks By The Slice,” at the end of January 2020. A new trade ticket was added to Fidelity’s native iOS and Android mobile apps, allowing a customer to purchase a certain dollar amount or fraction of a share of any exchange-listed stock (except for Berkshire-Hathaway type A stock, ticker BRK.A). Fidelity added fractional share trading to its web platform in fall 2020.
As of the end of Q3 2020, over 80% of participants in the fractional share program chose to make a dollar-based purchase while the rest entered orders in pieces of a share. The minimum purchase must be $1.00 or more as long as it comprises at least one one-hundredth (0.001) of a share. Trades are executed in real-time, and clients can specify a market or limit order.
Entering an order for a fractional share of stock on Fidelity's mobile app.
Fidelity offers “Stocks by the Slice” in brokerage, HSA, IRAs, and custodial accounts. It is also available to customers with a self-directed brokerage account within their 401(K) plan. Prior to entering your first fractional share order, you’ll be prompted to review your customer agreement.
Interactive Brokers
Interactive Brokers Fractional Trading, with access to all U.S. listed stocks, is available on all of the firm’s platforms for IBKR Lite and IBKR Pro customers as well as clients of financial advisors, except those who reside in Israel or have Canadian RRSP/TFSA accounts. Eligible clients must enable fractional share trading in Client Portal/Account Management prior to placing their first trade. Fractional share purchases can be made in dollar amounts or share amounts once the account has been enabled. Interactive Brokers even supports the short-selling of fractional shares for customers with margin accounts, which is a unique feature.
This is by far the most flexible of all of the fractional share programs, both in terms of the breadth of the stocks available as well as the order types available. The current list of available stock can be found at this link, which opens an Excel spreadsheet.
M1 Finance
Fractional share buying is a built-in component of M1’s Invest product, which launched in 2016. M1 offers most NYSE, NASDAQ and BATs traded stocks and ETFs, comprising over 6,000 exchange-listed securities. Fractional share trading is enabled for every available security. M1 aggregates all clients’ trades and executes them together during a trade window though clients can also place individual fractional share trades in real-time for an additional fee. The remainder of what’s left over after being allocated to customers’ accounts goes into an account owned by M1.
CEO Brian Barnes believes that M1 is the biggest trader of fractional shares in among U.S.-based brokers. “Every day, we do about 200,000 fractional share trades for our customers. To put that in perspective, E*TRADE did ~44,000 trades per day for all of its customers in the month of April,” states Barnes. Barnes says that M1 owns between 0 and 1 share of the entire universe of stocks and ETFs that customers can trade. When the number of shares held by M1 exceeds 1, the full share is sold.
Robinhood
Fractional share trading is available to all Robinhood customers, having rolled out throughout 2020. Stocks and ETFs worth over $1.00 per share with a market capitalization over $25,000,000 are eligible for fractional share orders. In addition, Robinhood clients can trade fractional shares of Alibaba and Nintendo ADRs.
If a stock or ETF isn't supported, Robinhood lets you know when you're entering the order. The minimum order size is $1 and/or 1/1000000 of a share. A Robinhood spokesperson estimates that there are just under 7,000 stocks eligible for fractional share trading.
Opportunities and Risks for Brokers
Brokers offering fractional shares are seeing an influx of younger investors, and an increase in trading activity. Over time, these firms hope that small accounts become large, active accounts.
But for the brokers themselves, offering fractional share trading comes with a number of challenges and risks. There is the bookkeeping nightmare of keeping track of these tiny slices of stocks and ETFs, which requires some investment on the part of the brokers and their clearing firms in information services and inventory management. Then there is the financial commitment since the brokerage house itself holds the remaining fractions. In a rising market, that could generate some additional profits for the brokers, but should we see another crash, the brokers will lose money along with their clients.
Any new brokerage that launches in the next couple of years will need to consider offering fractional shares in order to compete. The new firms are already locked in to zero commissions due to what has become an industry standard. Fractional share features could be another barrier to entry to new brokerage firms.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/how-to-buy-dividend-stocks-7503745
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How to Buy Dividend 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"> Buying dividend-paying stocks or dividend stock funds is a great way to obtain passive income from a stock portfolio. A portfolio consisting of dividend-paying stocks can compound significantly over many years. This article will outline how to add dividend-paying stocks to your portfolio, and further outline the benefits and risks of dividend-paying stocks and funds. <br/>
</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-how-to-buy-dividend-stocks"></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"> How to Buy Dividend Stocks </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Buying a stock that pays a dividend is as simple as buying any other stock. The investor opens an account at a brokerage firm, researches the dividend-paying stock or fund they want to purchase, then purchases the stock or fund through the broker’s order entry system.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-subheading__text"> Steps Required to Buy Dividend Stocks </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Buying dividend stocks is a relatively straightforward process. The investor opens and funds an account, researches the stock or fund they want to purchase, makes the purchase, and then monitors their position.
</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"> Here’s how it works.
</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"> <strong>Step 1: Open a brokerage account.</strong> Opening an account is a very easy process and can be done online. Accounts can be opened quickly, and do not require funding immediately. Dividend investing is not as intense as swing or other more active trading styles, so most online brokers are suitable for this more passive investment strategy that usually entails buying and holding positions, rather than actively trading them.
</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"> <strong>Step 2: Fund your account.</strong> The investor needs to fund their account once it has been approved and created. This can be done by <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 bank transfer</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wiretransfer.asp">wire transfer</a>, check, or by transfer from an existing investment account.
</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"> <strong>Step 3: Choose your stocks.</strong> Choosing dividend stocks or funds to invest in has become easier thanks to stock screeners available from most online brokers. The investor can use the screener to filter for dividend-paying stocks first, and you can also filter for a dividend yield above a certain rate.
</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 dividend yield of individual stocks should be compared to the level of interest rates, as well as the dividend yield of other stocks within the same industry or market sector. Once you have identified some good dividend-yielding stock candidates, determine the types of companies you want to invest in, such as the industry or sector. Other potential factors in choosing dividend stocks may include <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>, a company’s relative risk (using a stock’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">Beta</a> may be a helpful tool for this—see this <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/beta-gauging-price-fluctuations/">article</a> on how to use beta to calculate a stock’s risk), and the technical position of the stock using price charts and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> with a larger focus on the medium and long term prospects for the stock.
</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"> <strong>Step 4: Monitor your stocks.</strong> Monitoring dividend stocks is similar to monitoring any other stock positions. You want to see the overall performance of the stocks, including how the various sectors and industries you have exposure to in your portfolio are doing. In addition to monitoring this overall exposure on the stocks’ overall performance, you should also look to see that dividends continue to be paid, and ideally that the dividends are increasing. Another part of monitoring dividend stocks is assessing the company’s ability to continue to pay dividends with company earnings, and not by using cash and other resources just to maintain the dividend. This analysis relates to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualityofearnings.asp">quality of earnings</a>, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtequityratio.asp">debt-to-equity ratio</a>, and other <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp">fundamental 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"> <strong>Step 5: Receive your dividends.</strong> Dividends on stocks are typically paid quarterly. There are four dates relating to dividend payments: the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/declarationdate.asp">declaration date</a>, the ex-dividend date, the record date, and the payable date. The declaration date states the amount of the dividend payment, as well as the ex-dividend and payable dates. The ex-dividend date is the first date of trading on the stock where the dividend will not be paid to the owner of the stock. The record date is the trading day after the ex-dividend date and represents the owners of the stock that will receive the dividend. Finally, the payable date is the day the dividend payment is actually made to stockholders.
</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-what-you-need-to-open-a-dividend-stock-account"></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"> What You Need to Open a Dividend Stock Account </span> </h2>
<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"> Personal Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Similar to other stock trading accounts, brokers require certain personal information to open a dividend stock account. This information includes name, Social Security number (or taxpayer ID number), address, email address, date of birth, and a government ID (such as a license or passport).
</p>
<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"> Financial Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Brokers will also require personal financial information, such as net worth and income, under the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/knowyourclient.asp">Know Your Client</a> (KYC) rules to determine whether opening a trading account is appropriate for you.
</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"> Opening a trading account for the purpose of wealth-building and obtaining income are conservative reasons to open an account, and are usually approved if the personal information is in proper order.
</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-compare-some-top-platforms-for-investing-in-dividend-stocks"></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"> Compare Some Top Platforms for Investing in Dividend Stocks </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_33-0"> <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><b>Company</b></th>
<th><b>Fees</b></th>
<th><b>Account Minimum</b></th>
</tr>
</thead>
<tbody data-check="0">
<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&offerid=1500096.1134&type=3&subid=0" rel="sponsored nofollow">Fidelity</a></td>
<td>$0 for stock/ETF trades, $0 plus $0.65/contract for options trade</td>
<td>$0</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow">Interactive Brokers</a></td>
<td>$0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Lite; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.</td>
<td> $0</td>
</tr>
</tbody>
</table>
</div></figure>
<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-types-of-dividend-investments"></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"> Types of Dividend Investments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Dividend investment options include individual stocks, high-yield mutual funds and ETFs, and dividend-appreciation funds and ETFs. All of these investment types entail the purchase of dividend-paying stocks, but mutual funds and ETFs are investment vehicles that purchase multiple dividend stocks on behalf of their investors.
</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"> Individual Companies </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Investing in individual companies that pay a dividend is the most direct way to gain access to dividend-paying stocks in a portfolio. In this instance, the investor creates a portfolio of different companies that pay a dividend by performing their own research and making their own decisions on which stocks to hold in their portfolio. This method does not typically involve any additional expenses, especially as most online brokers provide commission-free stock trading. The investor is responsible for all of the investment decisions, however, so must do their homework and continuously monitor their positions.
</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"> High-Yield Mutual Funds and ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> High-yield mutual funds and ETFs are managed funds that select high-yielding dividend stocks on behalf of their investors. With these funds, the investor does not have to choose the individual dividend stocks for their portfolio, but they still get the dividend payments in the form of cash or by reinvesting the dividends in additional shares of the mutual fund or ETF. While most of these funds pay dividends on a quarterly basis, some do so on a monthly schedule. There are fees associated with these funds, which impact the overall performance of these funds, so the investor will have to evaluate whether the fees are worth paying relative to overall performance and not having to choose and manage the dividend stocks they are investing in themselves.
</p>
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<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"> Dividend-Appreciation Funds and ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Dividend-appreciation funds and ETFs are similar to high-yield mutual funds and ETFs, but the dividend stocks the professional managers choose for these portfolios will consist of dividend stocks that have consistently increased their dividends over several quarters. Like high-yield mutual funds and ETFs, investors need to take the funds’ fees into consideration when choosing a fund.<strong><br/></strong>
</p>
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<span class="heading-toc" id="toc-compare-some-of-the-top-dividend-stocks"></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"> Compare Some of the Top Dividend Stocks </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_48-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style="width: 159px;"></colgroup>
<colgroup span="1" style="width: 139px;"></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Company</b></th>
<th>Forward Dividend Yield</th>
<th>Payout Ratio</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="mntl-sc-block-heading__link" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FRO">Frontline PLC (FRO)</a></td>
<td> 29%</td>
<td> 0%</td>
</tr>
<tr>
<td><a class="mntl-sc-block-heading__link" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TWO">Two Harbors Investment Corp (TWO)</a></td>
<td> 19%</td>
<td> 58%</td>
</tr>
<tr>
<td><a class="mntl-sc-block-heading__link" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GNK">Genco Shipping & Trading Ltd. (GNK)</a></td>
<td> 18%</td>
<td> 73%</td>
</tr>
</tbody>
</table>
</div></figure>
<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-factors-to-consider-when-opening-a-dividend-stock-account"></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"> Factors to Consider When Opening a Dividend Stock Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> <strong>Fees:</strong> Fees are an important factor in any trading account, as fees impact the overall returns on an investment account. Fortunately for those trading individual dividend stocks, most brokers have moved to a commission-free model, so there is no cost. Commissions on individual stock trading are also very low for those trading in commission accounts, but most dividend investors are likely to choose a no-commission broker for purchasing individual dividend stocks.
</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"> Investors choosing to gain exposure to dividend stocks though mutual funds or ETFs should look at the fees and expense ratios charged by those funds, which will impact overall returns. Fees on ETFs are typically lower than on mutual funds.
</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"> <strong>Account minimums: </strong>The majority of online brokers no longer have account minimums, although some mutual fund companies have minimum investment amounts when investing directly through them. However, investors can gain access to many dividend mutual funds and ETFs directly through one of the many commission-free online brokers.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <strong>Research and trading tools: </strong>Research on dividend stocks is an important factor in deciding on which stocks to add to a portfolio, so it is helpful to use a broker that offers a good stock screener, as well as good fundamental and technical information for researching companies and industries.
</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 for trading tools, having the ability to use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conditionalorder.asp">conditional orders</a> to manage trading positions for profit and loss management, and the ability trade and monitor positions directly from a price chart, are nice-to-have features, but less critical since dividend investing typically involves more of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyandhold.asp">buy and hold</a>, and much less active, trading style. This article explores the pros and cons of a passive buy and hold strategy.
</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"> <strong>Customer service:</strong> With any broker, good customer service is a nice thing to have. While choosing and investing in dividend stocks and funds is a pretty straightforward endeavor, those newer to investing may particularly benefit from responsive customer service that can help them learn how to use stock screeners, make decisions on automatic reinvestment options, and execute trades. Some brokers offer live chat services in addition to customer service by phone, and there is a difference between brokers on their response times.
</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"> <strong>Security:</strong> Account security, including features such as <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>, is important to ensure the safety of your trading account. In addition, while most brokers have <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sipc.asp">Securities Investor Protection Company (SIPC)</a> protection on accounts, some brokers offer additional account protection—typically through excess coverage beyond SIPC protection through Lloyd’s of London insurance policies backing the broker—that might be an important consideration for investors with accounts exceeding SIPC coverage limits.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<span class="heading-toc" id="toc-faqs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> FAQs </span> </h2>
<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-how-are-dividend-stocks-taxed"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Dividend Stocks Taxed?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualifieddividend.asp">qualified</a> and unqualified dividends are included on a tax return, but they are treated differently for tax purposes. Ordinary dividends are the most common dividend paid by stocks and mutual funds that invest in stocks, and represent payments to the stockholder from a company’s earnings and profits. Ordinary dividends can be either qualified or unqualified. Unqualified dividends include dividends from regular dividend-paying stocks that are not held by the investor for a certain required holding period, as well as dividends from most <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts (REITs)</a>, employee stock option plans, tax-exempt companies, and mutual funds that invest in fixed income products (including money market mutual funds). The holding period for a stock dividend to be a qualified dividend, for an otherwise qualifying stock, is 61 or more days out of the 121 day period that starts 60 days before the stock’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ex-date.asp">ex-dividend</a> date (for preferred stocks, the holding period is 91 days out of the 181 day period starting 90 days before the ex-dividend date).</p><p>Unqualified dividends are taxed as ordinary income at the tax filer’s tax rate based on their overall income. Tax rates for qualified dividends are also based on the taxpayer’s income, but are lower, in line with capital gains tax rates, which are currently either 0%, 15%, or 20%. For 2023, the breakpoints on qualified dividends for an individual tax filer are 0% up to $41,675 in taxable income, then 15% to $459,750, then 20%. For those married and filing jointly, the breakpoints are 0% up to 83,350, then 15% to $517,200, then 20%, so there is a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marriage-penalty.asp">marriage penalty</a> on qualified dividend taxation for those married and filing jointly if their combined income is more than $459,750.<br/></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-are-dividend-stocks-the-same-as-dividend-funds"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Dividend Stocks the Same as Dividend Funds?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A dividend stock is an individual stock, while a dividend fund is a mutual fund or ETF that invests in multiple dividend-paying stocks. Investors in dividend funds can choose to reinvest dividends for more shares of the fund or ETF or simply take the dividends as an income stream. Holders of individual dividend stocks can take their dividends as an income stream or may have the option to participate in a Dividend Reinvestment Plan (DRIP) that automatically reinvests dividends for additional shares of the individual dividend-paying stock.</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-are-dividend-stocks-a-volatile-investment"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Dividend Stocks a Volatile Investment?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Like with any stock, dividend stocks are impacted by the overall rise and fall of the markets, making them vulnerable to periods of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>. But as a whole, these stocks have a tendency to be less volatile than non-dividend stocks. In part, this is because investors in dividend stocks have a tendency to be buy-and-hold investors looking for passive income, rather than very active traders. Other criteria that can be helpful to screen for includes companies with strong cash flow, long-term earnings between 5% and 15%, and low debt-to-equity ratios.</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-who-should-invest-in-dividend-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Should Invest in Dividend Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Any investor looking to accumulate wealth over the long term should consider including dividend stocks as part of their overall portfolio. Investing in dividend stocks has long been adopted as a solid method for building wealth over long periods of time, and dividend investing will likely continue to be used for this purpose because it offers passive income and compounds over time, and also provides a hedge against <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/search?q=what+is+inflation">inflation</a> more effectively than bonds.</p></div>
</div></div>
|
Buying dividend-paying stocks or dividend stock funds is a great way to obtain passive income from a stock portfolio. A portfolio consisting of dividend-paying stocks can compound significantly over many years. This article will outline how to add dividend-paying stocks to your portfolio, and further outline the benefits and risks of dividend-paying stocks and funds.
## How to Buy Dividend Stocks
Buying a stock that pays a dividend is as simple as buying any other stock. The investor opens an account at a brokerage firm, researches the dividend-paying stock or fund they want to purchase, then purchases the stock or fund through the broker’s order entry system.
### Steps Required to Buy Dividend Stocks
Buying dividend stocks is a relatively straightforward process. The investor opens and funds an account, researches the stock or fund they want to purchase, makes the purchase, and then monitors their position.
Here’s how it works.
**Step 1: Open a brokerage account.** Opening an account is a very easy process and can be done online. Accounts can be opened quickly, and do not require funding immediately. Dividend investing is not as intense as swing or other more active trading styles, so most online brokers are suitable for this more passive investment strategy that usually entails buying and holding positions, rather than actively trading them.
**Step 2: Fund your account.** The investor needs to fund their account once it has been approved and created. This can be done by [ACH bank transfer](https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120), [wire transfer](https://www.investopedia.com/terms/w/wiretransfer.asp), check, or by transfer from an existing investment account.
**Step 3: Choose your stocks.** Choosing dividend stocks or funds to invest in has become easier thanks to stock screeners available from most online brokers. The investor can use the screener to filter for dividend-paying stocks first, and you can also filter for a dividend yield above a certain rate.
The dividend yield of individual stocks should be compared to the level of interest rates, as well as the dividend yield of other stocks within the same industry or market sector. Once you have identified some good dividend-yielding stock candidates, determine the types of companies you want to invest in, such as the industry or sector. Other potential factors in choosing dividend stocks may include [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp), a company’s relative risk (using a stock’s [Beta](https://www.investopedia.com/terms/b/beta.asp) may be a helpful tool for this—see this [article](https://www.investopedia.com/investing/beta-gauging-price-fluctuations/) on how to use beta to calculate a stock’s risk), and the technical position of the stock using price charts and [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) with a larger focus on the medium and long term prospects for the stock.
**Step 4: Monitor your stocks.** Monitoring dividend stocks is similar to monitoring any other stock positions. You want to see the overall performance of the stocks, including how the various sectors and industries you have exposure to in your portfolio are doing. In addition to monitoring this overall exposure on the stocks’ overall performance, you should also look to see that dividends continue to be paid, and ideally that the dividends are increasing. Another part of monitoring dividend stocks is assessing the company’s ability to continue to pay dividends with company earnings, and not by using cash and other resources just to maintain the dividend. This analysis relates to the [quality of earnings](https://www.investopedia.com/terms/q/qualityofearnings.asp), the [debt-to-equity ratio](https://www.investopedia.com/terms/d/debtequityratio.asp), and other [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp).
**Step 5: Receive your dividends.** Dividends on stocks are typically paid quarterly. There are four dates relating to dividend payments: the [declaration date](https://www.investopedia.com/terms/d/declarationdate.asp), the ex-dividend date, the record date, and the payable date. The declaration date states the amount of the dividend payment, as well as the ex-dividend and payable dates. The ex-dividend date is the first date of trading on the stock where the dividend will not be paid to the owner of the stock. The record date is the trading day after the ex-dividend date and represents the owners of the stock that will receive the dividend. Finally, the payable date is the day the dividend payment is actually made to stockholders.
## What You Need to Open a Dividend Stock Account
### Personal Information
Similar to other stock trading accounts, brokers require certain personal information to open a dividend stock account. This information includes name, Social Security number (or taxpayer ID number), address, email address, date of birth, and a government ID (such as a license or passport).
### Financial Information
Brokers will also require personal financial information, such as net worth and income, under the [Know Your Client](https://www.investopedia.com/terms/k/knowyourclient.asp) (KYC) rules to determine whether opening a trading account is appropriate for you.
Opening a trading account for the purpose of wealth-building and obtaining income are conservative reasons to open an account, and are usually approved if the personal information is in proper order.
## Compare Some Top Platforms for Investing in Dividend Stocks
| **Company** | **Fees** | **Account Minimum** |
| --- | --- | --- |
| [Fidelity](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=1500096.1134&type=3&subid=0) | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade | $0 |
| [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) | $0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Lite; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures. | $0 |
## Types of Dividend Investments
Dividend investment options include individual stocks, high-yield mutual funds and ETFs, and dividend-appreciation funds and ETFs. All of these investment types entail the purchase of dividend-paying stocks, but mutual funds and ETFs are investment vehicles that purchase multiple dividend stocks on behalf of their investors.
### Individual Companies
Investing in individual companies that pay a dividend is the most direct way to gain access to dividend-paying stocks in a portfolio. In this instance, the investor creates a portfolio of different companies that pay a dividend by performing their own research and making their own decisions on which stocks to hold in their portfolio. This method does not typically involve any additional expenses, especially as most online brokers provide commission-free stock trading. The investor is responsible for all of the investment decisions, however, so must do their homework and continuously monitor their positions.
### High-Yield Mutual Funds and ETFs
High-yield mutual funds and ETFs are managed funds that select high-yielding dividend stocks on behalf of their investors. With these funds, the investor does not have to choose the individual dividend stocks for their portfolio, but they still get the dividend payments in the form of cash or by reinvesting the dividends in additional shares of the mutual fund or ETF. While most of these funds pay dividends on a quarterly basis, some do so on a monthly schedule. There are fees associated with these funds, which impact the overall performance of these funds, so the investor will have to evaluate whether the fees are worth paying relative to overall performance and not having to choose and manage the dividend stocks they are investing in themselves.
### Dividend-Appreciation Funds and ETFs
Dividend-appreciation funds and ETFs are similar to high-yield mutual funds and ETFs, but the dividend stocks the professional managers choose for these portfolios will consist of dividend stocks that have consistently increased their dividends over several quarters. Like high-yield mutual funds and ETFs, investors need to take the funds’ fees into consideration when choosing a fund.
## Compare Some of the Top Dividend Stocks
| **Company** | Forward Dividend Yield | Payout Ratio |
| --- | --- | --- |
| [Frontline PLC (FRO)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FRO) | 29% | 0% |
| [Two Harbors Investment Corp (TWO)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TWO) | 19% | 58% |
| [Genco Shipping & Trading Ltd. (GNK)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GNK) | 18% | 73% |
## Factors to Consider When Opening a Dividend Stock Account
**Fees:** Fees are an important factor in any trading account, as fees impact the overall returns on an investment account. Fortunately for those trading individual dividend stocks, most brokers have moved to a commission-free model, so there is no cost. Commissions on individual stock trading are also very low for those trading in commission accounts, but most dividend investors are likely to choose a no-commission broker for purchasing individual dividend stocks.
Investors choosing to gain exposure to dividend stocks though mutual funds or ETFs should look at the fees and expense ratios charged by those funds, which will impact overall returns. Fees on ETFs are typically lower than on mutual funds.
**Account minimums:** The majority of online brokers no longer have account minimums, although some mutual fund companies have minimum investment amounts when investing directly through them. However, investors can gain access to many dividend mutual funds and ETFs directly through one of the many commission-free online brokers.
**Research and trading tools:** Research on dividend stocks is an important factor in deciding on which stocks to add to a portfolio, so it is helpful to use a broker that offers a good stock screener, as well as good fundamental and technical information for researching companies and industries.
As for trading tools, having the ability to use [conditional orders](https://www.investopedia.com/terms/c/conditionalorder.asp) to manage trading positions for profit and loss management, and the ability trade and monitor positions directly from a price chart, are nice-to-have features, but less critical since dividend investing typically involves more of a [buy and hold](https://www.investopedia.com/terms/b/buyandhold.asp), and much less active, trading style. This article explores the pros and cons of a passive buy and hold strategy.
**Customer service:** With any broker, good customer service is a nice thing to have. While choosing and investing in dividend stocks and funds is a pretty straightforward endeavor, those newer to investing may particularly benefit from responsive customer service that can help them learn how to use stock screeners, make decisions on automatic reinvestment options, and execute trades. Some brokers offer live chat services in addition to customer service by phone, and there is a difference between brokers on their response times.
**Security:** Account security, including features such as [two-factor authentication](https://www.investopedia.com/terms/t/twofactor-authentication-2fa.asp), is important to ensure the safety of your trading account. In addition, while most brokers have [Securities Investor Protection Company (SIPC)](https://www.investopedia.com/terms/s/sipc.asp) protection on accounts, some brokers offer additional account protection—typically through excess coverage beyond SIPC protection through Lloyd’s of London insurance policies backing the broker—that might be an important consideration for investors with accounts exceeding SIPC coverage limits.
## FAQs
## How Are Dividend Stocks Taxed?
Both [qualified](https://www.investopedia.com/terms/q/qualifieddividend.asp) and unqualified dividends are included on a tax return, but they are treated differently for tax purposes. Ordinary dividends are the most common dividend paid by stocks and mutual funds that invest in stocks, and represent payments to the stockholder from a company’s earnings and profits. Ordinary dividends can be either qualified or unqualified. Unqualified dividends include dividends from regular dividend-paying stocks that are not held by the investor for a certain required holding period, as well as dividends from most [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp), employee stock option plans, tax-exempt companies, and mutual funds that invest in fixed income products (including money market mutual funds). The holding period for a stock dividend to be a qualified dividend, for an otherwise qualifying stock, is 61 or more days out of the 121 day period that starts 60 days before the stock’s [ex-dividend](https://www.investopedia.com/terms/e/ex-date.asp) date (for preferred stocks, the holding period is 91 days out of the 181 day period starting 90 days before the ex-dividend date).
Unqualified dividends are taxed as ordinary income at the tax filer’s tax rate based on their overall income. Tax rates for qualified dividends are also based on the taxpayer’s income, but are lower, in line with capital gains tax rates, which are currently either 0%, 15%, or 20%. For 2023, the breakpoints on qualified dividends for an individual tax filer are 0% up to $41,675 in taxable income, then 15% to $459,750, then 20%. For those married and filing jointly, the breakpoints are 0% up to 83,350, then 15% to $517,200, then 20%, so there is a [marriage penalty](https://www.investopedia.com/terms/m/marriage-penalty.asp) on qualified dividend taxation for those married and filing jointly if their combined income is more than $459,750.
## Are Dividend Stocks the Same as Dividend Funds?
A dividend stock is an individual stock, while a dividend fund is a mutual fund or ETF that invests in multiple dividend-paying stocks. Investors in dividend funds can choose to reinvest dividends for more shares of the fund or ETF or simply take the dividends as an income stream. Holders of individual dividend stocks can take their dividends as an income stream or may have the option to participate in a Dividend Reinvestment Plan (DRIP) that automatically reinvests dividends for additional shares of the individual dividend-paying stock.
## Are Dividend Stocks a Volatile Investment?
Like with any stock, dividend stocks are impacted by the overall rise and fall of the markets, making them vulnerable to periods of [volatility](https://www.investopedia.com/terms/v/volatility.asp). But as a whole, these stocks have a tendency to be less volatile than non-dividend stocks. In part, this is because investors in dividend stocks have a tendency to be buy-and-hold investors looking for passive income, rather than very active traders. Other criteria that can be helpful to screen for includes companies with strong cash flow, long-term earnings between 5% and 15%, and low debt-to-equity ratios.
## Who Should Invest in Dividend Stocks?
Any investor looking to accumulate wealth over the long term should consider including dividend stocks as part of their overall portfolio. Investing in dividend stocks has long been adopted as a solid method for building wealth over long periods of time, and dividend investing will likely continue to be used for this purpose because it offers passive income and compounds over time, and also provides a hedge against [inflation](https://www.investopedia.com/search?q=what+is+inflation) more effectively than bonds.
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Buying dividend-paying stocks or dividend stock funds is a great way to obtain passive income from a stock portfolio. A portfolio consisting of dividend-paying stocks can compound significantly over many years. This article will outline how to add dividend-paying stocks to your portfolio, and further outline the benefits and risks of dividend-paying stocks and funds.
How to Buy Dividend Stocks
Buying a stock that pays a dividend is as simple as buying any other stock. The investor opens an account at a brokerage firm, researches the dividend-paying stock or fund they want to purchase, then purchases the stock or fund through the broker’s order entry system.
Steps Required to Buy Dividend Stocks
Buying dividend stocks is a relatively straightforward process. The investor opens and funds an account, researches the stock or fund they want to purchase, makes the purchase, and then monitors their position.
Here’s how it works.
Step 1: Open a brokerage account. Opening an account is a very easy process and can be done online. Accounts can be opened quickly, and do not require funding immediately. Dividend investing is not as intense as swing or other more active trading styles, so most online brokers are suitable for this more passive investment strategy that usually entails buying and holding positions, rather than actively trading them.
Step 2: Fund your account. The investor needs to fund their account once it has been approved and created. This can be done by ACH bank transfer, wire transfer, check, or by transfer from an existing investment account.
Step 3: Choose your stocks. Choosing dividend stocks or funds to invest in has become easier thanks to stock screeners available from most online brokers. The investor can use the screener to filter for dividend-paying stocks first, and you can also filter for a dividend yield above a certain rate.
The dividend yield of individual stocks should be compared to the level of interest rates, as well as the dividend yield of other stocks within the same industry or market sector. Once you have identified some good dividend-yielding stock candidates, determine the types of companies you want to invest in, such as the industry or sector. Other potential factors in choosing dividend stocks may include market capitalization, a company’s relative risk (using a stock’s Beta may be a helpful tool for this—see this article on how to use beta to calculate a stock’s risk), and the technical position of the stock using price charts and technical analysis with a larger focus on the medium and long term prospects for the stock.
Step 4: Monitor your stocks. Monitoring dividend stocks is similar to monitoring any other stock positions. You want to see the overall performance of the stocks, including how the various sectors and industries you have exposure to in your portfolio are doing. In addition to monitoring this overall exposure on the stocks’ overall performance, you should also look to see that dividends continue to be paid, and ideally that the dividends are increasing. Another part of monitoring dividend stocks is assessing the company’s ability to continue to pay dividends with company earnings, and not by using cash and other resources just to maintain the dividend. This analysis relates to the quality of earnings, the debt-to-equity ratio, and other fundamental analysis.
Step 5: Receive your dividends. Dividends on stocks are typically paid quarterly. There are four dates relating to dividend payments: the declaration date, the ex-dividend date, the record date, and the payable date. The declaration date states the amount of the dividend payment, as well as the ex-dividend and payable dates. The ex-dividend date is the first date of trading on the stock where the dividend will not be paid to the owner of the stock. The record date is the trading day after the ex-dividend date and represents the owners of the stock that will receive the dividend. Finally, the payable date is the day the dividend payment is actually made to stockholders.
What You Need to Open a Dividend Stock Account
Personal Information
Similar to other stock trading accounts, brokers require certain personal information to open a dividend stock account. This information includes name, Social Security number (or taxpayer ID number), address, email address, date of birth, and a government ID (such as a license or passport).
Financial Information
Brokers will also require personal financial information, such as net worth and income, under the Know Your Client (KYC) rules to determine whether opening a trading account is appropriate for you.
Opening a trading account for the purpose of wealth-building and obtaining income are conservative reasons to open an account, and are usually approved if the personal information is in proper order.
Compare Some Top Platforms for Investing in Dividend Stocks
Company
Fees
Account Minimum
Fidelity
$0 for stock/ETF trades, $0 plus $0.65/contract for options trade
$0
Interactive Brokers
$0.00 commissions for equities/ETFs available on IBKR’s TWS Lite, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Lite; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.
$0
Types of Dividend Investments
Dividend investment options include individual stocks, high-yield mutual funds and ETFs, and dividend-appreciation funds and ETFs. All of these investment types entail the purchase of dividend-paying stocks, but mutual funds and ETFs are investment vehicles that purchase multiple dividend stocks on behalf of their investors.
Individual Companies
Investing in individual companies that pay a dividend is the most direct way to gain access to dividend-paying stocks in a portfolio. In this instance, the investor creates a portfolio of different companies that pay a dividend by performing their own research and making their own decisions on which stocks to hold in their portfolio. This method does not typically involve any additional expenses, especially as most online brokers provide commission-free stock trading. The investor is responsible for all of the investment decisions, however, so must do their homework and continuously monitor their positions.
High-Yield Mutual Funds and ETFs
High-yield mutual funds and ETFs are managed funds that select high-yielding dividend stocks on behalf of their investors. With these funds, the investor does not have to choose the individual dividend stocks for their portfolio, but they still get the dividend payments in the form of cash or by reinvesting the dividends in additional shares of the mutual fund or ETF. While most of these funds pay dividends on a quarterly basis, some do so on a monthly schedule. There are fees associated with these funds, which impact the overall performance of these funds, so the investor will have to evaluate whether the fees are worth paying relative to overall performance and not having to choose and manage the dividend stocks they are investing in themselves.
Dividend-Appreciation Funds and ETFs
Dividend-appreciation funds and ETFs are similar to high-yield mutual funds and ETFs, but the dividend stocks the professional managers choose for these portfolios will consist of dividend stocks that have consistently increased their dividends over several quarters. Like high-yield mutual funds and ETFs, investors need to take the funds’ fees into consideration when choosing a fund.
Compare Some of the Top Dividend Stocks
Company
Forward Dividend Yield
Payout Ratio
Frontline PLC (FRO)
29%
0%
Two Harbors Investment Corp (TWO)
19%
58%
Genco Shipping & Trading Ltd. (GNK)
18%
73%
Factors to Consider When Opening a Dividend Stock Account
Fees: Fees are an important factor in any trading account, as fees impact the overall returns on an investment account. Fortunately for those trading individual dividend stocks, most brokers have moved to a commission-free model, so there is no cost. Commissions on individual stock trading are also very low for those trading in commission accounts, but most dividend investors are likely to choose a no-commission broker for purchasing individual dividend stocks.
Investors choosing to gain exposure to dividend stocks though mutual funds or ETFs should look at the fees and expense ratios charged by those funds, which will impact overall returns. Fees on ETFs are typically lower than on mutual funds.
Account minimums: The majority of online brokers no longer have account minimums, although some mutual fund companies have minimum investment amounts when investing directly through them. However, investors can gain access to many dividend mutual funds and ETFs directly through one of the many commission-free online brokers.
Research and trading tools: Research on dividend stocks is an important factor in deciding on which stocks to add to a portfolio, so it is helpful to use a broker that offers a good stock screener, as well as good fundamental and technical information for researching companies and industries.
As for trading tools, having the ability to use conditional orders to manage trading positions for profit and loss management, and the ability trade and monitor positions directly from a price chart, are nice-to-have features, but less critical since dividend investing typically involves more of a buy and hold, and much less active, trading style. This article explores the pros and cons of a passive buy and hold strategy.
Customer service: With any broker, good customer service is a nice thing to have. While choosing and investing in dividend stocks and funds is a pretty straightforward endeavor, those newer to investing may particularly benefit from responsive customer service that can help them learn how to use stock screeners, make decisions on automatic reinvestment options, and execute trades. Some brokers offer live chat services in addition to customer service by phone, and there is a difference between brokers on their response times.
Security: Account security, including features such as two-factor authentication, is important to ensure the safety of your trading account. In addition, while most brokers have Securities Investor Protection Company (SIPC) protection on accounts, some brokers offer additional account protection—typically through excess coverage beyond SIPC protection through Lloyd’s of London insurance policies backing the broker—that might be an important consideration for investors with accounts exceeding SIPC coverage limits.
FAQs
How Are Dividend Stocks Taxed?
Both qualified and unqualified dividends are included on a tax return, but they are treated differently for tax purposes. Ordinary dividends are the most common dividend paid by stocks and mutual funds that invest in stocks, and represent payments to the stockholder from a company’s earnings and profits. Ordinary dividends can be either qualified or unqualified. Unqualified dividends include dividends from regular dividend-paying stocks that are not held by the investor for a certain required holding period, as well as dividends from most real estate investment trusts (REITs), employee stock option plans, tax-exempt companies, and mutual funds that invest in fixed income products (including money market mutual funds). The holding period for a stock dividend to be a qualified dividend, for an otherwise qualifying stock, is 61 or more days out of the 121 day period that starts 60 days before the stock’s ex-dividend date (for preferred stocks, the holding period is 91 days out of the 181 day period starting 90 days before the ex-dividend date).Unqualified dividends are taxed as ordinary income at the tax filer’s tax rate based on their overall income. Tax rates for qualified dividends are also based on the taxpayer’s income, but are lower, in line with capital gains tax rates, which are currently either 0%, 15%, or 20%. For 2023, the breakpoints on qualified dividends for an individual tax filer are 0% up to $41,675 in taxable income, then 15% to $459,750, then 20%. For those married and filing jointly, the breakpoints are 0% up to 83,350, then 15% to $517,200, then 20%, so there is a marriage penalty on qualified dividend taxation for those married and filing jointly if their combined income is more than $459,750.
Are Dividend Stocks the Same as Dividend Funds?
A dividend stock is an individual stock, while a dividend fund is a mutual fund or ETF that invests in multiple dividend-paying stocks. Investors in dividend funds can choose to reinvest dividends for more shares of the fund or ETF or simply take the dividends as an income stream. Holders of individual dividend stocks can take their dividends as an income stream or may have the option to participate in a Dividend Reinvestment Plan (DRIP) that automatically reinvests dividends for additional shares of the individual dividend-paying stock.
Are Dividend Stocks a Volatile Investment?
Like with any stock, dividend stocks are impacted by the overall rise and fall of the markets, making them vulnerable to periods of volatility. But as a whole, these stocks have a tendency to be less volatile than non-dividend stocks. In part, this is because investors in dividend stocks have a tendency to be buy-and-hold investors looking for passive income, rather than very active traders. Other criteria that can be helpful to screen for includes companies with strong cash flow, long-term earnings between 5% and 15%, and low debt-to-equity ratios.
Who Should Invest in Dividend Stocks?
Any investor looking to accumulate wealth over the long term should consider including dividend stocks as part of their overall portfolio. Investing in dividend stocks has long been adopted as a solid method for building wealth over long periods of time, and dividend investing will likely continue to be used for this purpose because it offers passive income and compounds over time, and also provides a hedge against inflation more effectively than bonds.
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https://www.investopedia.com/how-to-buy-and-sell-bitcoin-options-7378233
|
How To Buy and Sell Bitcoin Options
|
<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"> Bitcoin options are financial derivatives that enable investors to speculate on the price of the digital currency with leverage or hedge their digital asset portfolios. Available on both traditional derivatives exchanges and on crypto trading platforms, Bitcoin options have emerged as a popular investment product among advanced crypto traders.
</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"> For individuals looking to trade Bitcoin options, finding the right trading venue that offers ample liquidity and a high level of security is essential. We’ve compiled the basics every option trader should know, and have structured this guide for trading Bitcoin options to answer the most common questions novice option traders have.
</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>Bitcoin options are financial derivatives contracts that allow you to buy or sell Bitcoin at a predetermined price on a specific future date.</li><li>Trading Bitcoin and other cryptocurrency options works much the same as other options, except they're typically less liquid.</li><li>There are some trading platforms and crypto exchanges where you can trade Bitcoin options; but you'll need to set up and fund an account first.</li><li>Trading Bitcoin options is riskier and more complex than trading spot Bitcoin, which is itself risky and speculative.</li><li>Traders should conduct as much research as possible (including consulting with a financial advisor) before trading Bitcoin options, and must select a reputable reputable crypto derivatives exchange with strong security for their trades.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-bitcoin-options"></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 Bitcoin Options </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/articles/active-trading/040915/guide-option-trading-strategies-beginners.asp">Options</a> are financial derivatives contracts that give holders the right but not the obligation to buy or sell a predetermined amount of an asset at a specified price, and at a specific date in the future.
</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"> In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin (BTC). While the cryptocurrency options market is still fairly new, you can already trade Bitcoin and Ethereum options on a handful of traditional securities exchanges and crypto trading platforms.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><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_13-0"><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>Traders who wish to gain exposure to Bitcoin now have additional choices. The 11 recently launched <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-start-trading-today-heres-what-you-need-to-know-8425024">spot Bitcoin exchange-traded funds (ETFs)</a>, which were approved by the U.S. Securities and Exchange Commission in January 2024, each offer a basket of cryptocurrency securities and can be traded on Cboe BZX, NYSE Arca, and Nasdaq.<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_14-0"> From a technical point of view, cryptocurrency options and options contracts on assets like stocks, indexes, or commodities function in essentially the same way. However, crypto options are generally less liquid than options on leading stock indexes or commodities like gold. That’s a result of the crypto markets still being a lot smaller than traditional investment markets.
</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"> European vs. American </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> There are two main types of options contracts: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/08/american-european-options.asp">European and American</a>. The key difference between the two is that European-style options can only be exercised at expiration, while American-style options can be exercised at any time up until the expiry date.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> ITM vs. ATM vs. OTM </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> An options position can either be in the money, at the money, or out of the money.
</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>An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inthemoney.asp">in-the-money (ITM)</a> option refers to the situation when the option has intrinsic value. If you exercised an in-the-money option you would profit. For call options, this is when the market price is higher than the strike price. Put options are in-the-money when the market price is below the strike price.</li>
<li>An <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outofthemoney.asp">out-of-the-money (OTM)</a> option refers to a situation when you would lose money if you exercised the option, meaning the option currently has no intrinsic value. In the case of call options, this is when the market price is lower than the strike price. For put options, this is when the market price is higher than the strike price.</li>
<li>An <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/08/option-moneyness.asp">at-the-money (ATM)</a> option is currently trading at the strike price. </li>
</ul>
<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"> Calls vs. Puts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> You can either buy a call or a put option. A call gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.
</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"> Whether you buy or sell a Bitcoin put option or call option depends on whether you want to speculate on a rising or falling price or whether you are looking to hedge crypto exposure.
</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"> Physical vs. Cash Settle </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Options can either be cash settled or physically settled. For example, if you trade cocoa options, you could—if the options contract determines it—receive shipments of cocoa once the options contract expires.
</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"> When bitcoin options are settled physically, the bitcoin is transferred between the two parties. When cash settlement is used, the parties would exchange dollars or another currency.
</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-opening-an-options-trading-account"></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"> Opening an Options Trading Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Generally, you'll want an options trading platform that supports the trades you're looking to make, with costs that are affordable for you.
</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"> Our picks of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-options-trading-4587876">best options trading platforms</a> below allow you to trade options, cryptocurrency, and even crypto futures.<br/>
</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=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">Best Options Trading Platforms</th>
</tr>
<tr>
<th>Platform</th>
<th><b>Account</b> <b>Minimum</b></th>
<th> <b>Fees</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://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1" rel="sponsored nofollow">tastytrade</a></td>
<td>$0</td>
<td>$0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow">Interactive Brokers</a></td>
<td>$0 </td>
<td>$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders on TWS Pro. $0.65 per contract for options on TWS Light. $0.15 to $0.65 per contract on TWS Pro.</td>
</tr>
<tr>
<td>E*TRADE</td>
<td>$0</td>
<td>No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.webull.com/activity?source=Investopedia-Per" rel="sponsored nofollow">Webull</a> </td>
<td>$0 </td>
<td>$0 commissions for stock, ETF, options, and cryptocurrency trading</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> For Bitcoin options specifically, a crypto trading platform is likely preferable. Examples of crypto trading platforms that provide Bitcoin options include:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0">
<li>Bit.com</li>
<li>Bybit</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/deribit-review-5215948">Deribit</a></li>
<li><a data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://okx.sjv.io/c/328256/1387591/15383?subid1=7378233&subid2=n2c5684fe87004581938d8a183f01f50819" rel="nofollow">OKX</a>.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div>
<span class="heading-toc" id="toc-risks-to-watch-for-when-trading-bitcoin-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-heading__text"> Risks To Watch for When Trading Bitcoin Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Before you begin, know that trading cryptocurrency options involves a high level of risk. If you are new to derivatives trading, you should start with a demo account to learn the ins and outs of options trading before putting investment capital at risk.
</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"> Also keep in mind that Bitcoin itself is not regulated as a security, but rather is considered a digital currency.<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_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-important" 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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crypto-exchange-interview-5209280">Investing in cryptocurrencies</a>, decentralized finance (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/decentralized-finance-defi-5113835">DeFi</a>), and initial coin offerings (ICOs) is highly risky and speculative, and the markets can be extremely volatile. Consult with a qualified professional before making any financial decisions.</p></div></div></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"> Options Are Riskier Than Spot Trading </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Trading Bitcoin options is generally riskier than buying and selling Bitcoin in the spot market.
</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"> For example, suppose you buy a call option on Bitcoin with a strike price of $35,000 and an expiry date that is three months away. If the price of Bitcoin doesn’t surpass $35,000 by the expiration date, you will lose the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/112213/getting-handle-options-premium.asp">options premium</a> (the price you paid for the option) in full.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_56-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_57-0"> <span class="mntl-sc-block-subheading__text"> Options Are More Complex Than Spot Trading </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> When trading Bitcoin options, the price of Bitcoin is not the only factor affecting the value of options contracts. There are several key factors that affect the value of the options you buy or sell, but time decay is by far the most critical. That’s because as the time moves closer to the expiry date, the value of an options contract decreases because the time remaining to trade or exercise the options diminishes.
</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"> The Bitcoin Options Market Is Less Established </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> While Bitcoin options can be found on traditional securities exchanges, like the Chicago Mercantile Exchange (CME), and on dedicated crypto trading platforms, the BTC options market is still quite young and doesn’t have the deep liquidity found in mature options markets. This can affect price <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/slippage.asp">slippage</a>, especially in options with longer maturities.
</p>
<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-how-to-trade-bitcoin-options"></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"> How To Trade Bitcoin Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Trading Bitcoin options is different from trading spot Bitcoin. Not only is the risk profile of your trade completely different, but there is a range of different aspects to consider when looking at which Bitcoin options contracts to buy or sell.
</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"> Before you can start trading Bitcoin options, you need to sign up with an exchange that supports crypto derivatives. If your online brokerage account provides you with access to the CME, you could trade Bitcoin options on the leading securities exchange. For most private investors, however, the more likely choice will be to sign up with a digital asset exchange that offers Bitcoin options trading, such as Bit.com, Bybit, Deribit, or OKX.<br>
</br></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"> Here’s how it works.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-subheading__text"> Step 1: Sign Up for a Crypto Exchange </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Find a digital asset exchange that offers Bitcoin options trading. Ensure you select a reputable exchange; then complete the onboarding process.
</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"> Step 2: Deposit Funds in Your Trading Account </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Next, deposit U.S. dollars (using one of the exchange’s available fiat funding options) or cryptocurrency in your exchange account. <br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-subheading__text"> Step 3: Practice Trading Options Using a Demo Account </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Ideally, the exchange you have signed up for offers a demo trading account where you can start trading Bitcoin options without putting real capital at risk. That way, you can become comfortable with how the options <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/getting-to-know-the-greeks/">Greeks</a> affect Bitcoin options.
</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"> Step 4: Research the Bitcoin Market </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> Learn what drives the price of Bitcoin to get an idea of what type of options trading strategy is best suited for the cryptocurrency and for your risk/return profile. The more you learn about the Bitcoin market and Bitcoin options, the more likely you'll be able to trade options profitably.
</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"> Step 5: Place Your First Bitcoin Options Trade </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Once you feel comfortable with Bitcoin options and how they work, you can place your first trade using the platform.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div>
<span class="heading-toc" id="toc-what-you-need-to-open-an-options-trading-account"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_85-0"> <span class="mntl-sc-block-heading__text"> What You Need To Open an Options Trading Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> To open an options trading account, you'll need the same documents as for a standard spot trading account.<br/>
</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"> Personal Information </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Crypto options trading platforms generally require the following information from you:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> <li>Full name</li><li>Email address</li><li>Phone number </li><li>Home address</li>
</ul>
<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"> Additionally, to pass a trading platform’s <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> verification process, you may also need to provide a scanned copy of your government-issued ID (such as a passport or a driver’s license) and proof of address (such as a utility bill or a bank statement). You may also be asked questions about your level of expertise as a trader to enable access to derivatives trading products on the platform.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_95-0"> <span class="mntl-sc-block-subheading__text"> Minimum Deposits </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Crypto exchanges generally have very low minimum deposits; $10 to $20 is the industry standard, although there are also trading apps that allow you to start buying crypto with as little as $1.
</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"> To trade Bitcoin options, however, you will definitely need more than $1 to get started. Even the cheapest BTC options contracts have premiums worth over $10.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div>
<span class="heading-toc" id="toc-trading-on-cryptocurrency-exchanges"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-heading__text"> Trading On Cryptocurrency Exchanges </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> Trading on cryptocurrency exchanges is a little different. Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sipc.asp">Securities Investor Protection Corp. (SIPC)</a>. Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecuredcreditor.asp">unsecured creditors</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> The three main types of cryptocurrency exchanges are centralized, decentralized, and hybrid.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_105-0"> <span class="mntl-sc-block-subheading__text"> Centralized Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> Centralized crypto exchanges are online trading platforms that look and feel like traditional online brokerages. You can use them to trade a range of cryptocurrencies in the same way you would buy stocks, bonds, or ETFs using an online broker account after you have registered and completed KYC verification.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_108-0"> <span class="mntl-sc-block-subheading__text"> Decentralized Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_109-0"> Decentralized crypto exchanges are Internet-native online trading venues powered by smart contracts that allow traders to buy and sell cryptocurrencies on a peer-to-peer basis. Crypto assets are traded directly from wallet to wallet. There is no need to create an account or complete a KYC onboarding process, making decentralized crypto exchanges accessible to anyone in the world.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_111-0"> <span class="mntl-sc-block-subheading__text"> Hybrid Exchanges </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> Hybrid crypto exchanges merge a centralized order book for matching trades with decentralized crypto asset custody, allowing crypto traders and investors to benefit from the best features of both types of crypto exchanges.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_113-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_114-0"> <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">Best Cryptocurrency Exchanges</th>
</tr>
<tr>
<th>Company </th>
<th><b>Trading Fees</b></th>
<th><b>Currencies</b></th>
<th><b>Minimum Deposit or Purchase</b></th>
<th><b>Trade Limits</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://r.kraken.com/c/2104074/1118197/10583" rel="sponsored nofollow">Kraken</a></td>
<td>0.00% to 0.26%</td>
<td>230+</td>
<td>$1</td>
<td>No</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://coinbase-consumer.sjv.io/c/2104074/1175448/9251" rel="sponsored nofollow">Coinbase</a></td>
<td>0.00% to 0.60%</td>
<td>240+</td>
<td>$1</td>
<td>Yes</td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sid=${REQUEST_ID}-${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.anrdoezrs.net/click-100173779-14481999" rel="sponsored nofollow">Crypto.com</a></td>
<td>0.00% to 0.075%</td>
<td>300+</td>
<td>1 Euro</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_115-0"></div>
<span class="heading-toc" id="toc-factors-to-consider-when-opening-an-options-trading-account"></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"> Factors to Consider When Opening an Options Trading Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> When choosing where you'll place your trades, keep the following factors in mind:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> <li><strong>Security:</strong> Choose a reputable crypto derivatives exchange that has a high level of security, highlighted by a track record of no hacks. </li><li><strong>Fees:</strong> Trading fees can affect your trading profitability, especially when you are an active trader on an exchange with high commissions. Hence, it’s important to choose a crypto derivatives trading platform that balances low fees with platform reliability, strong trading technology, and highly rated customer service. </li><li><strong>Supported cryptocurrencies:</strong> If you are looking to trade a range of crypto options, you will need to choose an exchange that offers more than just BTC options. </li><li><strong>Research tools:</strong> If you plan on trading Bitcoin options, you should use a platform that provides you with all the tools you need to set yourself up for success. Ideally, the trading platform should offer a range of charting tools and options calculators and highlight all aspects of each contract in a clear, easy-to-understand manner. </li><li><strong>Storage and custody:</strong> Choose a trading platform that holds most, if not all, customer funds in cold storage. That greatly reduces the chances of losing funds due to an exchange hack. Moreover, if the exchange has additional wallet security features in place, such as withdrawal address whitelisting, that’s even better. Address whitelisting is a popular exchange wallet security feature that only allows crypto withdrawals to specific “whitelisted” external wallet addresses predetermined by the user. </li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span><li><strong>Customer service:</strong> Ideally, you should also choose an exchange that has responsive, high-quality customer support. After all, it’s your money at stake, so if there are any issues with the platform, you need to be able to resolve them quickly with the help of the exchange’s support team. </li>
</ul>
<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-are-bitcoin-futures-the-same-as-bitcoin-options"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Bitcoin Futures the Same as Bitcoin Options?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. Bitcoin futures are not the same as Bitcoin options. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/012215/how-invest-bitcoin-exchange-futures.asp">Bitcoin futures</a> obligate the buyer to purchase or the seller to sell a predetermined amount of Bitcoin at a specific price and date in the future. Conversely, Bitcoin options give the holder the right but not the obligation to buy or sell Bitcoin at a predefined price and date in the future. Therefore, options are more flexible than futures.<span class="ql-inline-citation" data-cite="3"></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_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-how-can-you-hedge-with-bitcoin-options"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Hedge With Bitcoin Options?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Bitcoin options are an excellent investment product for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/07/affordable-hedging.asp">hedging</a> digital asset exposure. For example, if you have a crypto portfolio composed of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp">long positions</a> in Bitcoin (BTC), Ethereum (ETH), Stacks (STX), Dogecoin (DOGE), and Solana (SOL), you could purchase Bitcoin put options with a 100% hedge ratio so that if the crypto market crashes and your portfolio drops in value, your profit on the BTC put options contracts would offset roughly all of your losses on your crypto portfolio. </p><p>Should the market not drop in this scenario, you will lose the money you paid for the options contracts. </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-can-you-trade-options-on-crypto-exchanges"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Trade Options on Crypto Exchanges?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, but not on all exchanges. Numerous <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-crypto-exchanges-5071855">digital asset exchanges</a> provide crypto derivatives, including Bitcoin options, on their platforms. Notable examples include Bybit, Deribit, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://okx.sjv.io/c/328256/1387591/15383?subid1=7378233&subid2=n2c5684fe87004581938d8a183f01f50819" rel="nofollow">OKX</a>. There, you will find BTC options contracts with various strike prices and expiration dates, giving crypto traders the flexibility to execute complex options trading strategies.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_126-0"></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_127-0"> <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_128-0"> Traders wishing to execute a Bitcoin options trading strategy should choose their trading platform or cryptocurrency exchange with care. There's always risk when trading derivatives, but the relatively new and illiquid nature of the Bitcoin options market means traders should exercise additional caution to protect their investment capital.<br/>
</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"> <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&sa=D&source=editors&ust=1705875629940460&usg=AOvVaw0n25c2ybotUodt5HMtFMe4"> </a><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.google.com/url?q=https://www.investopedia.com/legal-4768893%23toc-warranty-and-liability-disclaimer&sa=D&source=editors&ust=1705875629940605&usg=AOvVaw2RANt5XgGZuumkjNNc7pwG">warranty and liability disclaimer</a> for more info.<br/></em>
</p></div>
|
Bitcoin options are financial derivatives that enable investors to speculate on the price of the digital currency with leverage or hedge their digital asset portfolios. Available on both traditional derivatives exchanges and on crypto trading platforms, Bitcoin options have emerged as a popular investment product among advanced crypto traders.
For individuals looking to trade Bitcoin options, finding the right trading venue that offers ample liquidity and a high level of security is essential. We’ve compiled the basics every option trader should know, and have structured this guide for trading Bitcoin options to answer the most common questions novice option traders have.
### Key Takeaways
* Bitcoin options are financial derivatives contracts that allow you to buy or sell Bitcoin at a predetermined price on a specific future date.
* Trading Bitcoin and other cryptocurrency options works much the same as other options, except they're typically less liquid.
* There are some trading platforms and crypto exchanges where you can trade Bitcoin options; but you'll need to set up and fund an account first.
* Trading Bitcoin options is riskier and more complex than trading spot Bitcoin, which is itself risky and speculative.
* Traders should conduct as much research as possible (including consulting with a financial advisor) before trading Bitcoin options, and must select a reputable reputable crypto derivatives exchange with strong security for their trades.
## Understanding Bitcoin Options
[Options](https://www.investopedia.com/articles/active-trading/040915/guide-option-trading-strategies-beginners.asp) are financial derivatives contracts that give holders the right but not the obligation to buy or sell a predetermined amount of an asset at a specified price, and at a specific date in the future.
In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin (BTC). While the cryptocurrency options market is still fairly new, you can already trade Bitcoin and Ethereum options on a handful of traditional securities exchanges and crypto trading platforms.
###
Traders who wish to gain exposure to Bitcoin now have additional choices. The 11 recently launched [spot Bitcoin exchange-traded funds (ETFs)](https://www.investopedia.com/spot-bitcoin-etfs-start-trading-today-heres-what-you-need-to-know-8425024), which were approved by the U.S. Securities and Exchange Commission in January 2024, each offer a basket of cryptocurrency securities and can be traded on Cboe BZX, NYSE Arca, and Nasdaq.
From a technical point of view, cryptocurrency options and options contracts on assets like stocks, indexes, or commodities function in essentially the same way. However, crypto options are generally less liquid than options on leading stock indexes or commodities like gold. That’s a result of the crypto markets still being a lot smaller than traditional investment markets.
### European vs. American
There are two main types of options contracts: [European and American](https://www.investopedia.com/articles/optioninvestor/08/american-european-options.asp). The key difference between the two is that European-style options can only be exercised at expiration, while American-style options can be exercised at any time up until the expiry date.
### ITM vs. ATM vs. OTM
An options position can either be in the money, at the money, or out of the money.
* An [in-the-money (ITM)](https://www.investopedia.com/terms/i/inthemoney.asp) option refers to the situation when the option has intrinsic value. If you exercised an in-the-money option you would profit. For call options, this is when the market price is higher than the strike price. Put options are in-the-money when the market price is below the strike price.
* An [out-of-the-money (OTM)](https://www.investopedia.com/terms/o/outofthemoney.asp) option refers to a situation when you would lose money if you exercised the option, meaning the option currently has no intrinsic value. In the case of call options, this is when the market price is lower than the strike price. For put options, this is when the market price is higher than the strike price.
* An [at-the-money (ATM)](https://www.investopedia.com/articles/optioninvestor/08/option-moneyness.asp) option is currently trading at the strike price.
### Calls vs. Puts
You can either buy a call or a put option. A call gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.
Whether you buy or sell a Bitcoin put option or call option depends on whether you want to speculate on a rising or falling price or whether you are looking to hedge crypto exposure.
### Physical vs. Cash Settle
Options can either be cash settled or physically settled. For example, if you trade cocoa options, you could—if the options contract determines it—receive shipments of cocoa once the options contract expires.
When bitcoin options are settled physically, the bitcoin is transferred between the two parties. When cash settlement is used, the parties would exchange dollars or another currency.
## Opening an Options Trading Account
Generally, you'll want an options trading platform that supports the trades you're looking to make, with costs that are affordable for you.
Our picks of the [best options trading platforms](https://www.investopedia.com/best-brokers-for-options-trading-4587876) below allow you to trade options, cryptocurrency, and even crypto futures.
| Best Options Trading Platforms | | |
| --- | --- | --- |
| Platform | **Account** **Minimum** | **Fees** |
| [tastytrade](https://ad.doubleclick.net/ddm/trackclk/N7118.110872.INVESTOPEDIAUS/B30800776.384837585;dc_trk_aid=575518463;dc_trk_cid=203470243;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=;dc_tdv=1) | $0 | $0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close |
| [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) | $0 | $0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders on TWS Pro. $0.65 per contract for options on TWS Light. $0.15 to $0.65 per contract on TWS Pro. |
| E\*TRADE | $0 | No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume. |
| [Webull](https://www.webull.com/activity?source=Investopedia-Per) | $0 | $0 commissions for stock, ETF, options, and cryptocurrency trading |
For Bitcoin options specifically, a crypto trading platform is likely preferable. Examples of crypto trading platforms that provide Bitcoin options include:
* Bit.com
* Bybit
* [Deribit](https://www.investopedia.com/deribit-review-5215948)
* [OKX](https://okx.sjv.io/c/328256/1387591/15383?subid1=7378233&subid2=n2c5684fe87004581938d8a183f01f50819).
## Risks To Watch for When Trading Bitcoin Options
Before you begin, know that trading cryptocurrency options involves a high level of risk. If you are new to derivatives trading, you should start with a demo account to learn the ins and outs of options trading before putting investment capital at risk.
Also keep in mind that Bitcoin itself is not regulated as a security, but rather is considered a digital currency.
###
[Investing in cryptocurrencies](https://www.investopedia.com/crypto-exchange-interview-5209280), decentralized finance ([DeFi](https://www.investopedia.com/decentralized-finance-defi-5113835)), and initial coin offerings (ICOs) is highly risky and speculative, and the markets can be extremely volatile. Consult with a qualified professional before making any financial decisions.
### Options Are Riskier Than Spot Trading
Trading Bitcoin options is generally riskier than buying and selling Bitcoin in the spot market.
For example, suppose you buy a call option on Bitcoin with a strike price of $35,000 and an expiry date that is three months away. If the price of Bitcoin doesn’t surpass $35,000 by the expiration date, you will lose the [options premium](https://www.investopedia.com/articles/active-trading/112213/getting-handle-options-premium.asp) (the price you paid for the option) in full.
### Options Are More Complex Than Spot Trading
When trading Bitcoin options, the price of Bitcoin is not the only factor affecting the value of options contracts. There are several key factors that affect the value of the options you buy or sell, but time decay is by far the most critical. That’s because as the time moves closer to the expiry date, the value of an options contract decreases because the time remaining to trade or exercise the options diminishes.
### The Bitcoin Options Market Is Less Established
While Bitcoin options can be found on traditional securities exchanges, like the Chicago Mercantile Exchange (CME), and on dedicated crypto trading platforms, the BTC options market is still quite young and doesn’t have the deep liquidity found in mature options markets. This can affect price [slippage](https://www.investopedia.com/terms/s/slippage.asp), especially in options with longer maturities.
## How To Trade Bitcoin Options
Trading Bitcoin options is different from trading spot Bitcoin. Not only is the risk profile of your trade completely different, but there is a range of different aspects to consider when looking at which Bitcoin options contracts to buy or sell.
Before you can start trading Bitcoin options, you need to sign up with an exchange that supports crypto derivatives. If your online brokerage account provides you with access to the CME, you could trade Bitcoin options on the leading securities exchange. For most private investors, however, the more likely choice will be to sign up with a digital asset exchange that offers Bitcoin options trading, such as Bit.com, Bybit, Deribit, or OKX.
Here’s how it works.
### Step 1: Sign Up for a Crypto Exchange
Find a digital asset exchange that offers Bitcoin options trading. Ensure you select a reputable exchange; then complete the onboarding process.
### Step 2: Deposit Funds in Your Trading Account
Next, deposit U.S. dollars (using one of the exchange’s available fiat funding options) or cryptocurrency in your exchange account.
### Step 3: Practice Trading Options Using a Demo Account
Ideally, the exchange you have signed up for offers a demo trading account where you can start trading Bitcoin options without putting real capital at risk. That way, you can become comfortable with how the options [Greeks](https://www.investopedia.com/trading/getting-to-know-the-greeks/) affect Bitcoin options.
### Step 4: Research the Bitcoin Market
Learn what drives the price of Bitcoin to get an idea of what type of options trading strategy is best suited for the cryptocurrency and for your risk/return profile. The more you learn about the Bitcoin market and Bitcoin options, the more likely you'll be able to trade options profitably.
### Step 5: Place Your First Bitcoin Options Trade
Once you feel comfortable with Bitcoin options and how they work, you can place your first trade using the platform.
## What You Need To Open an Options Trading Account
To open an options trading account, you'll need the same documents as for a standard spot trading account.
### Personal Information
Crypto options trading platforms generally require the following information from you:
* Full name
* Email address
* Phone number
* Home address
Additionally, to pass a trading platform’s [Know Your Customer (KYC)](https://www.investopedia.com/terms/k/knowyourclient.asp) verification process, you may also need to provide a scanned copy of your government-issued ID (such as a passport or a driver’s license) and proof of address (such as a utility bill or a bank statement). You may also be asked questions about your level of expertise as a trader to enable access to derivatives trading products on the platform.
### Minimum Deposits
Crypto exchanges generally have very low minimum deposits; $10 to $20 is the industry standard, although there are also trading apps that allow you to start buying crypto with as little as $1.
To trade Bitcoin options, however, you will definitely need more than $1 to get started. Even the cheapest BTC options contracts have premiums worth over $10.
## Trading On Cryptocurrency Exchanges
Trading on cryptocurrency exchanges is a little different. Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the [Securities Investor Protection Corp. (SIPC)](https://www.investopedia.com/terms/s/sipc.asp). Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as [unsecured creditors](https://www.investopedia.com/terms/u/unsecuredcreditor.asp).
The three main types of cryptocurrency exchanges are centralized, decentralized, and hybrid.
### Centralized Exchanges
Centralized crypto exchanges are online trading platforms that look and feel like traditional online brokerages. You can use them to trade a range of cryptocurrencies in the same way you would buy stocks, bonds, or ETFs using an online broker account after you have registered and completed KYC verification.
### Decentralized Exchanges
Decentralized crypto exchanges are Internet-native online trading venues powered by smart contracts that allow traders to buy and sell cryptocurrencies on a peer-to-peer basis. Crypto assets are traded directly from wallet to wallet. There is no need to create an account or complete a KYC onboarding process, making decentralized crypto exchanges accessible to anyone in the world.
### Hybrid Exchanges
Hybrid crypto exchanges merge a centralized order book for matching trades with decentralized crypto asset custody, allowing crypto traders and investors to benefit from the best features of both types of crypto exchanges.
| Best Cryptocurrency Exchanges | | | | |
| --- | --- | --- | --- | --- |
| Company | **Trading Fees** | **Currencies** | **Minimum Deposit or Purchase** | **Trade Limits** |
| [Kraken](https://r.kraken.com/c/2104074/1118197/10583) | 0.00% to 0.26% | 230+ | $1 | No |
| [Coinbase](https://coinbase-consumer.sjv.io/c/2104074/1175448/9251) | 0.00% to 0.60% | 240+ | $1 | Yes |
| [Crypto.com](https://www.anrdoezrs.net/click-100173779-14481999) | 0.00% to 0.075% | 300+ | 1 Euro | Yes |
## Factors to Consider When Opening an Options Trading Account
When choosing where you'll place your trades, keep the following factors in mind:
* **Security:** Choose a reputable crypto derivatives exchange that has a high level of security, highlighted by a track record of no hacks.
* **Fees:** Trading fees can affect your trading profitability, especially when you are an active trader on an exchange with high commissions. Hence, it’s important to choose a crypto derivatives trading platform that balances low fees with platform reliability, strong trading technology, and highly rated customer service.
* **Supported cryptocurrencies:** If you are looking to trade a range of crypto options, you will need to choose an exchange that offers more than just BTC options.
* **Research tools:** If you plan on trading Bitcoin options, you should use a platform that provides you with all the tools you need to set yourself up for success. Ideally, the trading platform should offer a range of charting tools and options calculators and highlight all aspects of each contract in a clear, easy-to-understand manner.
* **Storage and custody:** Choose a trading platform that holds most, if not all, customer funds in cold storage. That greatly reduces the chances of losing funds due to an exchange hack. Moreover, if the exchange has additional wallet security features in place, such as withdrawal address whitelisting, that’s even better. Address whitelisting is a popular exchange wallet security feature that only allows crypto withdrawals to specific “whitelisted” external wallet addresses predetermined by the user.
* **Customer service:** Ideally, you should also choose an exchange that has responsive, high-quality customer support. After all, it’s your money at stake, so if there are any issues with the platform, you need to be able to resolve them quickly with the help of the exchange’s support team.
## Are Bitcoin Futures the Same as Bitcoin Options?
No. Bitcoin futures are not the same as Bitcoin options. [Bitcoin futures](https://www.investopedia.com/articles/investing/012215/how-invest-bitcoin-exchange-futures.asp) obligate the buyer to purchase or the seller to sell a predetermined amount of Bitcoin at a specific price and date in the future. Conversely, Bitcoin options give the holder the right but not the obligation to buy or sell Bitcoin at a predefined price and date in the future. Therefore, options are more flexible than futures.
## How Can You Hedge With Bitcoin Options?
Bitcoin options are an excellent investment product for [hedging](https://www.investopedia.com/articles/optioninvestor/07/affordable-hedging.asp) digital asset exposure. For example, if you have a crypto portfolio composed of [long positions](https://www.investopedia.com/terms/l/long.asp) in Bitcoin (BTC), Ethereum (ETH), Stacks (STX), Dogecoin (DOGE), and Solana (SOL), you could purchase Bitcoin put options with a 100% hedge ratio so that if the crypto market crashes and your portfolio drops in value, your profit on the BTC put options contracts would offset roughly all of your losses on your crypto portfolio.
Should the market not drop in this scenario, you will lose the money you paid for the options contracts.
## Can You Trade Options on Crypto Exchanges?
Yes, but not on all exchanges. Numerous [digital asset exchanges](https://www.investopedia.com/best-crypto-exchanges-5071855) provide crypto derivatives, including Bitcoin options, on their platforms. Notable examples include Bybit, Deribit, and [OKX](https://okx.sjv.io/c/328256/1387591/15383?subid1=7378233&subid2=n2c5684fe87004581938d8a183f01f50819). There, you will find BTC options contracts with various strike prices and expiration dates, giving crypto traders the flexibility to execute complex options trading strategies.
## The Bottom Line
Traders wishing to execute a Bitcoin options trading strategy should choose their trading platform or cryptocurrency exchange with care. There's always risk when trading derivatives, but the relatively new and illiquid nature of the Bitcoin options market means traders should exercise additional caution to protect their investment capital.
*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=1705875629940605&usg=AOvVaw2RANt5XgGZuumkjNNc7pwG) for more info.*
|
Bitcoin options are financial derivatives that enable investors to speculate on the price of the digital currency with leverage or hedge their digital asset portfolios. Available on both traditional derivatives exchanges and on crypto trading platforms, Bitcoin options have emerged as a popular investment product among advanced crypto traders.
For individuals looking to trade Bitcoin options, finding the right trading venue that offers ample liquidity and a high level of security is essential. We’ve compiled the basics every option trader should know, and have structured this guide for trading Bitcoin options to answer the most common questions novice option traders have.
Key Takeaways
Bitcoin options are financial derivatives contracts that allow you to buy or sell Bitcoin at a predetermined price on a specific future date.Trading Bitcoin and other cryptocurrency options works much the same as other options, except they're typically less liquid.There are some trading platforms and crypto exchanges where you can trade Bitcoin options; but you'll need to set up and fund an account first.Trading Bitcoin options is riskier and more complex than trading spot Bitcoin, which is itself risky and speculative.Traders should conduct as much research as possible (including consulting with a financial advisor) before trading Bitcoin options, and must select a reputable reputable crypto derivatives exchange with strong security for their trades.
Understanding Bitcoin Options
Options are financial derivatives contracts that give holders the right but not the obligation to buy or sell a predetermined amount of an asset at a specified price, and at a specific date in the future.
In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin (BTC). While the cryptocurrency options market is still fairly new, you can already trade Bitcoin and Ethereum options on a handful of traditional securities exchanges and crypto trading platforms.
Traders who wish to gain exposure to Bitcoin now have additional choices. The 11 recently launched spot Bitcoin exchange-traded funds (ETFs), which were approved by the U.S. Securities and Exchange Commission in January 2024, each offer a basket of cryptocurrency securities and can be traded on Cboe BZX, NYSE Arca, and Nasdaq.
From a technical point of view, cryptocurrency options and options contracts on assets like stocks, indexes, or commodities function in essentially the same way. However, crypto options are generally less liquid than options on leading stock indexes or commodities like gold. That’s a result of the crypto markets still being a lot smaller than traditional investment markets.
European vs. American
There are two main types of options contracts: European and American. The key difference between the two is that European-style options can only be exercised at expiration, while American-style options can be exercised at any time up until the expiry date.
ITM vs. ATM vs. OTM
An options position can either be in the money, at the money, or out of the money.
An in-the-money (ITM) option refers to the situation when the option has intrinsic value. If you exercised an in-the-money option you would profit. For call options, this is when the market price is higher than the strike price. Put options are in-the-money when the market price is below the strike price.
An out-of-the-money (OTM) option refers to a situation when you would lose money if you exercised the option, meaning the option currently has no intrinsic value. In the case of call options, this is when the market price is lower than the strike price. For put options, this is when the market price is higher than the strike price.
An at-the-money (ATM) option is currently trading at the strike price.
Calls vs. Puts
You can either buy a call or a put option. A call gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.
Whether you buy or sell a Bitcoin put option or call option depends on whether you want to speculate on a rising or falling price or whether you are looking to hedge crypto exposure.
Physical vs. Cash Settle
Options can either be cash settled or physically settled. For example, if you trade cocoa options, you could—if the options contract determines it—receive shipments of cocoa once the options contract expires.
When bitcoin options are settled physically, the bitcoin is transferred between the two parties. When cash settlement is used, the parties would exchange dollars or another currency.
Opening an Options Trading Account
Generally, you'll want an options trading platform that supports the trades you're looking to make, with costs that are affordable for you.
Our picks of the best options trading platforms below allow you to trade options, cryptocurrency, and even crypto futures.
Best Options Trading Platforms
Platform
Account Minimum
Fees
tastytrade
$0
$0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close
Interactive Brokers
$0
$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders on TWS Pro. $0.65 per contract for options on TWS Light. $0.15 to $0.65 per contract on TWS Pro.
E*TRADE
$0
No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.
Webull
$0
$0 commissions for stock, ETF, options, and cryptocurrency trading
For Bitcoin options specifically, a crypto trading platform is likely preferable. Examples of crypto trading platforms that provide Bitcoin options include:
Bit.com
Bybit
Deribit
OKX.
Risks To Watch for When Trading Bitcoin Options
Before you begin, know that trading cryptocurrency options involves a high level of risk. If you are new to derivatives trading, you should start with a demo account to learn the ins and outs of options trading before putting investment capital at risk.
Also keep in mind that Bitcoin itself is not regulated as a security, but rather is considered a digital currency.
Investing in cryptocurrencies, decentralized finance (DeFi), and initial coin offerings (ICOs) is highly risky and speculative, and the markets can be extremely volatile. Consult with a qualified professional before making any financial decisions.
Options Are Riskier Than Spot Trading
Trading Bitcoin options is generally riskier than buying and selling Bitcoin in the spot market.
For example, suppose you buy a call option on Bitcoin with a strike price of $35,000 and an expiry date that is three months away. If the price of Bitcoin doesn’t surpass $35,000 by the expiration date, you will lose the options premium (the price you paid for the option) in full.
Options Are More Complex Than Spot Trading
When trading Bitcoin options, the price of Bitcoin is not the only factor affecting the value of options contracts. There are several key factors that affect the value of the options you buy or sell, but time decay is by far the most critical. That’s because as the time moves closer to the expiry date, the value of an options contract decreases because the time remaining to trade or exercise the options diminishes.
The Bitcoin Options Market Is Less Established
While Bitcoin options can be found on traditional securities exchanges, like the Chicago Mercantile Exchange (CME), and on dedicated crypto trading platforms, the BTC options market is still quite young and doesn’t have the deep liquidity found in mature options markets. This can affect price slippage, especially in options with longer maturities.
How To Trade Bitcoin Options
Trading Bitcoin options is different from trading spot Bitcoin. Not only is the risk profile of your trade completely different, but there is a range of different aspects to consider when looking at which Bitcoin options contracts to buy or sell.
Before you can start trading Bitcoin options, you need to sign up with an exchange that supports crypto derivatives. If your online brokerage account provides you with access to the CME, you could trade Bitcoin options on the leading securities exchange. For most private investors, however, the more likely choice will be to sign up with a digital asset exchange that offers Bitcoin options trading, such as Bit.com, Bybit, Deribit, or OKX.
Here’s how it works.
Step 1: Sign Up for a Crypto Exchange
Find a digital asset exchange that offers Bitcoin options trading. Ensure you select a reputable exchange; then complete the onboarding process.
Step 2: Deposit Funds in Your Trading Account
Next, deposit U.S. dollars (using one of the exchange’s available fiat funding options) or cryptocurrency in your exchange account.
Step 3: Practice Trading Options Using a Demo Account
Ideally, the exchange you have signed up for offers a demo trading account where you can start trading Bitcoin options without putting real capital at risk. That way, you can become comfortable with how the options Greeks affect Bitcoin options.
Step 4: Research the Bitcoin Market
Learn what drives the price of Bitcoin to get an idea of what type of options trading strategy is best suited for the cryptocurrency and for your risk/return profile. The more you learn about the Bitcoin market and Bitcoin options, the more likely you'll be able to trade options profitably.
Step 5: Place Your First Bitcoin Options Trade
Once you feel comfortable with Bitcoin options and how they work, you can place your first trade using the platform.
What You Need To Open an Options Trading Account
To open an options trading account, you'll need the same documents as for a standard spot trading account.
Personal Information
Crypto options trading platforms generally require the following information from you:
Full nameEmail addressPhone number Home address
Additionally, to pass a trading platform’s Know Your Customer (KYC) verification process, you may also need to provide a scanned copy of your government-issued ID (such as a passport or a driver’s license) and proof of address (such as a utility bill or a bank statement). You may also be asked questions about your level of expertise as a trader to enable access to derivatives trading products on the platform.
Minimum Deposits
Crypto exchanges generally have very low minimum deposits; $10 to $20 is the industry standard, although there are also trading apps that allow you to start buying crypto with as little as $1.
To trade Bitcoin options, however, you will definitely need more than $1 to get started. Even the cheapest BTC options contracts have premiums worth over $10.
Trading On Cryptocurrency Exchanges
Trading on cryptocurrency exchanges is a little different. Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the Securities Investor Protection Corp. (SIPC). Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as unsecured creditors.
The three main types of cryptocurrency exchanges are centralized, decentralized, and hybrid.
Centralized Exchanges
Centralized crypto exchanges are online trading platforms that look and feel like traditional online brokerages. You can use them to trade a range of cryptocurrencies in the same way you would buy stocks, bonds, or ETFs using an online broker account after you have registered and completed KYC verification.
Decentralized Exchanges
Decentralized crypto exchanges are Internet-native online trading venues powered by smart contracts that allow traders to buy and sell cryptocurrencies on a peer-to-peer basis. Crypto assets are traded directly from wallet to wallet. There is no need to create an account or complete a KYC onboarding process, making decentralized crypto exchanges accessible to anyone in the world.
Hybrid Exchanges
Hybrid crypto exchanges merge a centralized order book for matching trades with decentralized crypto asset custody, allowing crypto traders and investors to benefit from the best features of both types of crypto exchanges.
Best Cryptocurrency Exchanges
Company
Trading Fees
Currencies
Minimum Deposit or Purchase
Trade Limits
Kraken
0.00% to 0.26%
230+
$1
No
Coinbase
0.00% to 0.60%
240+
$1
Yes
Crypto.com
0.00% to 0.075%
300+
1 Euro
Yes
Factors to Consider When Opening an Options Trading Account
When choosing where you'll place your trades, keep the following factors in mind:
Security: Choose a reputable crypto derivatives exchange that has a high level of security, highlighted by a track record of no hacks. Fees: Trading fees can affect your trading profitability, especially when you are an active trader on an exchange with high commissions. Hence, it’s important to choose a crypto derivatives trading platform that balances low fees with platform reliability, strong trading technology, and highly rated customer service. Supported cryptocurrencies: If you are looking to trade a range of crypto options, you will need to choose an exchange that offers more than just BTC options. Research tools: If you plan on trading Bitcoin options, you should use a platform that provides you with all the tools you need to set yourself up for success. Ideally, the trading platform should offer a range of charting tools and options calculators and highlight all aspects of each contract in a clear, easy-to-understand manner. Storage and custody: Choose a trading platform that holds most, if not all, customer funds in cold storage. That greatly reduces the chances of losing funds due to an exchange hack. Moreover, if the exchange has additional wallet security features in place, such as withdrawal address whitelisting, that’s even better. Address whitelisting is a popular exchange wallet security feature that only allows crypto withdrawals to specific “whitelisted” external wallet addresses predetermined by the user. Customer service: Ideally, you should also choose an exchange that has responsive, high-quality customer support. After all, it’s your money at stake, so if there are any issues with the platform, you need to be able to resolve them quickly with the help of the exchange’s support team.
Are Bitcoin Futures the Same as Bitcoin Options?
No. Bitcoin futures are not the same as Bitcoin options. Bitcoin futures obligate the buyer to purchase or the seller to sell a predetermined amount of Bitcoin at a specific price and date in the future. Conversely, Bitcoin options give the holder the right but not the obligation to buy or sell Bitcoin at a predefined price and date in the future. Therefore, options are more flexible than futures.
How Can You Hedge With Bitcoin Options?
Bitcoin options are an excellent investment product for hedging digital asset exposure. For example, if you have a crypto portfolio composed of long positions in Bitcoin (BTC), Ethereum (ETH), Stacks (STX), Dogecoin (DOGE), and Solana (SOL), you could purchase Bitcoin put options with a 100% hedge ratio so that if the crypto market crashes and your portfolio drops in value, your profit on the BTC put options contracts would offset roughly all of your losses on your crypto portfolio. Should the market not drop in this scenario, you will lose the money you paid for the options contracts.
Can You Trade Options on Crypto Exchanges?
Yes, but not on all exchanges. Numerous digital asset exchanges provide crypto derivatives, including Bitcoin options, on their platforms. Notable examples include Bybit, Deribit, and OKX. There, you will find BTC options contracts with various strike prices and expiration dates, giving crypto traders the flexibility to execute complex options trading strategies.
The Bottom Line
Traders wishing to execute a Bitcoin options trading strategy should choose their trading platform or cryptocurrency exchange with care. There's always risk when trading derivatives, but the relatively new and illiquid nature of the Bitcoin options market means traders should exercise additional caution to protect their investment capital.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.
|
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https://www.investopedia.com/snowflake-stock-jumps-as-keybanc-initiates-coverage-with-overweight-rating-8630355
|
Snowflake Stock Jumps as KeyBanc Initiates Coverage With 'Overweight' Rating
|
<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>Snowflake shares gained 4.2% on Thursday after KeyBanc initiated coverage of the independent cloud data warehouse and gave the stock an “overweight” rating, setting a price target of $185.</li><li>The KeyBanc analysts cited the company's leading position in its industry and highlighted the advantages that differentiate it from Amazon's AWS and Microsoft's Azure.</li><li>They added that the company's recent CEO transition could lead to more artificial intelligence-focused leadership.</li><li>Despite Thursday's gains, Snowflake shares have declined 20% since the start of 2024.</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"> Snowflake (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SNOW">SNOW</a>) shares jumped more than 4% on Thursday after KeyBanc Capital Markets initiated coverage, giving the stock an "overweight" rating and setting its price target at $185.<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"> The analysts cited Snowflake's leading position as an independent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cloud-computing.asp">cloud</a> data warehouse, saying that the company benefits from "ease-of-use, strong network effects (data sharing), instant scalability, and dynamic elasticity."
</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"> KeyBanc noted that Snowflake is differentiated from public cloud providers, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/amazon-effect-us-economy/">Amazon</a>'s (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>) AWS and Microsoft's (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>) <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/4-key-takeaways-from-microsoft-earnings-call-8553403">Azure</a> "with its independence, ease of use, platform breadth, and data sharing capabilities."
</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 analysts highlighted Snowflake's "experienced management team," noting that the company's executive team includes veterans of Alphabet's Google (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>), Microsoft, and Oracle (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=orcl">ORCL</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 company's shares <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/snowflake-stock-plunges-after-company-names-new-ceo-issues-disappointing-guidance-8601946">tumbled</a> in late February after the company announced Sridhar Ramaswamy as its new <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/ceo.asp">chief executive officer (CEO)</a>, but KeyBanc noted that the CEO transition could bring more <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>-oriented leadership.
</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"> Snowflake shares gained 4.2% to close Thursday at $159.35 Despite those gains, the stock has fallen 20% year-to-date.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* Snowflake shares gained 4.2% on Thursday after KeyBanc initiated coverage of the independent cloud data warehouse and gave the stock an “overweight” rating, setting a price target of $185.
* The KeyBanc analysts cited the company's leading position in its industry and highlighted the advantages that differentiate it from Amazon's AWS and Microsoft's Azure.
* They added that the company's recent CEO transition could lead to more artificial intelligence-focused leadership.
* Despite Thursday's gains, Snowflake shares have declined 20% since the start of 2024.
Snowflake ([SNOW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SNOW)) shares jumped more than 4% on Thursday after KeyBanc Capital Markets initiated coverage, giving the stock an "overweight" rating and setting its price target at $185.
The analysts cited Snowflake's leading position as an independent [cloud](https://www.investopedia.com/terms/c/cloud-computing.asp) data warehouse, saying that the company benefits from "ease-of-use, strong network effects (data sharing), instant scalability, and dynamic elasticity."
KeyBanc noted that Snowflake is differentiated from public cloud providers, such as [Amazon](https://www.investopedia.com/insights/amazon-effect-us-economy/)'s ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) AWS and Microsoft's ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) [Azure](https://www.investopedia.com/4-key-takeaways-from-microsoft-earnings-call-8553403) "with its independence, ease of use, platform breadth, and data sharing capabilities."
The analysts highlighted Snowflake's "experienced management team," noting that the company's executive team includes veterans of Alphabet's Google ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)), Microsoft, and Oracle ([ORCL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=orcl)).
The company's shares [tumbled](https://www.investopedia.com/snowflake-stock-plunges-after-company-names-new-ceo-issues-disappointing-guidance-8601946) in late February after the company announced Sridhar Ramaswamy as its new [chief executive officer (CEO)](https://www.investopedia.com/terms/c/ceo.asp), but KeyBanc noted that the CEO transition could bring more [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp)-oriented leadership.
Snowflake shares gained 4.2% to close Thursday at $159.35 Despite those gains, the stock has fallen 20% year-to-date.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
Snowflake shares gained 4.2% on Thursday after KeyBanc initiated coverage of the independent cloud data warehouse and gave the stock an “overweight” rating, setting a price target of $185.The KeyBanc analysts cited the company's leading position in its industry and highlighted the advantages that differentiate it from Amazon's AWS and Microsoft's Azure.They added that the company's recent CEO transition could lead to more artificial intelligence-focused leadership.Despite Thursday's gains, Snowflake shares have declined 20% since the start of 2024.
Snowflake (SNOW) shares jumped more than 4% on Thursday after KeyBanc Capital Markets initiated coverage, giving the stock an "overweight" rating and setting its price target at $185.
The analysts cited Snowflake's leading position as an independent cloud data warehouse, saying that the company benefits from "ease-of-use, strong network effects (data sharing), instant scalability, and dynamic elasticity."
KeyBanc noted that Snowflake is differentiated from public cloud providers, such as Amazon's (AMZN) AWS and Microsoft's (MSFT) Azure "with its independence, ease of use, platform breadth, and data sharing capabilities."
The analysts highlighted Snowflake's "experienced management team," noting that the company's executive team includes veterans of Alphabet's Google (GOOGL), Microsoft, and Oracle (ORCL).
The company's shares tumbled in late February after the company announced Sridhar Ramaswamy as its new chief executive officer (CEO), but KeyBanc noted that the CEO transition could bring more artificial intelligence (AI)-oriented leadership.
Snowflake shares gained 4.2% to close Thursday at $159.35 Despite those gains, the stock has fallen 20% year-to-date.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/does-a-mortgage-modification-hurt-your-credit-8639389
|
Does a Mortgage Modification Hurt Your Credit?
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<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 you experience financial hardship, you may find it difficult to keep up with your monthly mortgage payments. In this case, you could request a mortgage modification from your lender that will result in more affordable payments.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> But while a mortgage modification can provide welcome financial relief, it can also have a negative impact on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a>. Exactly how much depends on the circumstances surrounding the mortgage modification and the steps you take next. Here is what you need to know.
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<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>In a mortgage modification, the lender changes one or more features of your loan to make it easier to pay.</li><li>A mortgage modification can have a relatively immediate negative effect on your credit score, but the long-term impact depends on several factors.</li><li>Understanding your lender's modification terms is crucial for minimizing the negative impact.</li><li>Regularly monitoring your credit report post-modification can help you identify and correct any inaccuracies.</li><li>A past mortgage modification may make it more difficult to obtain a mortgage or other loan in the future, but the damage can be mitigated if you take the right steps.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-mortgage-modification"></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 Mortgage Modification </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Mortgage modification is just what it sounds like, but it can take a number of different forms.<br/>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-subheading__text"> What Is Mortgage Modification? </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> A mortgage modification occurs when the lender agrees to change the terms of your original loan. This could mean lowering 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>, extending the term (or length) of the loan, or reducing the amount you owe.<span class="ql-inline-citation" data-cite="1"></span> The goal is make your monthly mortgage payment affordable so you can continue to pay it.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There are several other ways to accomplish that goal, but they differ from mortgage modification in key ways:<br/>
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<li><strong>Refinancing.</strong> While a mortgage modification changes the terms of your current home loan, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/refinance.asp">refinance</a> involves an entirely new loan that pays off and replaces your old loan.<span class="ql-inline-citation" data-cite="12"></span> </li>
<li><strong>Forbearance.</strong> With <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forbearance.asp">forbearance</a>, your payments are temporarily paused or you pay a reduced amount, but for just a limited period of time.<span class="ql-inline-citation" data-cite="13"></span> <br/></li>
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<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"> Why Homeowners Opt for Mortgage Modification </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The most common reason homeowners may seek a mortgage modification is financial hardship. If they've lost their job, accumulated large amounts of debt, or had to pay for unexpected expenses such as medical bills or major car repairs, they may not have the cash they need to cover their monthly mortgage payment. <br>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Life changes also could make it difficult to pay the mortgage loan as agreed. For instance, if the homeowners divorce and one party receives the house, he or she may find it difficult to maintain the mortgage payments on one income. The same could occur following the death of one of the homeowners. <br/>
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<span class="heading-toc" id="toc-how-mortgage-modification-affects-credit-scores"></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"> How Mortgage Modification Affects Credit Scores </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If you have trouble paying your mortgage and decide to move forward with a mortgage modification, it could affect your credit score. Some of those impacts may be negative, but others could be positive compared with the alternatives.<br/>
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<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"> Immediate Impact on Credit Reports </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> If your lender reports your mortgage modification as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/debt-settlement.asp">settlement</a>, meaning you are paying less than you owe, that could appear on your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit reports</a> as a negative. Settled accounts can stay on your credit reports for up to seven years. The information on credit reports is used to calculate your credit score, so it will affect your score, as well.<span class="ql-inline-citation" data-cite="2"></span><br/>
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<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"> Mortgage Modification and Credit Score Factors </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Lenders typically don't approve a mortgage modification until the borrower has a history of missed payments.<span class="ql-inline-citation" data-cite="9"></span> Payment history accounts for the largest portion of your credit score, so every missed payment will damage your credit score even before you apply for modification.<span class="ql-inline-citation" data-cite="4"></span><br>
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<span class="heading-toc" id="toc-comparing-the-impact-mortgage-modification-vs-foreclosure-or-bankruptcy"></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"> Comparing the Impact: Mortgage Modification vs. Foreclosure or Bankruptcy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> As mentioned, with a mortgage modification, your credit score could take a hit due to late or missed payments. If the lender reports the modification as a settlement, that could remain on your credit report for seven years, also affecting your score. However, your credit score could begin to rebound once you start making on-time payments on the modified loan. <br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If your mortgage goes through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosure</a>, your credit score will likely drop due to the missed payments that led up to it. Foreclosure is the legal process a lender uses to recoup what the borrower owes if they default on their mortgage. The lender becomes the property owner and can sell it. Once a loan is foreclosed, that will remain on your credit report for seven years from the date of the foreclosure and is typically more damaging than a settlement.<span class="ql-inline-citation" data-cite="10"></span><span class="ql-inline-citation" data-cite="5"></span> Rebuilding your credit could take much longer than with a modification.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> If you file for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>, the impact to your credit score could be huge and long-lasting. It's possible your credit score could drop as much as 240 points after bankruptcy.<span class="ql-inline-citation" data-cite="6"></span> In addition, the bankruptcy may remain on your credit report for up to 10 years, which could affect your future ability to obtain credit.<span class="ql-inline-citation" data-cite="7"></span><br/>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Beware of loan modification scams. Some unscrupulous individuals or companies will promise to help you obtain relief, charge you upfront, and simply make off with your money.<span class="ql-inline-citation" data-cite="11"></span></p></div></div></div>
<span class="heading-toc" id="toc-steps-to-minimize-the-impact-on-your-credit"></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"> Steps to Minimize the Impact on Your Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> While a mortgage modification could negatively impact your credit, there are steps you could take to reduce that impact. <br>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_43-0"> <span class="mntl-sc-block-subheading__text"> Communicate With Your Lender </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> If you have concerns about paying your mortgage, contact your lender right away. Talking with the lender could help you find a solution before you have any late or missed payments, which will protect your credit score. <br/>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Understand the Terms of Your Modification </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> It's important to familiarize yourself with the modification terms so you know how they may affect your credit. For instance, if your lender plans to report your loan modification as a debt settlement, that will likely have a negative effect.<br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Also, if your mortgage modification includes a forbearance, find out whether the lender will report those paused payments as delinquent on your credit report.<span class="ql-inline-citation" data-cite="8"></span> Doing so will lower your credit score, so ask your lender to refrain from reporting those payments as missed if at all possible. <br/>
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<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"> Monitor Your Credit Report </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> As you work to rebuild your credit, it's important to regularly check your credit reports with the three major credit reporting agencies—Equifax, Experian, and TransUnion—for errors or inaccuracies that could affect your credit score after a modification. You can get free copies of your credit reports at least once a year through the official website, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.annualcreditreport.com" rel="sponsored nofollow">AnnualCreditReport.com</a>.<br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> If you spot a mistake, follow the credit reporting agency's procedures for reporting an error. It is required to investigate and get back to you. Continue to monitor your report to ensure the correction has been made. <br>
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<span class="heading-toc" id="toc-long-term-considerations"></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"> Long-Term Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> When contemplating a mortgage modification, it's important to understand not only the immediate impact but how it will affect your credit in the future.<br/>
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<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"> Rebuilding Credit After Modification </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Once your mortgage modification is complete, the best step you can take to rebuild your credit is to consistently make on-time payments on your mortgage and any other credit accounts.<span class="ql-inline-citation" data-cite="4"></span> One way to make that a little easier is to arrange for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/automatic-bill-payment.asp">automatic payments</a> from your checking account.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Also, try to keep your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratio</a> low. That's the amount of revolving debt you have outstanding compared with the total amount of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolvingcredit.asp">revolving credit</a> you have available to you.<br/>
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<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"> Future Mortgage Applications </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> If you follow the terms of a mortgage modification and pay the loan off as agreed, getting a mortgage in the future should not be major problem provided you meet the eligibility requirements for the loan. <br>
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<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-how-long-does-a-mortgage-modification-stay-on-your-credit-report"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does a Mortgage Modification Stay on Your Credit Report?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If the lender reports your mortgage modification as a settlement, it could remain on your credit report for seven years.</p></div>
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<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-can-you-refinance-your-mortgage-after-a-modification"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Refinance Your Mortgage After a Modification?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You may be able to refinance your mortgage following a modification, but the lender could require you to wait for a certain period, such as a year, before doing so.<span class="ql-inline-citation" data-cite="14"></span> </p></div>
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<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-how-does-a-mortgage-modification-compare-to-a-loan-forbearance-in-terms-of-credit-impact"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does a Mortgage Modification Compare to a Loan Forbearance in Terms of Credit Impact?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There could be similar impacts on your credit with a modification and a forbearance. If the lender reports the missed payments with a forbearance, that could have the same negative affect on your credit as the missed payments led up to the modification. </p></div>
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<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_73-0"> <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_74-0"> A mortgage modification can be helpful if you are finding it difficult to make your monthly mortgage payments. While a mortgage modification can affect your credit, the impact can be managed and mitigated. In particular, make sure to pay your mortgage bill on time every month.<br/>
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When you experience financial hardship, you may find it difficult to keep up with your monthly mortgage payments. In this case, you could request a mortgage modification from your lender that will result in more affordable payments.
But while a mortgage modification can provide welcome financial relief, it can also have a negative impact on your [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Exactly how much depends on the circumstances surrounding the mortgage modification and the steps you take next. Here is what you need to know.
### Key Takeaways
* In a mortgage modification, the lender changes one or more features of your loan to make it easier to pay.
* A mortgage modification can have a relatively immediate negative effect on your credit score, but the long-term impact depends on several factors.
* Understanding your lender's modification terms is crucial for minimizing the negative impact.
* Regularly monitoring your credit report post-modification can help you identify and correct any inaccuracies.
* A past mortgage modification may make it more difficult to obtain a mortgage or other loan in the future, but the damage can be mitigated if you take the right steps.
## Understanding Mortgage Modification
Mortgage modification is just what it sounds like, but it can take a number of different forms.
### What Is Mortgage Modification?
A mortgage modification occurs when the lender agrees to change the terms of your original loan. This could mean lowering the [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), extending the term (or length) of the loan, or reducing the amount you owe. The goal is make your monthly mortgage payment affordable so you can continue to pay it.
There are several other ways to accomplish that goal, but they differ from mortgage modification in key ways:
* **Refinancing.** While a mortgage modification changes the terms of your current home loan, a [refinance](https://www.investopedia.com/terms/r/refinance.asp) involves an entirely new loan that pays off and replaces your old loan.
* **Forbearance.** With [forbearance](https://www.investopedia.com/terms/f/forbearance.asp), your payments are temporarily paused or you pay a reduced amount, but for just a limited period of time.
### Why Homeowners Opt for Mortgage Modification
The most common reason homeowners may seek a mortgage modification is financial hardship. If they've lost their job, accumulated large amounts of debt, or had to pay for unexpected expenses such as medical bills or major car repairs, they may not have the cash they need to cover their monthly mortgage payment.
Life changes also could make it difficult to pay the mortgage loan as agreed. For instance, if the homeowners divorce and one party receives the house, he or she may find it difficult to maintain the mortgage payments on one income. The same could occur following the death of one of the homeowners.
## How Mortgage Modification Affects Credit Scores
If you have trouble paying your mortgage and decide to move forward with a mortgage modification, it could affect your credit score. Some of those impacts may be negative, but others could be positive compared with the alternatives.
### Immediate Impact on Credit Reports
If your lender reports your mortgage modification as a [settlement](https://www.investopedia.com/articles/pf/09/debt-settlement.asp), meaning you are paying less than you owe, that could appear on your [credit reports](https://www.investopedia.com/terms/c/creditreport.asp) as a negative. Settled accounts can stay on your credit reports for up to seven years. The information on credit reports is used to calculate your credit score, so it will affect your score, as well.
### Mortgage Modification and Credit Score Factors
Lenders typically don't approve a mortgage modification until the borrower has a history of missed payments. Payment history accounts for the largest portion of your credit score, so every missed payment will damage your credit score even before you apply for modification.
## Comparing the Impact: Mortgage Modification vs. Foreclosure or Bankruptcy
As mentioned, with a mortgage modification, your credit score could take a hit due to late or missed payments. If the lender reports the modification as a settlement, that could remain on your credit report for seven years, also affecting your score. However, your credit score could begin to rebound once you start making on-time payments on the modified loan.
If your mortgage goes through [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp), your credit score will likely drop due to the missed payments that led up to it. Foreclosure is the legal process a lender uses to recoup what the borrower owes if they default on their mortgage. The lender becomes the property owner and can sell it. Once a loan is foreclosed, that will remain on your credit report for seven years from the date of the foreclosure and is typically more damaging than a settlement. Rebuilding your credit could take much longer than with a modification.
If you file for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp), the impact to your credit score could be huge and long-lasting. It's possible your credit score could drop as much as 240 points after bankruptcy. In addition, the bankruptcy may remain on your credit report for up to 10 years, which could affect your future ability to obtain credit.
### Warning
Beware of loan modification scams. Some unscrupulous individuals or companies will promise to help you obtain relief, charge you upfront, and simply make off with your money.
## Steps to Minimize the Impact on Your Credit
While a mortgage modification could negatively impact your credit, there are steps you could take to reduce that impact.
### Communicate With Your Lender
If you have concerns about paying your mortgage, contact your lender right away. Talking with the lender could help you find a solution before you have any late or missed payments, which will protect your credit score.
### Understand the Terms of Your Modification
It's important to familiarize yourself with the modification terms so you know how they may affect your credit. For instance, if your lender plans to report your loan modification as a debt settlement, that will likely have a negative effect.
Also, if your mortgage modification includes a forbearance, find out whether the lender will report those paused payments as delinquent on your credit report. Doing so will lower your credit score, so ask your lender to refrain from reporting those payments as missed if at all possible.
### Monitor Your Credit Report
As you work to rebuild your credit, it's important to regularly check your credit reports with the three major credit reporting agencies—Equifax, Experian, and TransUnion—for errors or inaccuracies that could affect your credit score after a modification. You can get free copies of your credit reports at least once a year through the official website, [AnnualCreditReport.com](https://www.annualcreditreport.com).
If you spot a mistake, follow the credit reporting agency's procedures for reporting an error. It is required to investigate and get back to you. Continue to monitor your report to ensure the correction has been made.
## Long-Term Considerations
When contemplating a mortgage modification, it's important to understand not only the immediate impact but how it will affect your credit in the future.
### Rebuilding Credit After Modification
Once your mortgage modification is complete, the best step you can take to rebuild your credit is to consistently make on-time payments on your mortgage and any other credit accounts. One way to make that a little easier is to arrange for [automatic payments](https://www.investopedia.com/terms/a/automatic-bill-payment.asp) from your checking account.
Also, try to keep your [credit utilization ratio](https://www.investopedia.com/terms/c/credit-utilization-rate.asp) low. That's the amount of revolving debt you have outstanding compared with the total amount of [revolving credit](https://www.investopedia.com/terms/r/revolvingcredit.asp) you have available to you.
### Future Mortgage Applications
If you follow the terms of a mortgage modification and pay the loan off as agreed, getting a mortgage in the future should not be major problem provided you meet the eligibility requirements for the loan.
## How Long Does a Mortgage Modification Stay on Your Credit Report?
If the lender reports your mortgage modification as a settlement, it could remain on your credit report for seven years.
## Can You Refinance Your Mortgage After a Modification?
You may be able to refinance your mortgage following a modification, but the lender could require you to wait for a certain period, such as a year, before doing so.
## How Does a Mortgage Modification Compare to a Loan Forbearance in Terms of Credit Impact?
There could be similar impacts on your credit with a modification and a forbearance. If the lender reports the missed payments with a forbearance, that could have the same negative affect on your credit as the missed payments led up to the modification.
## The Bottom Line
A mortgage modification can be helpful if you are finding it difficult to make your monthly mortgage payments. While a mortgage modification can affect your credit, the impact can be managed and mitigated. In particular, make sure to pay your mortgage bill on time every month.
|
When you experience financial hardship, you may find it difficult to keep up with your monthly mortgage payments. In this case, you could request a mortgage modification from your lender that will result in more affordable payments.
But while a mortgage modification can provide welcome financial relief, it can also have a negative impact on your credit score. Exactly how much depends on the circumstances surrounding the mortgage modification and the steps you take next. Here is what you need to know.
Key Takeaways
In a mortgage modification, the lender changes one or more features of your loan to make it easier to pay.A mortgage modification can have a relatively immediate negative effect on your credit score, but the long-term impact depends on several factors.Understanding your lender's modification terms is crucial for minimizing the negative impact.Regularly monitoring your credit report post-modification can help you identify and correct any inaccuracies.A past mortgage modification may make it more difficult to obtain a mortgage or other loan in the future, but the damage can be mitigated if you take the right steps.
Understanding Mortgage Modification
Mortgage modification is just what it sounds like, but it can take a number of different forms.
What Is Mortgage Modification?
A mortgage modification occurs when the lender agrees to change the terms of your original loan. This could mean lowering the interest rate, extending the term (or length) of the loan, or reducing the amount you owe. The goal is make your monthly mortgage payment affordable so you can continue to pay it.
There are several other ways to accomplish that goal, but they differ from mortgage modification in key ways:
Refinancing. While a mortgage modification changes the terms of your current home loan, a refinance involves an entirely new loan that pays off and replaces your old loan.
Forbearance. With forbearance, your payments are temporarily paused or you pay a reduced amount, but for just a limited period of time.
Why Homeowners Opt for Mortgage Modification
The most common reason homeowners may seek a mortgage modification is financial hardship. If they've lost their job, accumulated large amounts of debt, or had to pay for unexpected expenses such as medical bills or major car repairs, they may not have the cash they need to cover their monthly mortgage payment.
Life changes also could make it difficult to pay the mortgage loan as agreed. For instance, if the homeowners divorce and one party receives the house, he or she may find it difficult to maintain the mortgage payments on one income. The same could occur following the death of one of the homeowners.
How Mortgage Modification Affects Credit Scores
If you have trouble paying your mortgage and decide to move forward with a mortgage modification, it could affect your credit score. Some of those impacts may be negative, but others could be positive compared with the alternatives.
Immediate Impact on Credit Reports
If your lender reports your mortgage modification as a settlement, meaning you are paying less than you owe, that could appear on your credit reports as a negative. Settled accounts can stay on your credit reports for up to seven years. The information on credit reports is used to calculate your credit score, so it will affect your score, as well.
Mortgage Modification and Credit Score Factors
Lenders typically don't approve a mortgage modification until the borrower has a history of missed payments. Payment history accounts for the largest portion of your credit score, so every missed payment will damage your credit score even before you apply for modification.
Comparing the Impact: Mortgage Modification vs. Foreclosure or Bankruptcy
As mentioned, with a mortgage modification, your credit score could take a hit due to late or missed payments. If the lender reports the modification as a settlement, that could remain on your credit report for seven years, also affecting your score. However, your credit score could begin to rebound once you start making on-time payments on the modified loan.
If your mortgage goes through foreclosure, your credit score will likely drop due to the missed payments that led up to it. Foreclosure is the legal process a lender uses to recoup what the borrower owes if they default on their mortgage. The lender becomes the property owner and can sell it. Once a loan is foreclosed, that will remain on your credit report for seven years from the date of the foreclosure and is typically more damaging than a settlement. Rebuilding your credit could take much longer than with a modification.
If you file for bankruptcy, the impact to your credit score could be huge and long-lasting. It's possible your credit score could drop as much as 240 points after bankruptcy. In addition, the bankruptcy may remain on your credit report for up to 10 years, which could affect your future ability to obtain credit.
Warning
Beware of loan modification scams. Some unscrupulous individuals or companies will promise to help you obtain relief, charge you upfront, and simply make off with your money.
Steps to Minimize the Impact on Your Credit
While a mortgage modification could negatively impact your credit, there are steps you could take to reduce that impact.
Communicate With Your Lender
If you have concerns about paying your mortgage, contact your lender right away. Talking with the lender could help you find a solution before you have any late or missed payments, which will protect your credit score.
Understand the Terms of Your Modification
It's important to familiarize yourself with the modification terms so you know how they may affect your credit. For instance, if your lender plans to report your loan modification as a debt settlement, that will likely have a negative effect.
Also, if your mortgage modification includes a forbearance, find out whether the lender will report those paused payments as delinquent on your credit report. Doing so will lower your credit score, so ask your lender to refrain from reporting those payments as missed if at all possible.
Monitor Your Credit Report
As you work to rebuild your credit, it's important to regularly check your credit reports with the three major credit reporting agencies—Equifax, Experian, and TransUnion—for errors or inaccuracies that could affect your credit score after a modification. You can get free copies of your credit reports at least once a year through the official website, AnnualCreditReport.com.
If you spot a mistake, follow the credit reporting agency's procedures for reporting an error. It is required to investigate and get back to you. Continue to monitor your report to ensure the correction has been made.
Long-Term Considerations
When contemplating a mortgage modification, it's important to understand not only the immediate impact but how it will affect your credit in the future.
Rebuilding Credit After Modification
Once your mortgage modification is complete, the best step you can take to rebuild your credit is to consistently make on-time payments on your mortgage and any other credit accounts. One way to make that a little easier is to arrange for automatic payments from your checking account.
Also, try to keep your credit utilization ratio low. That's the amount of revolving debt you have outstanding compared with the total amount of revolving credit you have available to you.
Future Mortgage Applications
If you follow the terms of a mortgage modification and pay the loan off as agreed, getting a mortgage in the future should not be major problem provided you meet the eligibility requirements for the loan.
How Long Does a Mortgage Modification Stay on Your Credit Report?
If the lender reports your mortgage modification as a settlement, it could remain on your credit report for seven years.
Can You Refinance Your Mortgage After a Modification?
You may be able to refinance your mortgage following a modification, but the lender could require you to wait for a certain period, such as a year, before doing so.
How Does a Mortgage Modification Compare to a Loan Forbearance in Terms of Credit Impact?
There could be similar impacts on your credit with a modification and a forbearance. If the lender reports the missed payments with a forbearance, that could have the same negative affect on your credit as the missed payments led up to the modification.
The Bottom Line
A mortgage modification can be helpful if you are finding it difficult to make your monthly mortgage payments. While a mortgage modification can affect your credit, the impact can be managed and mitigated. In particular, make sure to pay your mortgage bill on time every month.
|
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https://www.investopedia.com/terms/b/bespoke-cdo.asp
|
Bespoke CDO: Definition, Uses, Vs. Bespoke Tranche Opportunity
|
<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-bespoke-cdo"></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 Bespoke CDO? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A bespoke CDO is a structured financial product—specifically, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cdo.asp" rel="noopener noreferrer">collateralized debt obligation (CDO)</a>—that a dealer creates for a specific group of investors and tailors to their needs. The investor group typically buys a single <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tranches.asp" rel="noopener noreferrer">tranche</a> of the bespoke CDO, and the remaining tranches are then held by the dealer, who will usually attempt to hedge against potential losses using other financial products like <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>.
</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 bespoke CDO is now more commonly referred to as a bespoke tranche or a bespoke tranche opportunity (BTO).
</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 bespoke CDO is a collateralized debt obligation that has been customized to the specific needs of a particular group of investors</li><li>Shunned due to their outsized role in the 2007-09 financial crisis, bespoke CDOs began reappearing in 2016 under the moniker bespoke tranche opportunities (BTOs).</li><li>Bespoke CDOs today are mainly utilized by hedge funds and other sophisticated institutional investors.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-basics-of-a-bespoke-cdo"></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"> The Basics of a Bespoke CDO </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Traditionally, a collateralized debt obligation (CDO) pools together a collection of cash flow-generating assets—such as mortgages, bonds, and other types of loans—and then repackages this portfolio into discrete sections called tranches. Bespoke CDOs can be structured like these traditional CDOs, pooling classes of debt with income streams, but the term is usually referring to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/syntheticcdo.asp">synthetic CDOs</a> that invest in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditdefaultswap.asp">credit default swaps</a> (CDS) and which are more highly customizable and nuanced.
</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"> Tranches are portions of a pooled asset divided by specific characteristics. Different tranches of the CDO carry different degrees of risk, depending on the underlying asset's creditworthiness. Therefore, each tranche has a different quarterly rate of return that corresponds with its own risk profile. Obviously, the greater the chance of default of the tranche's holdings, the higher the return it offers. The major rating agencies do not grade bespoke CDOs—the creditworthiness evaluation is done by the issuer and to some extent, market perception. Because these are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">illiquid</a> and complex financial instruments, bespoke CDOs only trade <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">over the counter</a> (OTC).
</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-background-of-bespoke-cdos"></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"> Background of Bespoke CDOs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Bespoke CDOs—like CDOs in general—have lost popularity due to their prominent role in the financial crisis that followed the housing bubble and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime-meltdown.asp">mortgage meltdown</a> between 2007 and 2009. The creation of these products by Wall Street was seen as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/032315/were-collateralized-debt-obligations-cdo-responsible-2008-financial-crisis.asp">contributing to the massive market crash</a> and eventual government bailout—as well as a lack of common sense. The products were highly structured investments that were hard to understand—both by those buying and those selling them—and difficult to value.
</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"> Despite this, CDOs are a useful tool for transferring risk to parties willing to shoulder it, and for freeing up capital for other uses. Wall Street is always looking for ways to transfer risk and unlock capital. So, since around 2016, the bespoke CDO has been making a comeback. In its reincarnation, it's often called a bespoke tranche opportunity (BTO).
</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"> Re-branding has not, however, changed the tool itself but there is presumably a bit more scrutiny and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duediligence.asp">due diligence</a> going into the pricing models. It is hoped with these new products the investors don’t find themselves once again holding obligations they don’t properly understand.
</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 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>Some $50 billion worth of BTOs were sold in 2017.</p></div></div></div>
<span class="heading-toc" id="toc-pros-of-bespoke-cdos"></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"> Pros of Bespoke CDOs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The obvious advantage of a bespoke CDO is that the buyer can customize it. A bespoke CDO is simply a tool that allows investors to target very specific risk to return profiles for their investment strategies or hedging requirements. If an investor wants to make a large, targeted bet against the goat cheese industry, there will be a dealer who can build up a bespoke CDO to do that for the right price. Still, these products are somewhat diversified since the pool loans from say, several goat cheese producers.
</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"> The second main benefit is the above-market yields they can provide. When the credit markets are steady and fixed interest rates are low, those seeking investment income must dig deeper.
</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-cons-of-bespoke-cdos"></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"> Cons of Bespoke CDOs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The big disadvantage is that there is typically little to no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondarymarket.asp" rel="noopener noreferrer">secondary market</a> for bespoke CDOs. This lack of market makes daily pricing difficult. The value must be calculated based on complex theoretical <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialmodeling.asp" rel="noopener noreferrer">financial models.</a> Those models can make assumptions that turn out to be catastrophically wrong, costing the holder dearly and leaving them with a financial instrument they are unable to sell at any price. The more customized the CDO, the less likely it will appeal to another investor or investors.
</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"> Then there is the lack of transparency and liquidity that accompanies over-the-counter transactions in general and these instruments in particular. As unregulated products, bespoke CDOs remain relatively high on the risk scale—more of a suitable instrument for institutional investors, like hedge funds, than for individuals.
</p>
<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-comparisonlist mntl-block" id="mntl-sc-block_32-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_33-0"> <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>Customized to investor specs</p></li>
<li><p>High-yielding</p></li>
<li><p>Diversified</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>Unregulated</p></li>
<li><p>High-risk</p></li>
<li><p>Illiquid (small secondary market)</p></li>
<li><p>Opaque pricing</p></li>
</ul>
</div>
</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-real-world-example-of-bespoke-cdos"></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"> Real-World Example of Bespoke CDOs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Citigroup is one of the leading dealers in bespoke CDOs, doing US $7 billion worth of business in them in 2016 alone. To increase transparency in what "has historically been an opaque market"—to quote Vikram Prasad Citi's managing director of Correlation and Exotics Trading—the bank offers a standardized portfolio of credit default swaps These are the asset usually used to build the CDOs. It also makes the CDO tranches' pricing structure visible on its client portal, "publishing" the figures tranches fetch.
</p></div>
|
## What Is a Bespoke CDO?
A bespoke CDO is a structured financial product—specifically, a [collateralized debt obligation (CDO)](https://www.investopedia.com/terms/c/cdo.asp)—that a dealer creates for a specific group of investors and tailors to their needs. The investor group typically buys a single [tranche](https://www.investopedia.com/terms/t/tranches.asp) of the bespoke CDO, and the remaining tranches are then held by the dealer, who will usually attempt to hedge against potential losses using other financial products like [credit derivatives](https://www.investopedia.com/terms/c/creditderivative.asp).
A bespoke CDO is now more commonly referred to as a bespoke tranche or a bespoke tranche opportunity (BTO).
### Key Takeaways
* A bespoke CDO is a collateralized debt obligation that has been customized to the specific needs of a particular group of investors
* Shunned due to their outsized role in the 2007-09 financial crisis, bespoke CDOs began reappearing in 2016 under the moniker bespoke tranche opportunities (BTOs).
* Bespoke CDOs today are mainly utilized by hedge funds and other sophisticated institutional investors.
## The Basics of a Bespoke CDO
Traditionally, a collateralized debt obligation (CDO) pools together a collection of cash flow-generating assets—such as mortgages, bonds, and other types of loans—and then repackages this portfolio into discrete sections called tranches. Bespoke CDOs can be structured like these traditional CDOs, pooling classes of debt with income streams, but the term is usually referring to [synthetic CDOs](https://www.investopedia.com/terms/s/syntheticcdo.asp) that invest in [credit default swaps](https://www.investopedia.com/terms/c/creditdefaultswap.asp) (CDS) and which are more highly customizable and nuanced.
Tranches are portions of a pooled asset divided by specific characteristics. Different tranches of the CDO carry different degrees of risk, depending on the underlying asset's creditworthiness. Therefore, each tranche has a different quarterly rate of return that corresponds with its own risk profile. Obviously, the greater the chance of default of the tranche's holdings, the higher the return it offers. The major rating agencies do not grade bespoke CDOs—the creditworthiness evaluation is done by the issuer and to some extent, market perception. Because these are [illiquid](https://www.investopedia.com/terms/i/illiquid.asp) and complex financial instruments, bespoke CDOs only trade [over the counter](https://www.investopedia.com/terms/o/otc.asp) (OTC).
## Background of Bespoke CDOs
Bespoke CDOs—like CDOs in general—have lost popularity due to their prominent role in the financial crisis that followed the housing bubble and [mortgage meltdown](https://www.investopedia.com/terms/s/subprime-meltdown.asp) between 2007 and 2009. The creation of these products by Wall Street was seen as [contributing to the massive market crash](https://www.investopedia.com/ask/answers/032315/were-collateralized-debt-obligations-cdo-responsible-2008-financial-crisis.asp) and eventual government bailout—as well as a lack of common sense. The products were highly structured investments that were hard to understand—both by those buying and those selling them—and difficult to value.
Despite this, CDOs are a useful tool for transferring risk to parties willing to shoulder it, and for freeing up capital for other uses. Wall Street is always looking for ways to transfer risk and unlock capital. So, since around 2016, the bespoke CDO has been making a comeback. In its reincarnation, it's often called a bespoke tranche opportunity (BTO).
Re-branding has not, however, changed the tool itself but there is presumably a bit more scrutiny and [due diligence](https://www.investopedia.com/terms/d/duediligence.asp) going into the pricing models. It is hoped with these new products the investors don’t find themselves once again holding obligations they don’t properly understand.
###
Some $50 billion worth of BTOs were sold in 2017.
## Pros of Bespoke CDOs
The obvious advantage of a bespoke CDO is that the buyer can customize it. A bespoke CDO is simply a tool that allows investors to target very specific risk to return profiles for their investment strategies or hedging requirements. If an investor wants to make a large, targeted bet against the goat cheese industry, there will be a dealer who can build up a bespoke CDO to do that for the right price. Still, these products are somewhat diversified since the pool loans from say, several goat cheese producers.
The second main benefit is the above-market yields they can provide. When the credit markets are steady and fixed interest rates are low, those seeking investment income must dig deeper.
## Cons of Bespoke CDOs
The big disadvantage is that there is typically little to no [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp) for bespoke CDOs. This lack of market makes daily pricing difficult. The value must be calculated based on complex theoretical [financial models.](https://www.investopedia.com/terms/f/financialmodeling.asp) Those models can make assumptions that turn out to be catastrophically wrong, costing the holder dearly and leaving them with a financial instrument they are unable to sell at any price. The more customized the CDO, the less likely it will appeal to another investor or investors.
Then there is the lack of transparency and liquidity that accompanies over-the-counter transactions in general and these instruments in particular. As unregulated products, bespoke CDOs remain relatively high on the risk scale—more of a suitable instrument for institutional investors, like hedge funds, than for individuals.
Pros
* Customized to investor specs
* High-yielding
* Diversified
Cons
* Unregulated
* High-risk
* Illiquid (small secondary market)
* Opaque pricing
## Real-World Example of Bespoke CDOs
Citigroup is one of the leading dealers in bespoke CDOs, doing US $7 billion worth of business in them in 2016 alone. To increase transparency in what "has historically been an opaque market"—to quote Vikram Prasad Citi's managing director of Correlation and Exotics Trading—the bank offers a standardized portfolio of credit default swaps These are the asset usually used to build the CDOs. It also makes the CDO tranches' pricing structure visible on its client portal, "publishing" the figures tranches fetch.
|
What Is a Bespoke CDO?
A bespoke CDO is a structured financial product—specifically, a collateralized debt obligation (CDO)—that a dealer creates for a specific group of investors and tailors to their needs. The investor group typically buys a single tranche of the bespoke CDO, and the remaining tranches are then held by the dealer, who will usually attempt to hedge against potential losses using other financial products like credit derivatives.
A bespoke CDO is now more commonly referred to as a bespoke tranche or a bespoke tranche opportunity (BTO).
Key Takeaways
A bespoke CDO is a collateralized debt obligation that has been customized to the specific needs of a particular group of investorsShunned due to their outsized role in the 2007-09 financial crisis, bespoke CDOs began reappearing in 2016 under the moniker bespoke tranche opportunities (BTOs).Bespoke CDOs today are mainly utilized by hedge funds and other sophisticated institutional investors.
The Basics of a Bespoke CDO
Traditionally, a collateralized debt obligation (CDO) pools together a collection of cash flow-generating assets—such as mortgages, bonds, and other types of loans—and then repackages this portfolio into discrete sections called tranches. Bespoke CDOs can be structured like these traditional CDOs, pooling classes of debt with income streams, but the term is usually referring to synthetic CDOs that invest in credit default swaps (CDS) and which are more highly customizable and nuanced.
Tranches are portions of a pooled asset divided by specific characteristics. Different tranches of the CDO carry different degrees of risk, depending on the underlying asset's creditworthiness. Therefore, each tranche has a different quarterly rate of return that corresponds with its own risk profile. Obviously, the greater the chance of default of the tranche's holdings, the higher the return it offers. The major rating agencies do not grade bespoke CDOs—the creditworthiness evaluation is done by the issuer and to some extent, market perception. Because these are illiquid and complex financial instruments, bespoke CDOs only trade over the counter (OTC).
Background of Bespoke CDOs
Bespoke CDOs—like CDOs in general—have lost popularity due to their prominent role in the financial crisis that followed the housing bubble and mortgage meltdown between 2007 and 2009. The creation of these products by Wall Street was seen as contributing to the massive market crash and eventual government bailout—as well as a lack of common sense. The products were highly structured investments that were hard to understand—both by those buying and those selling them—and difficult to value.
Despite this, CDOs are a useful tool for transferring risk to parties willing to shoulder it, and for freeing up capital for other uses. Wall Street is always looking for ways to transfer risk and unlock capital. So, since around 2016, the bespoke CDO has been making a comeback. In its reincarnation, it's often called a bespoke tranche opportunity (BTO).
Re-branding has not, however, changed the tool itself but there is presumably a bit more scrutiny and due diligence going into the pricing models. It is hoped with these new products the investors don’t find themselves once again holding obligations they don’t properly understand.
Some $50 billion worth of BTOs were sold in 2017.
Pros of Bespoke CDOs
The obvious advantage of a bespoke CDO is that the buyer can customize it. A bespoke CDO is simply a tool that allows investors to target very specific risk to return profiles for their investment strategies or hedging requirements. If an investor wants to make a large, targeted bet against the goat cheese industry, there will be a dealer who can build up a bespoke CDO to do that for the right price. Still, these products are somewhat diversified since the pool loans from say, several goat cheese producers.
The second main benefit is the above-market yields they can provide. When the credit markets are steady and fixed interest rates are low, those seeking investment income must dig deeper.
Cons of Bespoke CDOs
The big disadvantage is that there is typically little to no secondary market for bespoke CDOs. This lack of market makes daily pricing difficult. The value must be calculated based on complex theoretical financial models. Those models can make assumptions that turn out to be catastrophically wrong, costing the holder dearly and leaving them with a financial instrument they are unable to sell at any price. The more customized the CDO, the less likely it will appeal to another investor or investors.
Then there is the lack of transparency and liquidity that accompanies over-the-counter transactions in general and these instruments in particular. As unregulated products, bespoke CDOs remain relatively high on the risk scale—more of a suitable instrument for institutional investors, like hedge funds, than for individuals.
Pros
Customized to investor specs
High-yielding
Diversified
Cons
Unregulated
High-risk
Illiquid (small secondary market)
Opaque pricing
Real-World Example of Bespoke CDOs
Citigroup is one of the leading dealers in bespoke CDOs, doing US $7 billion worth of business in them in 2016 alone. To increase transparency in what "has historically been an opaque market"—to quote Vikram Prasad Citi's managing director of Correlation and Exotics Trading—the bank offers a standardized portfolio of credit default swaps These are the asset usually used to build the CDOs. It also makes the CDO tranches' pricing structure visible on its client portal, "publishing" the figures tranches fetch.
|
[
[
"collateralized debt obligation (CDO)",
"https://www.investopedia.com/terms/c/cdo.asp"
],
[
"tranche",
"https://www.investopedia.com/terms/t/tranches.asp"
],
[
"credit derivatives",
"https://www.investopedia.com/terms/c/creditderivative.asp"
],
[
"synthetic CDOs",
"https://www.investopedia.com/terms/s/syntheticcdo.asp"
],
[
"credit default swaps",
"https://www.investopedia.com/terms/c/creditdefaultswap.asp"
],
[
"illiquid",
"https://www.investopedia.com/terms/i/illiquid.asp"
],
[
"over the counter",
"https://www.investopedia.com/terms/o/otc.asp"
],
[
"mortgage meltdown",
"https://www.investopedia.com/terms/s/subprime-meltdown.asp"
],
[
"contributing to the massive market crash",
"https://www.investopedia.com/ask/answers/032315/were-collateralized-debt-obligations-cdo-responsible-2008-financial-crisis.asp"
],
[
"due diligence",
"https://www.investopedia.com/terms/d/duediligence.asp"
],
[
"secondary market",
"https://www.investopedia.com/terms/s/secondarymarket.asp"
],
[
"financial models.",
"https://www.investopedia.com/terms/f/financialmodeling.asp"
]
] |
https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
|
What Is a Central Bank Digital Currency (CBDC)?
|
<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-central-bank-digital-currency-cbdc"></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 Central Bank Digital Currency (CBDC)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A central bank digital currency (CBDC) is a form of digital currency issued by a country's central bank. It is similar to cryptocurrencies, except that its value is fixed by the central bank and is equivalent to the country's fiat currency.
</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"> Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it's important to understand the CBDC meaning and what they mean for society.
</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 central bank digital currency (CBDC) is the digital form of a country's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiatmoney.asp">fiat currency</a>.</li>
<li>A nation's monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies the implementation of monetary and fiscal policies.</li>
<li>Many countries are exploring how CBDCs may affect their economies, financial networks, and stability.</li>
<li>It's important for people and nations to understand the CBDC meaning because the world's economies are moving toward the use of digital currencies.<br/></li>
</ul></div></div></div>
<span class="heading-toc" id="toc-understanding-central-bank-digital-currencies-cbdcs"></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 Central Bank Digital Currencies (CBDCs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up. It is considered a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/legal-tender.asp">legal tender</a> that can be exchanged for goods and services.
</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"> Traditionally, fiat money has been <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/banknote.asp">banknotes</a> and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based currency model that records balances and transactions digitally.
</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"> Physical currency is still widely exchanged and accepted. However, some developed countries have experienced a drop in its use, and that trend accelerated during the pandemic.<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_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The introduction and evolution of cryptocurrency and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/blockchain-one-historys-greatest-inventions/">blockchain</a> technology have spurred additional interest in cashless societies and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-currency.asp">digital currencies</a>.
</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>Governments and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">central banks</a> worldwide are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-paper-on-central-bank-digital-currency-cbdc-5216571">exploring the possibility</a> of using government-backed digital currencies. When and if they are implemented, these currencies would have the full faith and backing of the government that issues them, just as fiat money does.</p></div></div></div>
<span class="heading-toc" id="toc-purposes-of-cbdcs"></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"> Purposes of CBDCs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In the U.S. and many other countries, many individuals don't have access to financial services. In the U.S. alone, 6% of adults didn't have a bank account in 2022. In 2020, 13% of U.S. adults who had bank accounts used costly alternative services like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/money-order.asp">money orders</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payday-loans.asp">payday loans</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/where-can-you-cash-checks-5176474">check-cashing services</a>.<span class="ql-inline-citation" data-cite="35"></span><span class="ql-inline-citation" data-cite="28"></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"> <strong>1.</strong> The main purpose of CBDCs is to provide businesses and consumers conducting financial transactions with privacy, transferability, convenience, accessibility, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/06/10secureretirementtips.asp">financial security</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"> <strong>2.</strong> CBDCs could also decrease the cost of maintenance that a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money-transfer methods with lower-cost options.<span class="ql-inline-citation" data-cite="34"></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"> <strong>3.</strong> CBDCs would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">Cryptocurrencies</a> are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.
</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-note" 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 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 CBDC also provides a country's central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.</p></div></div></div>
<span class="heading-toc" id="toc-types-of-cbdcs"></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"> Types of CBDCs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> There are two types of CBDCs, wholesale and retail. Financial institutions are the primary users of wholesale CBDCs, whereas consumers and businesses use retail CBDCs.<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_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"> Wholesale CBDCs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Wholesale CBDCs function similarly to holding reserves in a central bank. The central bank grants an institution an account in which to deposit funds or to use to settle interbank <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transfer.asp">transfers</a>. Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.<br/>
</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"> Retail CBDCs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—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> that private digital currency issuers might become <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankrupt</a> and lose customers' assets.
</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"> There are two types of retail CBDCs. They differ in how individual users access and use their currency:<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_40-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0">
<li>Token-based retail CBDCs are accessible with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/private-key.asp">private keys</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/public-key.asp">public keys</a> or both. This method of validation allows users to execute transactions anonymously.</li>
<li>Account-based retail CBDCs require digital identification to access an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/account.asp">account</a>.<span class="ql-inline-citation" data-cite="22"></span></li>
</ul>
<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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>It is possible to develop two types of CBDCs, wholesale and retail, and have them function in the same economy.</p></div></div></div>
<span class="heading-toc" id="toc-issues-concerning-cbdcs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_45-0"> <span class="mntl-sc-block-heading__text"> Issues Concerning CBDCs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> 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> has identified issues addressed by CBDCs, as well as matters that must be addressed before a CBDC can be designed and implemented.<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_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"> Issues Addressed by CBDCs </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0">
<li>Eliminate the third-party risk of events like bank failures or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankrun.asp">bank runs</a>. Any residual risk that remains in the system rests with the central bank.</li>
<li>Can lower high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.</li>
<li>Could support and protect U.S. dollar dominance; the U.S. dollar is still the most-used currency in the world.<span class="ql-inline-citation" data-cite="27"></span><br/></li>
<li>Remove the cost of implementing a financial structure within a country to bring financial access to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unbanked.asp">unbanked</a> population.</li>
<li>Can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.<br/></li>
</ul>
<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"> Issues Created by CBDCs </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0">
<li>If the U.S. financial structure drastically changes, it's unknown how it would affect household expenses, investments, banking reserves, <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>, the financial services sector, or the economy.</li>
<li>Effects that a switch to a CBDC could have on a financial system's stability are unknown. For example, there may not be enough central bank <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> to facilitate withdrawals during a financial crisis.</li>
<li>Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unemploymentrate.asp">employment rates</a>. Central banks must ensure that they have the tools needed to impact the economy positively.</li>
<li>Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/crime-and-fraud-4427767">financial crimes</a>; monitoring is also important because it supports efforts to combat <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneylaundering.asp">money laundering </a>and the financing of <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/080216/top-5-ways-terrorism-impacts-economy.asp">terrorism</a>.</li>
<li>Cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves. Therefore, efforts to prevent system penetration and theft of assets and information would need to be robust.</li>
</ul>
<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-comparisonlist mntl-block" id="mntl-sc-block_54-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_55-0"> <div class="mntl-sc-block__wrapper mntl-sc-block-comparisonlist__wrapper">
<span class="mntl-sc-block__heading mntl-sc-block-comparisonlist__heading">Issues Addressed By CBDCs</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Free from credit and liquidity risk</p></li>
<li><p>Lower cross-border payment costs</p></li>
<li><p>Support the international role of the dollar</p></li>
<li><p>Aim for financial inclusion</p></li>
<li><p>Expand access to the general public</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">Issues Created by CBDCs</span>
<ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list">
<li><p>Financial structure changes</p></li>
<li><p>Financial system stability</p></li>
<li><p>Monetary policy influence</p></li>
<li><p>Privacy and protection</p></li>
<li><p>Cybersecurity</p></li>
</ul>
</div>
</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-cbdcs-vs-cryptocurrencies"></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"> CBDCs vs. Cryptocurrencies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The cryptocurrency ecosystem provides a glimpse of an alternative currency system in which cumbersome regulations don't dictate the terms of each transaction. Such transactions are hard to duplicate or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0412/the-most-counterfeit-proof-currencies.aspx">counterfeit</a> and are secured by consensus mechanisms that prevent tampering.
</p>
<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-callout mntl-block" id="mntl-sc-block_60-0"><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_61-0"><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>Central bank digital currencies are designed to be similar to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a>, but they may not require blockchain technology or consensus mechanisms.<span class="ql-inline-citation" data-cite="24"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Additionally, cryptocurrencies are unregulated and decentralized. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp">Their value</a> is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.
</p>
<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-cbdcs-in-use-and-in-development"></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"> CBDCs in Use and in Development </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Central banks in many countries have launched pilot programs and research projects to determine the viability and usability of a CBDC in their economies.<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_66-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> As of March 2024, three countries had a functioning CBDC: the Bahamas, Jamaica, and Nigeria. The Eastern Caribbean Currency Union halted its CBDC for technical reasons and started a new pilot program.<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_68-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> There are 36 CBDC pilots in operation and 19 of the G20 have programs in development. The BRICS countries—Brazil, Russia, India, China, and South Africa—are exploring a CBDC.<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_70-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> One example of a failed CBDC attempt is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/britcoin.asp">United Kingdom's Britcoin</a>, which existed between 2011 and 2019.<span class="ql-inline-citation" data-cite="36"></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"> According to the Federal Reserve, the U.S. is one of those countries that is exploring whether a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-cbdc-6740586">CBDC</a> "could improve on an already safe and efficient U.S. domestic payments system."<span class="ql-inline-citation" data-cite="33"></span><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_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-cbdc-a-cryptocurrency"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is CBDC a Cryptocurrency?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs aren't cryptocurrencies. A central bank controls a CBDC, whereas cryptocurrencies are almost always decentralized, meaning they can't be regulated by a single authority, such as a bank.</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-does-the-us-have-a-cbdc"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the U.S. Have a CBDC?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Not yet. The Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system. President Joe Biden has ordered the development of a national strategy on digital currencies.<span class="ql-inline-citation" data-cite="30"></span><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_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-a-cbdc-based-on-a-blockchain"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a CBDC Based on a Blockchain?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A CBDC can be based on a blockchain, but it doesn't need to be. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology's Digital Currency Initiative found that distributed ledgers could hinder the efficiency and scalability of a CBDC.<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_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"> Many countries are researching or developing central bank digital currencies, and three have implemented them. A CBDC's main purpose is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.
</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"> Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and give people who use alternative money-transfer methods lower-cost options.
</p></div>
|
## What Is a Central Bank Digital Currency (CBDC)?
A central bank digital currency (CBDC) is a form of digital currency issued by a country's central bank. It is similar to cryptocurrencies, except that its value is fixed by the central bank and is equivalent to the country's fiat currency.
Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it's important to understand the CBDC meaning and what they mean for society.
### Key Takeaways
* A central bank digital currency (CBDC) is the digital form of a country's [fiat currency](https://www.investopedia.com/terms/f/fiatmoney.asp).
* A nation's monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies the implementation of monetary and fiscal policies.
* Many countries are exploring how CBDCs may affect their economies, financial networks, and stability.
* It's important for people and nations to understand the CBDC meaning because the world's economies are moving toward the use of digital currencies.
## Understanding Central Bank Digital Currencies (CBDCs)
Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up. It is considered a form of [legal tender](https://www.investopedia.com/terms/l/legal-tender.asp) that can be exchanged for goods and services.
Traditionally, fiat money has been [banknotes](https://www.investopedia.com/terms/b/banknote.asp) and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based currency model that records balances and transactions digitally.
Physical currency is still widely exchanged and accepted. However, some developed countries have experienced a drop in its use, and that trend accelerated during the pandemic.
The introduction and evolution of cryptocurrency and [blockchain](https://www.investopedia.com/tech/blockchain-one-historys-greatest-inventions/) technology have spurred additional interest in cashless societies and [digital currencies](https://www.investopedia.com/terms/d/digital-currency.asp).
###
Governments and [central banks](https://www.investopedia.com/terms/c/centralbank.asp) worldwide are [exploring the possibility](https://www.investopedia.com/fed-paper-on-central-bank-digital-currency-cbdc-5216571) of using government-backed digital currencies. When and if they are implemented, these currencies would have the full faith and backing of the government that issues them, just as fiat money does.
## Purposes of CBDCs
In the U.S. and many other countries, many individuals don't have access to financial services. In the U.S. alone, 6% of adults didn't have a bank account in 2022. In 2020, 13% of U.S. adults who had bank accounts used costly alternative services like [money orders](https://www.investopedia.com/terms/m/money-order.asp), [payday loans](https://www.investopedia.com/terms/p/payday-loans.asp), and [check-cashing services](https://www.investopedia.com/where-can-you-cash-checks-5176474).
**1.** The main purpose of CBDCs is to provide businesses and consumers conducting financial transactions with privacy, transferability, convenience, accessibility, and [financial security](https://www.investopedia.com/articles/retirement/06/10secureretirementtips.asp).
**2.** CBDCs could also decrease the cost of maintenance that a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money-transfer methods with lower-cost options.
**3.** CBDCs would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. [Cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.
###
A CBDC also provides a country's central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.
## Types of CBDCs
There are two types of CBDCs, wholesale and retail. Financial institutions are the primary users of wholesale CBDCs, whereas consumers and businesses use retail CBDCs.
### Wholesale CBDCs
Wholesale CBDCs function similarly to holding reserves in a central bank. The central bank grants an institution an account in which to deposit funds or to use to settle interbank [transfers](https://www.investopedia.com/terms/t/transfer.asp). Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.
### Retail CBDCs
Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—the [risk](https://www.investopedia.com/terms/r/risk.asp) that private digital currency issuers might become [bankrupt](https://www.investopedia.com/terms/b/bankruptcy.asp) and lose customers' assets.
There are two types of retail CBDCs. They differ in how individual users access and use their currency:
* Token-based retail CBDCs are accessible with [private keys](https://www.investopedia.com/terms/p/private-key.asp) or [public keys](https://www.investopedia.com/terms/p/public-key.asp) or both. This method of validation allows users to execute transactions anonymously.
* Account-based retail CBDCs require digital identification to access an [account](https://www.investopedia.com/terms/a/account.asp).
###
It is possible to develop two types of CBDCs, wholesale and retail, and have them function in the same economy.
## Issues Concerning CBDCs
The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) has identified issues addressed by CBDCs, as well as matters that must be addressed before a CBDC can be designed and implemented.
### Issues Addressed by CBDCs
* Eliminate the third-party risk of events like bank failures or [bank runs](https://www.investopedia.com/terms/b/bankrun.asp). Any residual risk that remains in the system rests with the central bank.
* Can lower high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
* Could support and protect U.S. dollar dominance; the U.S. dollar is still the most-used currency in the world.
* Remove the cost of implementing a financial structure within a country to bring financial access to the [unbanked](https://www.investopedia.com/terms/u/unbanked.asp) population.
* Can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.
### Issues Created by CBDCs
* If the U.S. financial structure drastically changes, it's unknown how it would affect household expenses, investments, banking reserves, [interest rates](https://www.investopedia.com/terms/i/interestrate.asp), the financial services sector, or the economy.
* Effects that a switch to a CBDC could have on a financial system's stability are unknown. For example, there may not be enough central bank [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) to facilitate withdrawals during a financial crisis.
* Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects [employment rates](https://www.investopedia.com/terms/u/unemploymentrate.asp). Central banks must ensure that they have the tools needed to impact the economy positively.
* Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for [financial crimes](https://www.investopedia.com/crime-and-fraud-4427767); monitoring is also important because it supports efforts to combat [money laundering](https://www.investopedia.com/terms/m/moneylaundering.asp) and the financing of [terrorism](https://www.investopedia.com/articles/markets/080216/top-5-ways-terrorism-impacts-economy.asp).
* Cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves. Therefore, efforts to prevent system penetration and theft of assets and information would need to be robust.
Issues Addressed By CBDCs
* Free from credit and liquidity risk
* Lower cross-border payment costs
* Support the international role of the dollar
* Aim for financial inclusion
* Expand access to the general public
Issues Created by CBDCs
* Financial structure changes
* Financial system stability
* Monetary policy influence
* Privacy and protection
* Cybersecurity
## CBDCs vs. Cryptocurrencies
The cryptocurrency ecosystem provides a glimpse of an alternative currency system in which cumbersome regulations don't dictate the terms of each transaction. Such transactions are hard to duplicate or [counterfeit](https://www.investopedia.com/financial-edge/0412/the-most-counterfeit-proof-currencies.aspx) and are secured by consensus mechanisms that prevent tampering.
###
Central bank digital currencies are designed to be similar to [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp), but they may not require blockchain technology or consensus mechanisms.
Additionally, cryptocurrencies are unregulated and decentralized. [Their value](https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp) is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.
## CBDCs in Use and in Development
Central banks in many countries have launched pilot programs and research projects to determine the viability and usability of a CBDC in their economies.
As of March 2024, three countries had a functioning CBDC: the Bahamas, Jamaica, and Nigeria. The Eastern Caribbean Currency Union halted its CBDC for technical reasons and started a new pilot program.
There are 36 CBDC pilots in operation and 19 of the G20 have programs in development. The BRICS countries—Brazil, Russia, India, China, and South Africa—are exploring a CBDC.
One example of a failed CBDC attempt is the [United Kingdom's Britcoin](https://www.investopedia.com/terms/b/britcoin.asp), which existed between 2011 and 2019.
According to the Federal Reserve, the U.S. is one of those countries that is exploring whether a [CBDC](https://www.investopedia.com/us-cbdc-6740586) "could improve on an already safe and efficient U.S. domestic payments system."
## Is CBDC a Cryptocurrency?
Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs aren't cryptocurrencies. A central bank controls a CBDC, whereas cryptocurrencies are almost always decentralized, meaning they can't be regulated by a single authority, such as a bank.
## Does the U.S. Have a CBDC?
Not yet. The Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system. President Joe Biden has ordered the development of a national strategy on digital currencies.
## Is a CBDC Based on a Blockchain?
A CBDC can be based on a blockchain, but it doesn't need to be. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology's Digital Currency Initiative found that distributed ledgers could hinder the efficiency and scalability of a CBDC.
## The Bottom Line
Many countries are researching or developing central bank digital currencies, and three have implemented them. A CBDC's main purpose is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.
Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and give people who use alternative money-transfer methods lower-cost options.
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What Is a Central Bank Digital Currency (CBDC)?
A central bank digital currency (CBDC) is a form of digital currency issued by a country's central bank. It is similar to cryptocurrencies, except that its value is fixed by the central bank and is equivalent to the country's fiat currency.
Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it's important to understand the CBDC meaning and what they mean for society.
Key Takeaways
A central bank digital currency (CBDC) is the digital form of a country's fiat currency.
A nation's monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies the implementation of monetary and fiscal policies.
Many countries are exploring how CBDCs may affect their economies, financial networks, and stability.
It's important for people and nations to understand the CBDC meaning because the world's economies are moving toward the use of digital currencies.
Understanding Central Bank Digital Currencies (CBDCs)
Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up. It is considered a form of legal tender that can be exchanged for goods and services.
Traditionally, fiat money has been banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based currency model that records balances and transactions digitally.
Physical currency is still widely exchanged and accepted. However, some developed countries have experienced a drop in its use, and that trend accelerated during the pandemic.
The introduction and evolution of cryptocurrency and blockchain technology have spurred additional interest in cashless societies and digital currencies.
Governments and central banks worldwide are exploring the possibility of using government-backed digital currencies. When and if they are implemented, these currencies would have the full faith and backing of the government that issues them, just as fiat money does.
Purposes of CBDCs
In the U.S. and many other countries, many individuals don't have access to financial services. In the U.S. alone, 6% of adults didn't have a bank account in 2022. In 2020, 13% of U.S. adults who had bank accounts used costly alternative services like money orders, payday loans, and check-cashing services.
1. The main purpose of CBDCs is to provide businesses and consumers conducting financial transactions with privacy, transferability, convenience, accessibility, and financial security.
2. CBDCs could also decrease the cost of maintenance that a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money-transfer methods with lower-cost options.
3. CBDCs would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. Cryptocurrencies are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.
A CBDC also provides a country's central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.
Types of CBDCs
There are two types of CBDCs, wholesale and retail. Financial institutions are the primary users of wholesale CBDCs, whereas consumers and businesses use retail CBDCs.
Wholesale CBDCs
Wholesale CBDCs function similarly to holding reserves in a central bank. The central bank grants an institution an account in which to deposit funds or to use to settle interbank transfers. Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.
Retail CBDCs
Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers' assets.
There are two types of retail CBDCs. They differ in how individual users access and use their currency:
Token-based retail CBDCs are accessible with private keys or public keys or both. This method of validation allows users to execute transactions anonymously.
Account-based retail CBDCs require digital identification to access an account.
It is possible to develop two types of CBDCs, wholesale and retail, and have them function in the same economy.
Issues Concerning CBDCs
The Federal Reserve has identified issues addressed by CBDCs, as well as matters that must be addressed before a CBDC can be designed and implemented.
Issues Addressed by CBDCs
Eliminate the third-party risk of events like bank failures or bank runs. Any residual risk that remains in the system rests with the central bank.
Can lower high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
Could support and protect U.S. dollar dominance; the U.S. dollar is still the most-used currency in the world.
Remove the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
Can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.
Issues Created by CBDCs
If the U.S. financial structure drastically changes, it's unknown how it would affect household expenses, investments, banking reserves, interest rates, the financial services sector, or the economy.
Effects that a switch to a CBDC could have on a financial system's stability are unknown. For example, there may not be enough central bank liquidity to facilitate withdrawals during a financial crisis.
Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects employment rates. Central banks must ensure that they have the tools needed to impact the economy positively.
Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for financial crimes; monitoring is also important because it supports efforts to combat money laundering and the financing of terrorism.
Cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves. Therefore, efforts to prevent system penetration and theft of assets and information would need to be robust.
Issues Addressed By CBDCs
Free from credit and liquidity risk
Lower cross-border payment costs
Support the international role of the dollar
Aim for financial inclusion
Expand access to the general public
Issues Created by CBDCs
Financial structure changes
Financial system stability
Monetary policy influence
Privacy and protection
Cybersecurity
CBDCs vs. Cryptocurrencies
The cryptocurrency ecosystem provides a glimpse of an alternative currency system in which cumbersome regulations don't dictate the terms of each transaction. Such transactions are hard to duplicate or counterfeit and are secured by consensus mechanisms that prevent tampering.
Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.
Additionally, cryptocurrencies are unregulated and decentralized. Their value is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.
CBDCs in Use and in Development
Central banks in many countries have launched pilot programs and research projects to determine the viability and usability of a CBDC in their economies.
As of March 2024, three countries had a functioning CBDC: the Bahamas, Jamaica, and Nigeria. The Eastern Caribbean Currency Union halted its CBDC for technical reasons and started a new pilot program.
There are 36 CBDC pilots in operation and 19 of the G20 have programs in development. The BRICS countries—Brazil, Russia, India, China, and South Africa—are exploring a CBDC.
One example of a failed CBDC attempt is the United Kingdom's Britcoin, which existed between 2011 and 2019.
According to the Federal Reserve, the U.S. is one of those countries that is exploring whether a CBDC "could improve on an already safe and efficient U.S. domestic payments system."
Is CBDC a Cryptocurrency?
Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs aren't cryptocurrencies. A central bank controls a CBDC, whereas cryptocurrencies are almost always decentralized, meaning they can't be regulated by a single authority, such as a bank.
Does the U.S. Have a CBDC?
Not yet. The Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system. President Joe Biden has ordered the development of a national strategy on digital currencies.
Is a CBDC Based on a Blockchain?
A CBDC can be based on a blockchain, but it doesn't need to be. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology's Digital Currency Initiative found that distributed ledgers could hinder the efficiency and scalability of a CBDC.
The Bottom Line
Many countries are researching or developing central bank digital currencies, and three have implemented them. A CBDC's main purpose is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.
Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and give people who use alternative money-transfer methods lower-cost options.
|
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https://www.investopedia.com/terms/i/immediate-family.asp
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Immediate Family Definition, Criteria, and Legal Aspects
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<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-immediate-family"></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 Immediate Family? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Most of us know how we define "immediate family" in our own minds, but our views of the matter may not matter when it comes to its definition in the fine print of legal documents or company policies.
</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 definition of an immediate family can affect whether a person can use paid or unpaid leave to care for a sick family member or attend a funeral. It also can restrict some financial transactions, especially those involving the stock market.
</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 immediate family usually consists of one's parents, siblings, spouse, and children.</li><li>Who is considered immediate family matters in situations such as a company's family leave policy.</li><li>The Family and Medical Leave Act, for example, defines immediate family as your spouse, parents, and dependent children.</li><li>For U.S. immigration purposes, immediate family is limited to one's spouse, parents, or unmarried children below age 21. </li><li>In estate law, the right of inheritance passes to one's spouses and surviving children before moving on to other relatives. </li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-immediate-family"></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 Immediate Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> In general, a person's immediate family is their smallest family unit, including parents, siblings, spouse, and children. It may include relatives through marriage, such as a mother-in-law. But the exact inclusions may differ depending on the law or organization that defines an individual's immediate family.
</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"> However, the definition of an immediate family can be murky because, unless a specific law is involved, it’s up to companies, organizations, and policy-makers to make their own rules.<br/>
</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"> Parents, spouses, and minor children are almost always considered to be immediate family, while siblings may or may not count. In addition, adoptive parents or children are also considered immediate family, although there is no blood relation. Half-siblings, step-siblings, and other near relatives are also ambiguous.
</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"> Criteria for Immediate Family </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> In addition to blood ties, there are also other factors that may help determine what counts as immediate family. The following are some other criteria that may determine who counts for one's immediate family:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0">
<li><strong>Distance: </strong>In the past, family members who lived at a great distance might not have fit the definition of the immediate family, even if they were close blood relatives. Due to the growing importance of Internet communication and air travel, this factor is less important.</li>
<li><strong>Relationship: </strong>Half-siblings, step-siblings, and stepparents do not always count as immediate family, depending on the type of relationship that they have with you.</li>
<li><strong>Length of Time: </strong>In some cases, a long-term relationship might qualify someone as a member of the immediate family even if there are no blood or legal ties. One example of this type of relationship is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0210/marriage-vs.-common-law-what-it-means-financially.aspx">common-law marriage</a>.<br/></li>
</ul>
<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-legal-aspects-of-immediate-family"></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"> Legal Aspects of Immediate Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The members of your immediate family may be allowed to make important legal or medical decisions in the event that you are incapacitated. Moreover, there are certain legal restrictions on their ability to trade or sell stock in a company where you are an executive officer, and when you die, they may be permitted to make a claim on your estate.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-subheading__text"> Medical Leave and the Immediate Family </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> For example, companies with 50 or more employees must comply with the federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp">Family and Medical Leave Act</a> (FMLA). The FMLA requires that up to 12 weeks of unpaid, job-protected leave be given to employees who need to care for a sick member of their immediate family.
</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 act in this case broadly generally defines that as a spouse, parent, or minor child. Notably, it does not mention an adult independent child or a grandparent, not to mention a more distantly related family member who may live with you or depend on you for assistance.
</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 fine print in the law further specifies that the leave must be extended to care for children under age 18 or unable to care for themselves, and it includes adopted and foster children. In-laws are excluded, even if they live with the employee.<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_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> As another example, federal law does not require a company to give its employees paid bereavement leave when they attend a funeral for a family member. Many companies choose to offer this benefit anyway, but they are free to define family members in any way they choose.
</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"> The Stock Markets and Immediate Family </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/finra.asp" rel="noopener noreferrer">Financial Industry Regulatory Authority</a> (FINRA) is responsible for preventing corrupt practices in the financial markets. For instance, it prohibits brokers from selling <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hotissue.asp" rel="noopener noreferrer">hot issues</a> such as initial public offering (IPO) shares to members of their immediate families.
</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"> As such, its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rulesoffairpractice.asp" rel="noopener noreferrer">Rules of Fair Practice</a> include a strict definition of what constitutes an immediate family member. In this case, it includes all in-laws and anyone who relies on the person for material support. Rules governing transactions with a person's immediate family also are noted in FINRA's concepts of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/withholding.asp" rel="noopener noreferrer">withholding</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freeriding.asp" rel="noopener noreferrer">free-riding</a>.
</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-note" 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 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>Adoptive parents or children are usually considered immediate family, although there is no blood relation.</p></div></div></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"> Inheritance and Immediate Family </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> If a person dies without leaving behind a will, the assets of the deceased are divided according to the laws of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/intestate.asp">intestate succession</a>. These rules vary from state to state, as do the definitions of those family members entitled to make a claim.
</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 most states, a surviving spouse inherits at least half of the deceased's assets, with the remainder divided among their surviving children. If there are no immediate children, the right of inheritance passes down to any grandchildren, before returning to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/inheritedpension.asp">deceased's parents</a>, and any collateral heirs (such as brothers and sisters).
</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"> If there is no identifiable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/next-of-kin.asp">next of kin</a>, the asset passes on to the state. Close friends, unmarried partners, and unrecognized children may not be able to inherit even if they believe that the deceased would have wanted it. For that reason, it is important to have a clear will that states how you wish your estate to be divided.
</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-how-to-protect-your-immediate-family"></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"> How to Protect Your Immediate Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Given the ambiguity, it's wise for everyone to consider making sure that all of the members of their immediate families, as they define them, are protected. A few considerations:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> <li>Make sure that you have a will, and that it specifies who gets what. Every state has its own inheritance laws, and you want to make sure that your assets are awarded to the family member or members that you want to have them.</li><li>Check other key documents including all financial accounts to make sure you have correctly identified the beneficiaries of your assets, and make sure you keep this information up to date.</li><li>Read the fine print in your company's employee manual to determine how it defines your immediate family, particularly in that Family and Medical Leave Act (FMLA) provision. The policy may be negotiable if you are responsible for a mother-in-law or other family member not defined as "immediate" by law.</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div>
<span class="heading-toc" id="toc-immediate-family-vs-extended-family"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_51-0"> <span class="mntl-sc-block-heading__text"> Immediate Family vs. Extended Family </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> In contrast to the immediate family, the extended family is a large network of individuals with blood or legal ties. This can include aunts, uncles, cousins, grandparents, grandchildren, as well as their married spouses (and their extended family).
</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"> In some cases, extended family may be able to exercise some rights if the immediate family is unable to exercise them. For example, if a child loses one parent, the grandparents may be able to exercise some custody rights, such as legal visitation. Extended family members may also be eligible to adopt the children of parents who are deceased or otherwise unable to provide care.
</p>
<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-who-counts-as-immediate-family-for-bereavement-pay"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Counts As Immediate Family for Bereavement Pay?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Federal law does not require companies to offer bereavement pay, so each company may have its own definition for which family members count. Generally speaking, one's legal children and parents will almost always count for bereavement leave. Siblings, step-children, and step-parents are also likely to be included.</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-who-counts-as-immediate-family-for-a-green-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Counts as Immediate Family for a Green Card?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A U.S. citizen can petition for members of their immediate family to receive permanent resident ("green card") status. For these purposes, the immediate family is defined as one's spouse, a child who is unmarried and less than 21 years old, or a parent (if the applying citizen is over 21 years old). Older children, married children, siblings, half-siblings and adoptive siblings are also eligible, although they may face longer wait times.<span class="ql-inline-citation" data-cite="3"></span><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_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-counts-as-immediate-family-for-asylum-claims"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Counts as Immediate Family for Asylum Claims?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>People with asylum or refugee status may petition for members of their immediate family to be given green card status. Under U.S. law, "immediate family" only includes the spouse, parent, or child of the person making the application. A "child" is considered to be younger than age 21 and unmarried.<span class="ql-inline-citation" data-cite="4"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></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_62-0"> <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_63-0"> Immediate family is a term for the closest members of a person's family unit: their spouse and children, parents and siblings. However, the exact definitions of one's immediate family may vary depending on the context.
</p></div>
|
## What Is Immediate Family?
Most of us know how we define "immediate family" in our own minds, but our views of the matter may not matter when it comes to its definition in the fine print of legal documents or company policies.
The definition of an immediate family can affect whether a person can use paid or unpaid leave to care for a sick family member or attend a funeral. It also can restrict some financial transactions, especially those involving the stock market.
### Key Takeaways
* The immediate family usually consists of one's parents, siblings, spouse, and children.
* Who is considered immediate family matters in situations such as a company's family leave policy.
* The Family and Medical Leave Act, for example, defines immediate family as your spouse, parents, and dependent children.
* For U.S. immigration purposes, immediate family is limited to one's spouse, parents, or unmarried children below age 21.
* In estate law, the right of inheritance passes to one's spouses and surviving children before moving on to other relatives.
## Understanding Immediate Family
In general, a person's immediate family is their smallest family unit, including parents, siblings, spouse, and children. It may include relatives through marriage, such as a mother-in-law. But the exact inclusions may differ depending on the law or organization that defines an individual's immediate family.
However, the definition of an immediate family can be murky because, unless a specific law is involved, it’s up to companies, organizations, and policy-makers to make their own rules.
Parents, spouses, and minor children are almost always considered to be immediate family, while siblings may or may not count. In addition, adoptive parents or children are also considered immediate family, although there is no blood relation. Half-siblings, step-siblings, and other near relatives are also ambiguous.
### Criteria for Immediate Family
In addition to blood ties, there are also other factors that may help determine what counts as immediate family. The following are some other criteria that may determine who counts for one's immediate family:
* **Distance:** In the past, family members who lived at a great distance might not have fit the definition of the immediate family, even if they were close blood relatives. Due to the growing importance of Internet communication and air travel, this factor is less important.
* **Relationship:** Half-siblings, step-siblings, and stepparents do not always count as immediate family, depending on the type of relationship that they have with you.
* **Length of Time:** In some cases, a long-term relationship might qualify someone as a member of the immediate family even if there are no blood or legal ties. One example of this type of relationship is [common-law marriage](https://www.investopedia.com/financial-edge/0210/marriage-vs.-common-law-what-it-means-financially.aspx).
## Legal Aspects of Immediate Family
The members of your immediate family may be allowed to make important legal or medical decisions in the event that you are incapacitated. Moreover, there are certain legal restrictions on their ability to trade or sell stock in a company where you are an executive officer, and when you die, they may be permitted to make a claim on your estate.
### Medical Leave and the Immediate Family
For example, companies with 50 or more employees must comply with the federal [Family and Medical Leave Act](https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp) (FMLA). The FMLA requires that up to 12 weeks of unpaid, job-protected leave be given to employees who need to care for a sick member of their immediate family.
The act in this case broadly generally defines that as a spouse, parent, or minor child. Notably, it does not mention an adult independent child or a grandparent, not to mention a more distantly related family member who may live with you or depend on you for assistance.
The fine print in the law further specifies that the leave must be extended to care for children under age 18 or unable to care for themselves, and it includes adopted and foster children. In-laws are excluded, even if they live with the employee.
As another example, federal law does not require a company to give its employees paid bereavement leave when they attend a funeral for a family member. Many companies choose to offer this benefit anyway, but they are free to define family members in any way they choose.
### The Stock Markets and Immediate Family
The [Financial Industry Regulatory Authority](https://www.investopedia.com/terms/f/finra.asp) (FINRA) is responsible for preventing corrupt practices in the financial markets. For instance, it prohibits brokers from selling [hot issues](https://www.investopedia.com/terms/h/hotissue.asp) such as initial public offering (IPO) shares to members of their immediate families.
As such, its [Rules of Fair Practice](https://www.investopedia.com/terms/r/rulesoffairpractice.asp) include a strict definition of what constitutes an immediate family member. In this case, it includes all in-laws and anyone who relies on the person for material support. Rules governing transactions with a person's immediate family also are noted in FINRA's concepts of [withholding](https://www.investopedia.com/terms/w/withholding.asp) and [free-riding](https://www.investopedia.com/terms/f/freeriding.asp).
###
Adoptive parents or children are usually considered immediate family, although there is no blood relation.
### Inheritance and Immediate Family
If a person dies without leaving behind a will, the assets of the deceased are divided according to the laws of [intestate succession](https://www.investopedia.com/terms/i/intestate.asp). These rules vary from state to state, as do the definitions of those family members entitled to make a claim.
In most states, a surviving spouse inherits at least half of the deceased's assets, with the remainder divided among their surviving children. If there are no immediate children, the right of inheritance passes down to any grandchildren, before returning to the [deceased's parents](https://www.investopedia.com/ask/answers/05/inheritedpension.asp), and any collateral heirs (such as brothers and sisters).
If there is no identifiable [next of kin](https://www.investopedia.com/terms/n/next-of-kin.asp), the asset passes on to the state. Close friends, unmarried partners, and unrecognized children may not be able to inherit even if they believe that the deceased would have wanted it. For that reason, it is important to have a clear will that states how you wish your estate to be divided.
## How to Protect Your Immediate Family
Given the ambiguity, it's wise for everyone to consider making sure that all of the members of their immediate families, as they define them, are protected. A few considerations:
* Make sure that you have a will, and that it specifies who gets what. Every state has its own inheritance laws, and you want to make sure that your assets are awarded to the family member or members that you want to have them.
* Check other key documents including all financial accounts to make sure you have correctly identified the beneficiaries of your assets, and make sure you keep this information up to date.
* Read the fine print in your company's employee manual to determine how it defines your immediate family, particularly in that Family and Medical Leave Act (FMLA) provision. The policy may be negotiable if you are responsible for a mother-in-law or other family member not defined as "immediate" by law.
## Immediate Family vs. Extended Family
In contrast to the immediate family, the extended family is a large network of individuals with blood or legal ties. This can include aunts, uncles, cousins, grandparents, grandchildren, as well as their married spouses (and their extended family).
In some cases, extended family may be able to exercise some rights if the immediate family is unable to exercise them. For example, if a child loses one parent, the grandparents may be able to exercise some custody rights, such as legal visitation. Extended family members may also be eligible to adopt the children of parents who are deceased or otherwise unable to provide care.
## Who Counts As Immediate Family for Bereavement Pay?
Federal law does not require companies to offer bereavement pay, so each company may have its own definition for which family members count. Generally speaking, one's legal children and parents will almost always count for bereavement leave. Siblings, step-children, and step-parents are also likely to be included.
## Who Counts as Immediate Family for a Green Card?
A U.S. citizen can petition for members of their immediate family to receive permanent resident ("green card") status. For these purposes, the immediate family is defined as one's spouse, a child who is unmarried and less than 21 years old, or a parent (if the applying citizen is over 21 years old). Older children, married children, siblings, half-siblings and adoptive siblings are also eligible, although they may face longer wait times.
## What Counts as Immediate Family for Asylum Claims?
People with asylum or refugee status may petition for members of their immediate family to be given green card status. Under U.S. law, "immediate family" only includes the spouse, parent, or child of the person making the application. A "child" is considered to be younger than age 21 and unmarried.
## The Bottom Line
Immediate family is a term for the closest members of a person's family unit: their spouse and children, parents and siblings. However, the exact definitions of one's immediate family may vary depending on the context.
|
What Is Immediate Family?
Most of us know how we define "immediate family" in our own minds, but our views of the matter may not matter when it comes to its definition in the fine print of legal documents or company policies.
The definition of an immediate family can affect whether a person can use paid or unpaid leave to care for a sick family member or attend a funeral. It also can restrict some financial transactions, especially those involving the stock market.
Key Takeaways
The immediate family usually consists of one's parents, siblings, spouse, and children.Who is considered immediate family matters in situations such as a company's family leave policy.The Family and Medical Leave Act, for example, defines immediate family as your spouse, parents, and dependent children.For U.S. immigration purposes, immediate family is limited to one's spouse, parents, or unmarried children below age 21. In estate law, the right of inheritance passes to one's spouses and surviving children before moving on to other relatives.
Understanding Immediate Family
In general, a person's immediate family is their smallest family unit, including parents, siblings, spouse, and children. It may include relatives through marriage, such as a mother-in-law. But the exact inclusions may differ depending on the law or organization that defines an individual's immediate family.
However, the definition of an immediate family can be murky because, unless a specific law is involved, it’s up to companies, organizations, and policy-makers to make their own rules.
Parents, spouses, and minor children are almost always considered to be immediate family, while siblings may or may not count. In addition, adoptive parents or children are also considered immediate family, although there is no blood relation. Half-siblings, step-siblings, and other near relatives are also ambiguous.
Criteria for Immediate Family
In addition to blood ties, there are also other factors that may help determine what counts as immediate family. The following are some other criteria that may determine who counts for one's immediate family:
Distance: In the past, family members who lived at a great distance might not have fit the definition of the immediate family, even if they were close blood relatives. Due to the growing importance of Internet communication and air travel, this factor is less important.
Relationship: Half-siblings, step-siblings, and stepparents do not always count as immediate family, depending on the type of relationship that they have with you.
Length of Time: In some cases, a long-term relationship might qualify someone as a member of the immediate family even if there are no blood or legal ties. One example of this type of relationship is common-law marriage.
Legal Aspects of Immediate Family
The members of your immediate family may be allowed to make important legal or medical decisions in the event that you are incapacitated. Moreover, there are certain legal restrictions on their ability to trade or sell stock in a company where you are an executive officer, and when you die, they may be permitted to make a claim on your estate.
Medical Leave and the Immediate Family
For example, companies with 50 or more employees must comply with the federal Family and Medical Leave Act (FMLA). The FMLA requires that up to 12 weeks of unpaid, job-protected leave be given to employees who need to care for a sick member of their immediate family.
The act in this case broadly generally defines that as a spouse, parent, or minor child. Notably, it does not mention an adult independent child or a grandparent, not to mention a more distantly related family member who may live with you or depend on you for assistance.
The fine print in the law further specifies that the leave must be extended to care for children under age 18 or unable to care for themselves, and it includes adopted and foster children. In-laws are excluded, even if they live with the employee.
As another example, federal law does not require a company to give its employees paid bereavement leave when they attend a funeral for a family member. Many companies choose to offer this benefit anyway, but they are free to define family members in any way they choose.
The Stock Markets and Immediate Family
The Financial Industry Regulatory Authority (FINRA) is responsible for preventing corrupt practices in the financial markets. For instance, it prohibits brokers from selling hot issues such as initial public offering (IPO) shares to members of their immediate families.
As such, its Rules of Fair Practice include a strict definition of what constitutes an immediate family member. In this case, it includes all in-laws and anyone who relies on the person for material support. Rules governing transactions with a person's immediate family also are noted in FINRA's concepts of withholding and free-riding.
Adoptive parents or children are usually considered immediate family, although there is no blood relation.
Inheritance and Immediate Family
If a person dies without leaving behind a will, the assets of the deceased are divided according to the laws of intestate succession. These rules vary from state to state, as do the definitions of those family members entitled to make a claim.
In most states, a surviving spouse inherits at least half of the deceased's assets, with the remainder divided among their surviving children. If there are no immediate children, the right of inheritance passes down to any grandchildren, before returning to the deceased's parents, and any collateral heirs (such as brothers and sisters).
If there is no identifiable next of kin, the asset passes on to the state. Close friends, unmarried partners, and unrecognized children may not be able to inherit even if they believe that the deceased would have wanted it. For that reason, it is important to have a clear will that states how you wish your estate to be divided.
How to Protect Your Immediate Family
Given the ambiguity, it's wise for everyone to consider making sure that all of the members of their immediate families, as they define them, are protected. A few considerations:
Make sure that you have a will, and that it specifies who gets what. Every state has its own inheritance laws, and you want to make sure that your assets are awarded to the family member or members that you want to have them.Check other key documents including all financial accounts to make sure you have correctly identified the beneficiaries of your assets, and make sure you keep this information up to date.Read the fine print in your company's employee manual to determine how it defines your immediate family, particularly in that Family and Medical Leave Act (FMLA) provision. The policy may be negotiable if you are responsible for a mother-in-law or other family member not defined as "immediate" by law.
Immediate Family vs. Extended Family
In contrast to the immediate family, the extended family is a large network of individuals with blood or legal ties. This can include aunts, uncles, cousins, grandparents, grandchildren, as well as their married spouses (and their extended family).
In some cases, extended family may be able to exercise some rights if the immediate family is unable to exercise them. For example, if a child loses one parent, the grandparents may be able to exercise some custody rights, such as legal visitation. Extended family members may also be eligible to adopt the children of parents who are deceased or otherwise unable to provide care.
Who Counts As Immediate Family for Bereavement Pay?
Federal law does not require companies to offer bereavement pay, so each company may have its own definition for which family members count. Generally speaking, one's legal children and parents will almost always count for bereavement leave. Siblings, step-children, and step-parents are also likely to be included.
Who Counts as Immediate Family for a Green Card?
A U.S. citizen can petition for members of their immediate family to receive permanent resident ("green card") status. For these purposes, the immediate family is defined as one's spouse, a child who is unmarried and less than 21 years old, or a parent (if the applying citizen is over 21 years old). Older children, married children, siblings, half-siblings and adoptive siblings are also eligible, although they may face longer wait times.
What Counts as Immediate Family for Asylum Claims?
People with asylum or refugee status may petition for members of their immediate family to be given green card status. Under U.S. law, "immediate family" only includes the spouse, parent, or child of the person making the application. A "child" is considered to be younger than age 21 and unmarried.
The Bottom Line
Immediate family is a term for the closest members of a person's family unit: their spouse and children, parents and siblings. However, the exact definitions of one's immediate family may vary depending on the context.
|
[
[
"common-law marriage",
"https://www.investopedia.com/financial-edge/0210/marriage-vs.-common-law-what-it-means-financially.aspx"
],
[
"Family and Medical Leave Act",
"https://www.investopedia.com/terms/f/family-and-medical-leave-act.asp"
],
[
"Financial Industry Regulatory Authority",
"https://www.investopedia.com/terms/f/finra.asp"
],
[
"hot issues",
"https://www.investopedia.com/terms/h/hotissue.asp"
],
[
"Rules of Fair Practice",
"https://www.investopedia.com/terms/r/rulesoffairpractice.asp"
],
[
"withholding",
"https://www.investopedia.com/terms/w/withholding.asp"
],
[
"free-riding",
"https://www.investopedia.com/terms/f/freeriding.asp"
],
[
"intestate succession",
"https://www.investopedia.com/terms/i/intestate.asp"
],
[
"deceased's parents",
"https://www.investopedia.com/ask/answers/05/inheritedpension.asp"
],
[
"next of kin",
"https://www.investopedia.com/terms/n/next-of-kin.asp"
]
] |
https://www.investopedia.com/articles/investing/080715/etf-analysis-ipath-sp-500-vix-futures-vxx.asp
|
ETF Analysis: The iPath S&P 500 VIX 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"> The iPath S&P 500 VIX Short-Term Futures (VXX) is an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etn.asp">exchange-traded note (ETN)</a> designed to provide investors with exposure to equity market volatility. Shares of an ETN, which is structured as a debt instrument, can be bought and sold like shares of stock.
</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"> During times of high <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 the stock market, the value of VXX shares will typically increase. On the other hand, quiet periods for the market will likely keep shares trending lower. Here's why.
</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-understanding-vxx"></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 VXX </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an exchange-traded note (ETN), which is similar in nature to an exchange-traded fund (ETF). <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0213/etf-or-etn-whats-the-difference.aspx">The main difference between an ETF and an ETN</a> is that, while the exchange-traded fund represents ownership in a basket of securities—stocks, bonds, or commodities—within the fund's portfolio, the exchange-traded note is an uncollateralized debt instrument and has bond-like characteristics: investors can hold shares until <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a> (which is Jan. 23, 2048, for the VXX ETN launched Jan. 19, 2018) and buy and sell before maturity.<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>
<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 iPath S&P 500 VIX Short-Term Futures ETN is an investment security that provides exposure to the volatility of the U.S. stock market.</li><li>An ETN is like an ETF, but rather than holding a basket of stocks, bonds, or commodities, the exchange-traded note is a debt instrument with a maturity date.</li><li>VXX is designed to track the value of futures contracts on Cboe Volatility Index, which is a gauge of current volatility that is priced into S&P 500 index options.</li><li>VXX continuously rolls VIX futures contracts at each expiration, which can detract from performance.</li><li>VXX shares will typically increase in value when market volatility increases, but trend lower when volatility is muted.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Managed by Barclays Capital Incorporated, the iPath S&P 500 VIX Short-Term Futures ETN is linked to the daily price changes in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/021015/what-cboe-volatility-index-vix.asp">Cboe Volatility Index</a>, but in a complicated way.<span class="ql-inline-citation" data-cite="1"></span> VIX is sometimes called the market's "fear gauge" because it tends to rise during periods of market uncertainty and spike in times of panic. The index tracks changes in the expected volatility priced into S&P 500 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexoption.asp">Index options</a> and is computed using an options-pricing formula.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <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> are listed on Cboe Volatility Index, and VXX is an ETN that tracks the S&P 500 VIX Short-Term Futures Total Return Index, which is designed to offer exposure to long positions in Cboe Volatility Index futures contracts. Therefore, VXX does not track VIX itself (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spotprice.asp">spot VIX</a>), but the futures on VIX, which often trade at very different price levels depending on the time to maturity.<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_13-0"></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_14-0"> <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_15-0"> Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/073015/how-do-futures-contracts-roll-over.asp">rolling</a>.<span class="ql-inline-citation" data-cite="1"></span> Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts).
</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>In extreme market conditions, when volatility spikes, short-term VIX futures contracts can trade at higher levels compared to longer-term ones and the situation is called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/backwardation.asp">backwardation</a>. More often, however, VIX futures are in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/07/contango_backwardation.asp">contango</a> and longer-term contracts trade at higher prices compared to short-term ones.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The iPath S&P 500 VIX Short-Term Futures ETN can be influenced by many unpredictable factors, and the price of VXX can fluctuate substantially between now and the maturity date. Influential factors include prevailing market prices of the U.S. stock market, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp" rel="noopener noreferrer">S&P 500 Index</a> options prices, supply and demand for VXX, as well as economic, political, regulatory or judicial events, or changes to interest rate policies. Basically, anything that affects stock prices can also affect volatility and VXX shares.
</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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> An investment in VXX might be suitable for investors who want to hedge their portfolios against a market downturn and speculators who have a high <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a>. However, since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vix.asp">Cboe Volatility Index</a> and VIX futures before investing or trading the exchange-traded note.
</p></div>
|
The iPath S&P 500 VIX Short-Term Futures (VXX) is an [exchange-traded note (ETN)](https://www.investopedia.com/terms/e/etn.asp) designed to provide investors with exposure to equity market volatility. Shares of an ETN, which is structured as a debt instrument, can be bought and sold like shares of stock.
During times of high [volatility](https://www.investopedia.com/terms/v/volatility.asp) in the stock market, the value of VXX shares will typically increase. On the other hand, quiet periods for the market will likely keep shares trending lower. Here's why.
## Understanding VXX
The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an exchange-traded note (ETN), which is similar in nature to an exchange-traded fund (ETF). [The main difference between an ETF and an ETN](https://www.investopedia.com/financial-edge/0213/etf-or-etn-whats-the-difference.aspx) is that, while the exchange-traded fund represents ownership in a basket of securities—stocks, bonds, or commodities—within the fund's portfolio, the exchange-traded note is an uncollateralized debt instrument and has bond-like characteristics: investors can hold shares until [maturity](https://www.investopedia.com/terms/m/maturity.asp) (which is Jan. 23, 2048, for the VXX ETN launched Jan. 19, 2018) and buy and sell before maturity.
### Key Takeaways
* The iPath S&P 500 VIX Short-Term Futures ETN is an investment security that provides exposure to the volatility of the U.S. stock market.
* An ETN is like an ETF, but rather than holding a basket of stocks, bonds, or commodities, the exchange-traded note is a debt instrument with a maturity date.
* VXX is designed to track the value of futures contracts on Cboe Volatility Index, which is a gauge of current volatility that is priced into S&P 500 index options.
* VXX continuously rolls VIX futures contracts at each expiration, which can detract from performance.
* VXX shares will typically increase in value when market volatility increases, but trend lower when volatility is muted.
Managed by Barclays Capital Incorporated, the iPath S&P 500 VIX Short-Term Futures ETN is linked to the daily price changes in [Cboe Volatility Index](https://www.investopedia.com/ask/answers/021015/what-cboe-volatility-index-vix.asp), but in a complicated way. VIX is sometimes called the market's "fear gauge" because it tends to rise during periods of market uncertainty and spike in times of panic. The index tracks changes in the expected volatility priced into S&P 500 [Index options](https://www.investopedia.com/terms/i/indexoption.asp) and is computed using an options-pricing formula.
[Futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) are listed on Cboe Volatility Index, and VXX is an ETN that tracks the S&P 500 VIX Short-Term Futures Total Return Index, which is designed to offer exposure to long positions in Cboe Volatility Index futures contracts. Therefore, VXX does not track VIX itself ([spot VIX](https://www.investopedia.com/terms/s/spotprice.asp)), but the futures on VIX, which often trade at very different price levels depending on the time to maturity.
## Risks
Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called [rolling](https://www.investopedia.com/ask/answers/073015/how-do-futures-contracts-roll-over.asp). Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts).
###
In extreme market conditions, when volatility spikes, short-term VIX futures contracts can trade at higher levels compared to longer-term ones and the situation is called [backwardation](https://www.investopedia.com/terms/b/backwardation.asp). More often, however, VIX futures are in [contango](https://www.investopedia.com/articles/07/contango_backwardation.asp) and longer-term contracts trade at higher prices compared to short-term ones.
The iPath S&P 500 VIX Short-Term Futures ETN can be influenced by many unpredictable factors, and the price of VXX can fluctuate substantially between now and the maturity date. Influential factors include prevailing market prices of the U.S. stock market, [S&P 500 Index](https://www.investopedia.com/terms/s/sp500.asp) options prices, supply and demand for VXX, as well as economic, political, regulatory or judicial events, or changes to interest rate policies. Basically, anything that affects stock prices can also affect volatility and VXX shares.
## The Bottom Line
An investment in VXX might be suitable for investors who want to hedge their portfolios against a market downturn and speculators who have a high [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp). However, since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the [Cboe Volatility Index](https://www.investopedia.com/terms/v/vix.asp) and VIX futures before investing or trading the exchange-traded note.
|
The iPath S&P 500 VIX Short-Term Futures (VXX) is an exchange-traded note (ETN) designed to provide investors with exposure to equity market volatility. Shares of an ETN, which is structured as a debt instrument, can be bought and sold like shares of stock.
During times of high volatility in the stock market, the value of VXX shares will typically increase. On the other hand, quiet periods for the market will likely keep shares trending lower. Here's why.
Understanding VXX
The iPath S&P 500 VIX Short-Term Futures ETN is legally structured as an exchange-traded note (ETN), which is similar in nature to an exchange-traded fund (ETF). The main difference between an ETF and an ETN is that, while the exchange-traded fund represents ownership in a basket of securities—stocks, bonds, or commodities—within the fund's portfolio, the exchange-traded note is an uncollateralized debt instrument and has bond-like characteristics: investors can hold shares until maturity (which is Jan. 23, 2048, for the VXX ETN launched Jan. 19, 2018) and buy and sell before maturity.
Key Takeaways
The iPath S&P 500 VIX Short-Term Futures ETN is an investment security that provides exposure to the volatility of the U.S. stock market.An ETN is like an ETF, but rather than holding a basket of stocks, bonds, or commodities, the exchange-traded note is a debt instrument with a maturity date.VXX is designed to track the value of futures contracts on Cboe Volatility Index, which is a gauge of current volatility that is priced into S&P 500 index options.VXX continuously rolls VIX futures contracts at each expiration, which can detract from performance.VXX shares will typically increase in value when market volatility increases, but trend lower when volatility is muted.
Managed by Barclays Capital Incorporated, the iPath S&P 500 VIX Short-Term Futures ETN is linked to the daily price changes in Cboe Volatility Index, but in a complicated way. VIX is sometimes called the market's "fear gauge" because it tends to rise during periods of market uncertainty and spike in times of panic. The index tracks changes in the expected volatility priced into S&P 500 Index options and is computed using an options-pricing formula.
Futures contracts are listed on Cboe Volatility Index, and VXX is an ETN that tracks the S&P 500 VIX Short-Term Futures Total Return Index, which is designed to offer exposure to long positions in Cboe Volatility Index futures contracts. Therefore, VXX does not track VIX itself (spot VIX), but the futures on VIX, which often trade at very different price levels depending on the time to maturity.
Risks
Since VXX must roll its futures contracts to rebalance the fund to the later contract, the fund manager is forced to sell the futures contracts that are closest to their expiration dates and buy the next dated contracts, which is a process called rolling. Since longer-dated futures contracts are often at higher levels than shorter-dated ones (during normal market conditions), the rolling activity can result in losses (as the ETN is forced to sell the lower-valued contracts and buy the higher-priced contracts).
In extreme market conditions, when volatility spikes, short-term VIX futures contracts can trade at higher levels compared to longer-term ones and the situation is called backwardation. More often, however, VIX futures are in contango and longer-term contracts trade at higher prices compared to short-term ones.
The iPath S&P 500 VIX Short-Term Futures ETN can be influenced by many unpredictable factors, and the price of VXX can fluctuate substantially between now and the maturity date. Influential factors include prevailing market prices of the U.S. stock market, S&P 500 Index options prices, supply and demand for VXX, as well as economic, political, regulatory or judicial events, or changes to interest rate policies. Basically, anything that affects stock prices can also affect volatility and VXX shares.
The Bottom Line
An investment in VXX might be suitable for investors who want to hedge their portfolios against a market downturn and speculators who have a high risk tolerance. However, since the iPath S&P 500 VIX Short-Term Futures ETN is only composed of derivative contracts, individuals should understand the Cboe Volatility Index and VIX futures before investing or trading the exchange-traded note.
|
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] |
https://www.investopedia.com/articles/personal-finance/060915/impact-investing-vs-venture-philanthropy.asp
|
Impact Investing vs. Venture Philanthropy
|
<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"> Impact investing and venture philanthropy might sound like the same thing, but they have several differences.
</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"> For one thing, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/venture-philanthropy.asp">venture philanthropy</a> has been around for much longer. The phrase was coined by John D. Rockefeller III in 1969. His idea of venture philanthropy was said to be an "adventurous approach to funding unpopular social causes.”<span class="ql-inline-citation" data-cite="1"></span> Venture philanthropy peaked in popularity in the mid-to-late 1990s.
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/impact-investing.asp">Impact investing</a> emerged as an "ethical" investment strategy in 2007 when the phrase was coined at the Rockefeller Foundation.<span class="ql-inline-citation" data-cite="2"></span> At the time, impact investing was defined as “mobilizing large pools of private capital from new sources to address the world’s most critical problems.”
</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"> Venture philanthropy specifically focuses on social causes, while impact investing has a broader remit of social and environmental causes. Both generally aim for a financial return while having a positive impact on the world, but not all investments yield a financial return.
</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-impact-investing"></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"> Impact Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Impact investing, with the dual goal of making a profit and creating positive social or environmental improvements, can take place in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/developed-economy.asp">developed</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergingmarketeconomy.asp">emerging markets</a>. In emerging economies, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/microfinance.asp">microfinance</a> projects are popular, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology. This is often accomplished through <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateequity.asp">private equity</a>, debt, or <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-incomesecurity.asp">fixed-income securities</a>.
</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 large corporations—including 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>), Tesla Motors Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=tsla">TSLA</a>), General Electric Co. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ge">GE</a>), and First Solar Inc. (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fslr">FSLR</a>)—have stepped up to the plate to reduce the carbon footprint in their supply chain. When you see that a private or public company is taking this approach, putting some money behind that company is a form of impact investing. You can also start impact investing through a variety of <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a> and mutual funds.
</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-note" 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 no-title" 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>Impact investing is experiencing explosive growth, with assets in the sector growing to $715 billion in 2020.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div>
<span class="heading-toc" id="toc-venture-philanthropy"></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"> Venture Philanthropy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Venture philanthropy is more focused on capital building than general <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating_expense.asp">operating expenses</a>, and there is a great deal of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grantee.asp">grantee</a> involvement to help drive innovation. There is also plenty of emphasis on performance measurement, with improving systems and sectors as the primary goal (as opposed to promoting individual organizations and funding individual projects).
</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 engagement period for venture philanthropy is a minimum of three years and an average of five to seven years. Most venture philanthropy investments transact through a foundation or a private equity firm. With impact investing, there is no time frame. It’s more of an “as long as it takes” approach.
</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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> With impact investing, the investor is looking to make a profit while also having a positive impact on the world's social or environmental concerns. With venture philanthropy, the goal is usually (but not always) to make a profit while making a positive social impact on the world.<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/011215/what-are-top-trends-corporate-social-responsibility.asp"> </a>
</p></div>
|
Impact investing and venture philanthropy might sound like the same thing, but they have several differences.
For one thing, [venture philanthropy](https://www.investopedia.com/terms/v/venture-philanthropy.asp) has been around for much longer. The phrase was coined by John D. Rockefeller III in 1969. His idea of venture philanthropy was said to be an "adventurous approach to funding unpopular social causes.” Venture philanthropy peaked in popularity in the mid-to-late 1990s.
[Impact investing](https://www.investopedia.com/terms/i/impact-investing.asp) emerged as an "ethical" investment strategy in 2007 when the phrase was coined at the Rockefeller Foundation. At the time, impact investing was defined as “mobilizing large pools of private capital from new sources to address the world’s most critical problems.”
Venture philanthropy specifically focuses on social causes, while impact investing has a broader remit of social and environmental causes. Both generally aim for a financial return while having a positive impact on the world, but not all investments yield a financial return.
## Impact Investing
Impact investing, with the dual goal of making a profit and creating positive social or environmental improvements, can take place in [developed](https://www.investopedia.com/terms/d/developed-economy.asp) or [emerging markets](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp). In emerging economies, [microfinance](https://www.investopedia.com/terms/m/microfinance.asp) projects are popular, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology. This is often accomplished through [private equity](https://www.investopedia.com/terms/p/privateequity.asp), debt, or [fixed-income securities](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp).
Many large corporations—including Apple Inc. ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)), Tesla Motors Inc. ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tsla)), General Electric Co. ([GE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ge)), and First Solar Inc. ([FSLR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fslr))—have stepped up to the plate to reduce the carbon footprint in their supply chain. When you see that a private or public company is taking this approach, putting some money behind that company is a form of impact investing. You can also start impact investing through a variety of [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) and mutual funds.
###
Impact investing is experiencing explosive growth, with assets in the sector growing to $715 billion in 2020.
## Venture Philanthropy
Venture philanthropy is more focused on capital building than general [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp), and there is a great deal of [grantee](https://www.investopedia.com/terms/g/grantee.asp) involvement to help drive innovation. There is also plenty of emphasis on performance measurement, with improving systems and sectors as the primary goal (as opposed to promoting individual organizations and funding individual projects).
The engagement period for venture philanthropy is a minimum of three years and an average of five to seven years. Most venture philanthropy investments transact through a foundation or a private equity firm. With impact investing, there is no time frame. It’s more of an “as long as it takes” approach.
## The Bottom Line
With impact investing, the investor is looking to make a profit while also having a positive impact on the world's social or environmental concerns. With venture philanthropy, the goal is usually (but not always) to make a profit while making a positive social impact on the world.
|
Impact investing and venture philanthropy might sound like the same thing, but they have several differences.
For one thing, venture philanthropy has been around for much longer. The phrase was coined by John D. Rockefeller III in 1969. His idea of venture philanthropy was said to be an "adventurous approach to funding unpopular social causes.” Venture philanthropy peaked in popularity in the mid-to-late 1990s.
Impact investing emerged as an "ethical" investment strategy in 2007 when the phrase was coined at the Rockefeller Foundation. At the time, impact investing was defined as “mobilizing large pools of private capital from new sources to address the world’s most critical problems.”
Venture philanthropy specifically focuses on social causes, while impact investing has a broader remit of social and environmental causes. Both generally aim for a financial return while having a positive impact on the world, but not all investments yield a financial return.
Impact Investing
Impact investing, with the dual goal of making a profit and creating positive social or environmental improvements, can take place in developed or emerging markets. In emerging economies, microfinance projects are popular, but impact investing also funds improving employment and education opportunities, supporting sustainable agriculture, making healthcare or housing affordable, and developing clean technology. This is often accomplished through private equity, debt, or fixed-income securities.
Many large corporations—including Apple Inc. (AAPL), Tesla Motors Inc. (TSLA), General Electric Co. (GE), and First Solar Inc. (FSLR)—have stepped up to the plate to reduce the carbon footprint in their supply chain. When you see that a private or public company is taking this approach, putting some money behind that company is a form of impact investing. You can also start impact investing through a variety of exchange-traded funds (ETFs) and mutual funds.
Impact investing is experiencing explosive growth, with assets in the sector growing to $715 billion in 2020.
Venture Philanthropy
Venture philanthropy is more focused on capital building than general operating expenses, and there is a great deal of grantee involvement to help drive innovation. There is also plenty of emphasis on performance measurement, with improving systems and sectors as the primary goal (as opposed to promoting individual organizations and funding individual projects).
The engagement period for venture philanthropy is a minimum of three years and an average of five to seven years. Most venture philanthropy investments transact through a foundation or a private equity firm. With impact investing, there is no time frame. It’s more of an “as long as it takes” approach.
The Bottom Line
With impact investing, the investor is looking to make a profit while also having a positive impact on the world's social or environmental concerns. With venture philanthropy, the goal is usually (but not always) to make a profit while making a positive social impact on the world.
|
[
[
"venture philanthropy",
"https://www.investopedia.com/terms/v/venture-philanthropy.asp"
],
[
"Impact investing",
"https://www.investopedia.com/terms/i/impact-investing.asp"
],
[
"developed",
"https://www.investopedia.com/terms/d/developed-economy.asp"
],
[
"emerging markets",
"https://www.investopedia.com/terms/e/emergingmarketeconomy.asp"
],
[
"microfinance",
"https://www.investopedia.com/terms/m/microfinance.asp"
],
[
"private equity",
"https://www.investopedia.com/terms/p/privateequity.asp"
],
[
"fixed-income securities",
"https://www.investopedia.com/terms/f/fixed-incomesecurity.asp"
],
[
"AAPL",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl"
],
[
"TSLA",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=tsla"
],
[
"GE",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=ge"
],
[
"FSLR",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=fslr"
],
[
"exchange-traded funds (ETFs)",
"https://www.investopedia.com/terms/e/etf.asp"
],
[
"operating expenses",
"https://www.investopedia.com/terms/o/operating_expense.asp"
],
[
"grantee",
"https://www.investopedia.com/terms/g/grantee.asp"
]
] |
https://www.investopedia.com/what-is-google-stack-5198591
|
Google Stack: What it is, How it Works, 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-google-stack"></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 Google Stack? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Google Stack is a document-scanning and -filing app. It digitally photographs and stores receipts, bills, and other papers as PDFs, organizing them into different categories. Free to download, it is available exclusively for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/android-operating-system.asp">Android</a> phones and tablets in the United States.<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_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>Google Stack is a document-digitizing and -filing app, launched by Google in March 2021.</li><li>The app is free but available exclusively for Android users.</li><li>Google Stack uses artificial intelligence to scan and store papers as PDFs, organizing them into customizable categories.</li><li>Users can search their stacked docs in various ways, including by a store name, a bill’s due date, or a sum of money.</li><li>Copies of Google Stack documents also can be stored on a user’s Google Drive.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-google-stack-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 Google Stack Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Launched on March 30, 2021, Google Stack was created by Area 120, the in-house incubator of Google, owned by Alphabet Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=goog">GOOG</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=googl">GOOGL</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_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-note" 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 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 team leader for Stack was Christopher Pedregal, creator of Socratic, an education app that Google acquired in 2018.<span class="ql-inline-citation" data-cite="19"></span><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_11-0"> To use Stack—once it’s downloaded from the Google Play store—you begin by photographing a document. The app will scan it, title it for you, and suggest the right category, or “stack” (get the name now?), for you to store it in, based on details within the doc.<span class="ql-inline-citation" data-cite="5"></span> You can also import and scan existing PDFs or photos of documents already on your Android <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smartphone.asp">smartphone</a>.<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_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The stacks have names, such as Bills, Receipts, Banking, House, IDs, Vehicles, Insurance, Legal, Medical, Tax, and Travel. If you don’t like the preset suggestions, you can change the file name, slot the doc into another stack, or create a category of your own. You can put a PDF into more than one stack, and you can edit a file’s appearance (crop, color) as well—though the app automatically does a lot of digital enhancement. One professional app reviewer was particularly impressed by Stack’s ability to gather information from and categorize a highly crumpled receipt.<span class="ql-inline-citation" data-cite="16"></span><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_14-0"></div>
<span class="heading-toc" id="toc-google-stack-strong-points"></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"> Google Stack Strong Points </span> </h2>
<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/best-business-card-scanner-apps-5192266">Scanning apps have been around for a while</a>. The biggest deal with Stack’s is its organizing function—the way that it “reads” a document and files it.<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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Stack makes extensive use of Google’s DocAI tool, a Cloud-based technology for document analysis.<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_20-0"> This ability to analyze and zero in on key data also allows you to search for your stacked docs in various ways: by a store name, a bill’s due date, a sum of money, etc. The app also enables full-text searches within a doc.<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"> Another of Stack’s selling points is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/company-insights/090116/dropboxs-top-3-competitors-box-goog.asp">its ability to sync with Google Drive</a>; you can opt to automatically save a copy of your stacked documents there, for access on a desktop or laptop. That way, your scans will always be available, should you ever decide to stop using Stack—or should Google discontinue it, as some cynics say it will.<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_23-0"></div>
<span class="heading-toc" id="toc-reactions-to-google-stack"></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"> Reactions to Google Stack </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Stack receives largely favorable reviews on the Google Play store. As of March 4, 2022, the app has a 4.7-star rating (out of five) from 6,680 reviewers. “Use this app daily” and “amazing app” are typical kudos. Complaints have centered on AI aspect and difficulty switching cameras.<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_26-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Some responders have expressed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/big-data.asp">big data</a> concerns, given <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/020515/business-google.asp">how Google makes money</a>. But according to Google's commitment to privacy policy of Workspace, the company will "never use customer data or service data (such as usage activity) for ads targeting."<span class="ql-inline-citation" data-cite="20"></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-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 with-title" id="mntl-sc-block-callout-heading_4-0">100,000+</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The number of Stack installs, as of March 4, 2022.<span class="ql-inline-citation" data-cite="12"></span></p></div></div></div>
<span class="heading-toc" id="toc-google-stack-competitors"></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"> Google Stack Competitors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Document-scanning and -digitizing services are not new: CamScanner, one of the oldest, dates back to 2011.<span class="ql-inline-citation" data-cite="17"></span> Some of the leading mobile apps that Google Stack is competing with include:
</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>Microsoft Office Lens for iPhone and Android, which lets you save to OneNote or OneDrive<span class="ql-inline-citation" data-cite="7"></span><br/></li><li>Tiny Scanner, with versions for iOS and Android devices<span class="ql-inline-citation" data-cite="10"></span></li><li>Adobe Scan for iOS and Android, which can upload PDFs or JPEGs to Adobe Document Cloud<span class="ql-inline-citation" data-cite="8"></span><br/></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"> FAQs </span> </h3>
<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-is-google-stack-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Google Stack Safe?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Stack uses Google’s advanced security and sign-in technology to protect documents. For extra safeguarding, you can require a scan of your face or fingerprint every time that you unlock the app.<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_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-how-do-i-use-google-stack"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Use Google Stack?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>First, you sign in to the Google Stack app, using your Google account. Then tap on the <strong>+</strong> button in the bottom-right corner of the screen. You can scan and import items in three ways: the PDF option for already-digitized files, the Gallery option if it’s a photo, or the Camera option to create a digitized version of an actual document. Using Camera is akin to taking any smartphone pic: Place the paper on a well-lit, even surface, hold the phone steady, and tap the Scan button. The app automatically crops and sharpens the image.<span class="ql-inline-citation" data-cite="16"></span></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-google-stack-documents-stored"></span> <h2 class="mntl-sc-block-questionandanswer__question">Where Are Google Stack Documents Stored?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Google Stack documents are stored in the app itself, organized into different categories (the “stacks”). You also can opt to have copies of the docs saved to your Google Drive.<span class="ql-inline-citation" data-cite="5"></span></p></div>
</div></div>
|
## What Is Google Stack?
Google Stack is a document-scanning and -filing app. It digitally photographs and stores receipts, bills, and other papers as PDFs, organizing them into different categories. Free to download, it is available exclusively for [Android](https://www.investopedia.com/terms/a/android-operating-system.asp) phones and tablets in the United States.
### Key Takeaways
* Google Stack is a document-digitizing and -filing app, launched by Google in March 2021.
* The app is free but available exclusively for Android users.
* Google Stack uses artificial intelligence to scan and store papers as PDFs, organizing them into customizable categories.
* Users can search their stacked docs in various ways, including by a store name, a bill’s due date, or a sum of money.
* Copies of Google Stack documents also can be stored on a user’s Google Drive.
## How Google Stack Works
Launched on March 30, 2021, Google Stack was created by Area 120, the in-house incubator of Google, owned by Alphabet Inc. ([GOOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=goog) and [GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=googl)).
###
The team leader for Stack was Christopher Pedregal, creator of Socratic, an education app that Google acquired in 2018.
To use Stack—once it’s downloaded from the Google Play store—you begin by photographing a document. The app will scan it, title it for you, and suggest the right category, or “stack” (get the name now?), for you to store it in, based on details within the doc. You can also import and scan existing PDFs or photos of documents already on your Android [smartphone](https://www.investopedia.com/terms/s/smartphone.asp).
The stacks have names, such as Bills, Receipts, Banking, House, IDs, Vehicles, Insurance, Legal, Medical, Tax, and Travel. If you don’t like the preset suggestions, you can change the file name, slot the doc into another stack, or create a category of your own. You can put a PDF into more than one stack, and you can edit a file’s appearance (crop, color) as well—though the app automatically does a lot of digital enhancement. One professional app reviewer was particularly impressed by Stack’s ability to gather information from and categorize a highly crumpled receipt.
## Google Stack Strong Points
[Scanning apps have been around for a while](https://www.investopedia.com/best-business-card-scanner-apps-5192266). The biggest deal with Stack’s is its organizing function—the way that it “reads” a document and files it.
###
Stack makes extensive use of Google’s DocAI tool, a Cloud-based technology for document analysis.
This ability to analyze and zero in on key data also allows you to search for your stacked docs in various ways: by a store name, a bill’s due date, a sum of money, etc. The app also enables full-text searches within a doc.
Another of Stack’s selling points is [its ability to sync with Google Drive](https://www.investopedia.com/articles/company-insights/090116/dropboxs-top-3-competitors-box-goog.asp); you can opt to automatically save a copy of your stacked documents there, for access on a desktop or laptop. That way, your scans will always be available, should you ever decide to stop using Stack—or should Google discontinue it, as some cynics say it will.
## Reactions to Google Stack
Stack receives largely favorable reviews on the Google Play store. As of March 4, 2022, the app has a 4.7-star rating (out of five) from 6,680 reviewers. “Use this app daily” and “amazing app” are typical kudos. Complaints have centered on AI aspect and difficulty switching cameras.
Some responders have expressed [big data](https://www.investopedia.com/terms/b/big-data.asp) concerns, given [how Google makes money](https://www.investopedia.com/articles/investing/020515/business-google.asp). But according to Google's commitment to privacy policy of Workspace, the company will "never use customer data or service data (such as usage activity) for ads targeting."
### 100,000+
The number of Stack installs, as of March 4, 2022.
## Google Stack Competitors
Document-scanning and -digitizing services are not new: CamScanner, one of the oldest, dates back to 2011. Some of the leading mobile apps that Google Stack is competing with include:
* Microsoft Office Lens for iPhone and Android, which lets you save to OneNote or OneDrive
* Tiny Scanner, with versions for iOS and Android devices
* Adobe Scan for iOS and Android, which can upload PDFs or JPEGs to Adobe Document Cloud
### FAQs
## Is Google Stack Safe?
Stack uses Google’s advanced security and sign-in technology to protect documents. For extra safeguarding, you can require a scan of your face or fingerprint every time that you unlock the app.
## How Do I Use Google Stack?
First, you sign in to the Google Stack app, using your Google account. Then tap on the **+** button in the bottom-right corner of the screen. You can scan and import items in three ways: the PDF option for already-digitized files, the Gallery option if it’s a photo, or the Camera option to create a digitized version of an actual document. Using Camera is akin to taking any smartphone pic: Place the paper on a well-lit, even surface, hold the phone steady, and tap the Scan button. The app automatically crops and sharpens the image.
## Where Are Google Stack Documents Stored?
Google Stack documents are stored in the app itself, organized into different categories (the “stacks”). You also can opt to have copies of the docs saved to your Google Drive.
|
What Is Google Stack?
Google Stack is a document-scanning and -filing app. It digitally photographs and stores receipts, bills, and other papers as PDFs, organizing them into different categories. Free to download, it is available exclusively for Android phones and tablets in the United States.
Key Takeaways
Google Stack is a document-digitizing and -filing app, launched by Google in March 2021.The app is free but available exclusively for Android users.Google Stack uses artificial intelligence to scan and store papers as PDFs, organizing them into customizable categories.Users can search their stacked docs in various ways, including by a store name, a bill’s due date, or a sum of money.Copies of Google Stack documents also can be stored on a user’s Google Drive.
How Google Stack Works
Launched on March 30, 2021, Google Stack was created by Area 120, the in-house incubator of Google, owned by Alphabet Inc. (GOOG and GOOGL).
The team leader for Stack was Christopher Pedregal, creator of Socratic, an education app that Google acquired in 2018.
To use Stack—once it’s downloaded from the Google Play store—you begin by photographing a document. The app will scan it, title it for you, and suggest the right category, or “stack” (get the name now?), for you to store it in, based on details within the doc. You can also import and scan existing PDFs or photos of documents already on your Android smartphone.
The stacks have names, such as Bills, Receipts, Banking, House, IDs, Vehicles, Insurance, Legal, Medical, Tax, and Travel. If you don’t like the preset suggestions, you can change the file name, slot the doc into another stack, or create a category of your own. You can put a PDF into more than one stack, and you can edit a file’s appearance (crop, color) as well—though the app automatically does a lot of digital enhancement. One professional app reviewer was particularly impressed by Stack’s ability to gather information from and categorize a highly crumpled receipt.
Google Stack Strong Points
Scanning apps have been around for a while. The biggest deal with Stack’s is its organizing function—the way that it “reads” a document and files it.
Stack makes extensive use of Google’s DocAI tool, a Cloud-based technology for document analysis.
This ability to analyze and zero in on key data also allows you to search for your stacked docs in various ways: by a store name, a bill’s due date, a sum of money, etc. The app also enables full-text searches within a doc.
Another of Stack’s selling points is its ability to sync with Google Drive; you can opt to automatically save a copy of your stacked documents there, for access on a desktop or laptop. That way, your scans will always be available, should you ever decide to stop using Stack—or should Google discontinue it, as some cynics say it will.
Reactions to Google Stack
Stack receives largely favorable reviews on the Google Play store. As of March 4, 2022, the app has a 4.7-star rating (out of five) from 6,680 reviewers. “Use this app daily” and “amazing app” are typical kudos. Complaints have centered on AI aspect and difficulty switching cameras.
Some responders have expressed big data concerns, given how Google makes money. But according to Google's commitment to privacy policy of Workspace, the company will "never use customer data or service data (such as usage activity) for ads targeting."
100,000+
The number of Stack installs, as of March 4, 2022.
Google Stack Competitors
Document-scanning and -digitizing services are not new: CamScanner, one of the oldest, dates back to 2011. Some of the leading mobile apps that Google Stack is competing with include:
Microsoft Office Lens for iPhone and Android, which lets you save to OneNote or OneDriveTiny Scanner, with versions for iOS and Android devicesAdobe Scan for iOS and Android, which can upload PDFs or JPEGs to Adobe Document Cloud
FAQs
Is Google Stack Safe?
Stack uses Google’s advanced security and sign-in technology to protect documents. For extra safeguarding, you can require a scan of your face or fingerprint every time that you unlock the app.
How Do I Use Google Stack?
First, you sign in to the Google Stack app, using your Google account. Then tap on the + button in the bottom-right corner of the screen. You can scan and import items in three ways: the PDF option for already-digitized files, the Gallery option if it’s a photo, or the Camera option to create a digitized version of an actual document. Using Camera is akin to taking any smartphone pic: Place the paper on a well-lit, even surface, hold the phone steady, and tap the Scan button. The app automatically crops and sharpens the image.
Where Are Google Stack Documents Stored?
Google Stack documents are stored in the app itself, organized into different categories (the “stacks”). You also can opt to have copies of the docs saved to your Google Drive.
|
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https://www.investopedia.com/new-vs-used-baby-items-safety-5324723
|
New vs. Used Baby Items: Is It Safe to Save?
|
<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 lot of planning goes into having a baby, from deciding where to give birth to choosing a name. Parents-to-be also need to ensure that they have the basic baby gear they’ll need to welcome their new arrival. Buying gently used baby items can save money, but when <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/budgeting-for-baby.asp">budgeting for having a baby</a>, there are certain items that should only be purchased new.
</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>Certain baby items, such as clothing, cloth diapers, high chairs, and changing tables, are safe to buy used if they’re clean and in good condition.</li><li>Other baby items, such as car seats and cribs, should be purchased new purely for safety reasons.</li><li>When budgeting for having a baby, it’s important to consider which items are essentials and which are “extras” that you may be able to forgo to save money.</li><li>Thrift stores, secondhand shops, consignment shops, and eBay are some of the places where you can buy gently used baby items to save money.</li></ul></div></div></div>
<span class="heading-toc" id="toc-baby-items-that-are-safe-to-buy-used"></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"> Baby Items That Are Safe to Buy Used </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> When having a baby, saving money is usually a priority for parents. After all, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090415/cost-raising-child-america.asp">cost of raising a child</a> to age 18 is $233,610 on average, according to the U.S. Department of Agriculture.<span class="ql-inline-citation" data-cite="1"></span> That figure doesn’t include expenditures for college, which can easily land in the five- or even six-figure range. So it makes sense that parents would want to cut costs as much as possible when stocking the nursery.
</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 help you prepare a baby budget, here are some of the items that are safe to buy in used condition to save money.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-subheading__text"> Baby clothes and shoes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Buying used baby clothing can be a smart move since babies grow quickly—what fits them one week may not fit them the next. The types of baby clothing that can be purchased used include onesies, sleepers and pajamas, shirts, pants, socks, coats, hats, and shoes. When purchasing used baby clothing, check for stains, tears, missing buttons, and broken zippers.
</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"> Baby furniture </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Outfitting a nursery could easily break a new-baby budget if you’re splurging on high-end furniture. A simple way to save money is to stick with basic furniture that you can buy used. Some of the things you might consider buying used include a changing table, a dresser, and a rocker. Similar to purchasing used baby clothes, it’s important to inspect baby furniture to make sure it’s in good condition.
</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"> Cloth diapers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Using cloth diapers can be a money saver for parents. According to the American Academy of Pediatrics, a typical family spends $1,000 on disposable diapers during a baby’s first year.<span class="ql-inline-citation" data-cite="2"></span> That number doesn’t include additional spending on baby wipes or diaper rash cream. Reusable cloth diapers may be a cheaper option—and they can be more environmentally friendly. As long as they’re thoroughly cleaned and sanitized, cloth diapers are safe to purchase used.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> High chairs and booster seats </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> High chairs and booster seats are generally safe to buy used, though it’s important to go over them carefully to look for any potential safety hazards. For example, a high chair with a broken or missing harness to keep the baby in place could be a safety risk. It’s wise to check the manual for size and weight limits, too. And consider the cleanliness factor. Food can easily hide in the crevices of a high chair or booster seat, so it’s important to give these items a good cleaning before use.<br/>
</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"> Baby baths </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> A baby bath can be helpful for keeping your infant clean until they’re able to sit up on their own. Baby baths can be purchased used as long as they’re in good condition—meaning that there are no visible cracks or mold in evidence. However, use caution when purchasing used baby bath toys, as mold can easily collect inside and on them.
</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"> Carriers, wraps, and slings </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Studies suggest that babywearing—carrying your baby close to your torso in a sling or carrier—can promote bonding and attachment, as well as encourage language development, while keeping parents’ hands free to perform other chores.<span class="ql-inline-citation" data-cite="3"></span> Baby carriers, wraps, and slings can be safely purchased used if they’re inspected carefully beforehand. Parents will want to check for any excessive wear in the material or in the buckles and closures that hold the carrier, wrap, or sling in place.
</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-tip" 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>Some of the best places to buy used baby items include thrift stores, secondhand stores, consignment shops, and online resale websites.</p></div></div></div>
<span class="heading-toc" id="toc-baby-items-that-should-be-purchased-new"></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"> Baby Items That Should Be Purchased New </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Certain items of baby gear should only be purchased new for safety reasons. While this could mean spending more money for those items, it can be a wise investment to protect your baby from harm.
</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"> Car seats </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> A car seat is one of the most important pieces of baby gear that parents can purchase. If you’re involved in an accident, the right car seat can help to protect your baby. The American Academy of Pediatrics provides guidelines on choosing a car seat. Specifically, you should never use a car seat that:<br/>
</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>Is past the manufacturer’s expiration date</li>
<li>Has visible cracks or damage</li>
<li>Is missing a label showing the manufacturing date and model number</li>
<li>Was <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/product_recall.asp">recalled</a> by the manufacturer or the National Highway Traffic Safety Administration (NHTSA)</li>
<li>Is missing instructions or parts</li>
<li>Has been in a crash<span class="ql-inline-citation" data-cite="14"></span></li>
</ul>
<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-callout mntl-block" id="mntl-sc-block_38-0"><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_39-0"><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>You can find out if a car seat is subject to a recall by contacting the manufacturer directly or checking the NHTSA’s online recall center for car seats. You will only need the brand name or model.<span class="ql-inline-citation" data-cite="15"></span> If you have a complaint or concern regarding a car seat, you can call the NHTSA’s Vehicle Safety Hotline at 1-888-327-4236 or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.nhtsa.gov/report-a-safety-problem#index">complete the online form</a>.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></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"> Cribs and crib mattresses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Used cribs and crib mattresses can pose safety risks if the crib is damaged or has a drop rail or if the mattress has developed dips that could potentially create a suffocation hazard. When shopping for a crib, make sure it’s soundly constructed and that there are no missing parts. Slats should not be too widely spaced, as this can allow the baby’s head or body to slip through. (Older cribs may predate the most recent safely regulations on construction.)<span class="ql-inline-citation" data-cite="13"></span> Crib mattresses should be firm and tight-fitting to reduce the possibility of the baby getting caught between the mattress and the crib’s sides.<span class="ql-inline-citation" data-cite="12"></span><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_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-note" 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 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>Playpens, play yards, or pack-n-plays are better off being purchased new to prevent safety hazards as well as minimize wear and tear. If you decide to buy a used playpen, make sure to pick one made after 2012, when the U.S. Consumer Product Safety Commission approved strict regulations for safety standards.<span class="ql-inline-citation" data-cite="16"></span></p></div></div></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"> Strollers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> A baby stroller can make it easier to get out and about, but these items are generally best purchased new rather than used. Stroller safety standards were updated in 2015, and parents are advised against purchasing a stroller made before that date.<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_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> If cost is a concern, consider looking for an adaptable stroller that can grow with your baby. It may be a bit pricier, but investing in a stroller that can be used through your baby’s different growing stages means that you won’t have to spend more money replacing it as they move from newborn to infant to toddler.
</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"> Breast pumps </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The U.S. <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> considers breast pumps to be single-use devices, meaning that they’re not to be used by more than one person. Reusing one could put a breastfeeding mother at risk of potentially harmful bacteria or other infectious agents. For that reason, this is another item that is best purchased new to protect the health of mother and baby.<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_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"> Bottles, pacifiers, and teething toys </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> While some parents prefer breastfeeding, bottle feeding may be more practical or even necessary for others. And many parents rely on pacifiers or teething toys to soothe and calm fussy infants. While these items can be purchased used, buying new may be preferable for a few reasons.
</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"> Buying bottles new is the best way to ensure that you’re getting BPA-free items. BPA, or bisphenol A, can present numerous health risks to babies and infants.<span class="ql-inline-citation" data-cite="7"></span> Bottle nipples can also degrade over time, so buying new can help you avoid any health risks associated with degraded nipples. With teething rings and pacifiers, buying new ensures that you’re getting clean, germ-free items.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_58-0"><span class="heading-toc" id="toc-is-it-ok-to-buy-a-used-crib"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is it OK to buy a used crib?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Cribs and crib mattresses are baby items that are best purchased new to minimize potential safety risks. Older cribs, particularly those with a drop rail feature, could present a safety hazard to newborns, infants, and toddlers.<span class="ql-inline-citation" data-cite="18"></span><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_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-are-used-baby-toys-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are used baby toys safe?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Used baby toys are generally safe as long as they’ve been thoroughly cleaned and are in good working order. Baby toys that have been recalled, are broken in some way, or have been allowed to collect mold could be unsafe to give to children. You can check the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.cpsc.gov/Recalls">Consumer Product Safety Commission website</a> for recalled toys and other baby products.</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-are-old-strollers-safe"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are old strollers safe?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Strollers made before 2015 do not meet current safety standards. If you have a stroller made after 2015, it may be safe to use, but it’s important to inspect it thoroughly to look for excessive wear and tear or visible damage.</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"> Deciding which baby items to buy new vs. used can help with fine-tuning a baby budget and potentially saving money. When buying used isn’t an option, there are still things that parents can do to save on baby gear, including adding essential items to a baby registry, using coupons or online promo codes to shop, and buying items on sale whenever possible.<br/>
</p></div>
|
A lot of planning goes into having a baby, from deciding where to give birth to choosing a name. Parents-to-be also need to ensure that they have the basic baby gear they’ll need to welcome their new arrival. Buying gently used baby items can save money, but when [budgeting for having a baby](https://www.investopedia.com/articles/pf/08/budgeting-for-baby.asp), there are certain items that should only be purchased new.
### Key Takeaways
* Certain baby items, such as clothing, cloth diapers, high chairs, and changing tables, are safe to buy used if they’re clean and in good condition.
* Other baby items, such as car seats and cribs, should be purchased new purely for safety reasons.
* When budgeting for having a baby, it’s important to consider which items are essentials and which are “extras” that you may be able to forgo to save money.
* Thrift stores, secondhand shops, consignment shops, and eBay are some of the places where you can buy gently used baby items to save money.
## Baby Items That Are Safe to Buy Used
When having a baby, saving money is usually a priority for parents. After all, the [cost of raising a child](https://www.investopedia.com/articles/personal-finance/090415/cost-raising-child-america.asp) to age 18 is $233,610 on average, according to the U.S. Department of Agriculture. That figure doesn’t include expenditures for college, which can easily land in the five- or even six-figure range. So it makes sense that parents would want to cut costs as much as possible when stocking the nursery.
To help you prepare a baby budget, here are some of the items that are safe to buy in used condition to save money.
### Baby clothes and shoes
Buying used baby clothing can be a smart move since babies grow quickly—what fits them one week may not fit them the next. The types of baby clothing that can be purchased used include onesies, sleepers and pajamas, shirts, pants, socks, coats, hats, and shoes. When purchasing used baby clothing, check for stains, tears, missing buttons, and broken zippers.
### Baby furniture
Outfitting a nursery could easily break a new-baby budget if you’re splurging on high-end furniture. A simple way to save money is to stick with basic furniture that you can buy used. Some of the things you might consider buying used include a changing table, a dresser, and a rocker. Similar to purchasing used baby clothes, it’s important to inspect baby furniture to make sure it’s in good condition.
### Cloth diapers
Using cloth diapers can be a money saver for parents. According to the American Academy of Pediatrics, a typical family spends $1,000 on disposable diapers during a baby’s first year. That number doesn’t include additional spending on baby wipes or diaper rash cream. Reusable cloth diapers may be a cheaper option—and they can be more environmentally friendly. As long as they’re thoroughly cleaned and sanitized, cloth diapers are safe to purchase used.
### High chairs and booster seats
High chairs and booster seats are generally safe to buy used, though it’s important to go over them carefully to look for any potential safety hazards. For example, a high chair with a broken or missing harness to keep the baby in place could be a safety risk. It’s wise to check the manual for size and weight limits, too. And consider the cleanliness factor. Food can easily hide in the crevices of a high chair or booster seat, so it’s important to give these items a good cleaning before use.
### Baby baths
A baby bath can be helpful for keeping your infant clean until they’re able to sit up on their own. Baby baths can be purchased used as long as they’re in good condition—meaning that there are no visible cracks or mold in evidence. However, use caution when purchasing used baby bath toys, as mold can easily collect inside and on them.
### Carriers, wraps, and slings
Studies suggest that babywearing—carrying your baby close to your torso in a sling or carrier—can promote bonding and attachment, as well as encourage language development, while keeping parents’ hands free to perform other chores. Baby carriers, wraps, and slings can be safely purchased used if they’re inspected carefully beforehand. Parents will want to check for any excessive wear in the material or in the buckles and closures that hold the carrier, wrap, or sling in place.
###
Some of the best places to buy used baby items include thrift stores, secondhand stores, consignment shops, and online resale websites.
## Baby Items That Should Be Purchased New
Certain items of baby gear should only be purchased new for safety reasons. While this could mean spending more money for those items, it can be a wise investment to protect your baby from harm.
### Car seats
A car seat is one of the most important pieces of baby gear that parents can purchase. If you’re involved in an accident, the right car seat can help to protect your baby. The American Academy of Pediatrics provides guidelines on choosing a car seat. Specifically, you should never use a car seat that:
* Is past the manufacturer’s expiration date
* Has visible cracks or damage
* Is missing a label showing the manufacturing date and model number
* Was [recalled](https://www.investopedia.com/terms/p/product_recall.asp) by the manufacturer or the National Highway Traffic Safety Administration (NHTSA)
* Is missing instructions or parts
* Has been in a crash
###
You can find out if a car seat is subject to a recall by contacting the manufacturer directly or checking the NHTSA’s online recall center for car seats. You will only need the brand name or model. If you have a complaint or concern regarding a car seat, you can call the NHTSA’s Vehicle Safety Hotline at 1-888-327-4236 or [complete the online form](https://www.nhtsa.gov/report-a-safety-problem#index).
### Cribs and crib mattresses
Used cribs and crib mattresses can pose safety risks if the crib is damaged or has a drop rail or if the mattress has developed dips that could potentially create a suffocation hazard. When shopping for a crib, make sure it’s soundly constructed and that there are no missing parts. Slats should not be too widely spaced, as this can allow the baby’s head or body to slip through. (Older cribs may predate the most recent safely regulations on construction.) Crib mattresses should be firm and tight-fitting to reduce the possibility of the baby getting caught between the mattress and the crib’s sides.
###
Playpens, play yards, or pack-n-plays are better off being purchased new to prevent safety hazards as well as minimize wear and tear. If you decide to buy a used playpen, make sure to pick one made after 2012, when the U.S. Consumer Product Safety Commission approved strict regulations for safety standards.
### Strollers
A baby stroller can make it easier to get out and about, but these items are generally best purchased new rather than used. Stroller safety standards were updated in 2015, and parents are advised against purchasing a stroller made before that date.
If cost is a concern, consider looking for an adaptable stroller that can grow with your baby. It may be a bit pricier, but investing in a stroller that can be used through your baby’s different growing stages means that you won’t have to spend more money replacing it as they move from newborn to infant to toddler.
### Breast pumps
The U.S. [Food and Drug Administration (FDA)](https://www.investopedia.com/terms/f/fda.asp) considers breast pumps to be single-use devices, meaning that they’re not to be used by more than one person. Reusing one could put a breastfeeding mother at risk of potentially harmful bacteria or other infectious agents. For that reason, this is another item that is best purchased new to protect the health of mother and baby.
### Bottles, pacifiers, and teething toys
While some parents prefer breastfeeding, bottle feeding may be more practical or even necessary for others. And many parents rely on pacifiers or teething toys to soothe and calm fussy infants. While these items can be purchased used, buying new may be preferable for a few reasons.
Buying bottles new is the best way to ensure that you’re getting BPA-free items. BPA, or bisphenol A, can present numerous health risks to babies and infants. Bottle nipples can also degrade over time, so buying new can help you avoid any health risks associated with degraded nipples. With teething rings and pacifiers, buying new ensures that you’re getting clean, germ-free items.
## Is it OK to buy a used crib?
Cribs and crib mattresses are baby items that are best purchased new to minimize potential safety risks. Older cribs, particularly those with a drop rail feature, could present a safety hazard to newborns, infants, and toddlers.
## Are used baby toys safe?
Used baby toys are generally safe as long as they’ve been thoroughly cleaned and are in good working order. Baby toys that have been recalled, are broken in some way, or have been allowed to collect mold could be unsafe to give to children. You can check the U.S. [Consumer Product Safety Commission website](https://www.cpsc.gov/Recalls) for recalled toys and other baby products.
## Are old strollers safe?
Strollers made before 2015 do not meet current safety standards. If you have a stroller made after 2015, it may be safe to use, but it’s important to inspect it thoroughly to look for excessive wear and tear or visible damage.
## The Bottom Line
Deciding which baby items to buy new vs. used can help with fine-tuning a baby budget and potentially saving money. When buying used isn’t an option, there are still things that parents can do to save on baby gear, including adding essential items to a baby registry, using coupons or online promo codes to shop, and buying items on sale whenever possible.
|
A lot of planning goes into having a baby, from deciding where to give birth to choosing a name. Parents-to-be also need to ensure that they have the basic baby gear they’ll need to welcome their new arrival. Buying gently used baby items can save money, but when budgeting for having a baby, there are certain items that should only be purchased new.
Key Takeaways
Certain baby items, such as clothing, cloth diapers, high chairs, and changing tables, are safe to buy used if they’re clean and in good condition.Other baby items, such as car seats and cribs, should be purchased new purely for safety reasons.When budgeting for having a baby, it’s important to consider which items are essentials and which are “extras” that you may be able to forgo to save money.Thrift stores, secondhand shops, consignment shops, and eBay are some of the places where you can buy gently used baby items to save money.
Baby Items That Are Safe to Buy Used
When having a baby, saving money is usually a priority for parents. After all, the cost of raising a child to age 18 is $233,610 on average, according to the U.S. Department of Agriculture. That figure doesn’t include expenditures for college, which can easily land in the five- or even six-figure range. So it makes sense that parents would want to cut costs as much as possible when stocking the nursery.
To help you prepare a baby budget, here are some of the items that are safe to buy in used condition to save money.
Baby clothes and shoes
Buying used baby clothing can be a smart move since babies grow quickly—what fits them one week may not fit them the next. The types of baby clothing that can be purchased used include onesies, sleepers and pajamas, shirts, pants, socks, coats, hats, and shoes. When purchasing used baby clothing, check for stains, tears, missing buttons, and broken zippers.
Baby furniture
Outfitting a nursery could easily break a new-baby budget if you’re splurging on high-end furniture. A simple way to save money is to stick with basic furniture that you can buy used. Some of the things you might consider buying used include a changing table, a dresser, and a rocker. Similar to purchasing used baby clothes, it’s important to inspect baby furniture to make sure it’s in good condition.
Cloth diapers
Using cloth diapers can be a money saver for parents. According to the American Academy of Pediatrics, a typical family spends $1,000 on disposable diapers during a baby’s first year. That number doesn’t include additional spending on baby wipes or diaper rash cream. Reusable cloth diapers may be a cheaper option—and they can be more environmentally friendly. As long as they’re thoroughly cleaned and sanitized, cloth diapers are safe to purchase used.
High chairs and booster seats
High chairs and booster seats are generally safe to buy used, though it’s important to go over them carefully to look for any potential safety hazards. For example, a high chair with a broken or missing harness to keep the baby in place could be a safety risk. It’s wise to check the manual for size and weight limits, too. And consider the cleanliness factor. Food can easily hide in the crevices of a high chair or booster seat, so it’s important to give these items a good cleaning before use.
Baby baths
A baby bath can be helpful for keeping your infant clean until they’re able to sit up on their own. Baby baths can be purchased used as long as they’re in good condition—meaning that there are no visible cracks or mold in evidence. However, use caution when purchasing used baby bath toys, as mold can easily collect inside and on them.
Carriers, wraps, and slings
Studies suggest that babywearing—carrying your baby close to your torso in a sling or carrier—can promote bonding and attachment, as well as encourage language development, while keeping parents’ hands free to perform other chores. Baby carriers, wraps, and slings can be safely purchased used if they’re inspected carefully beforehand. Parents will want to check for any excessive wear in the material or in the buckles and closures that hold the carrier, wrap, or sling in place.
Some of the best places to buy used baby items include thrift stores, secondhand stores, consignment shops, and online resale websites.
Baby Items That Should Be Purchased New
Certain items of baby gear should only be purchased new for safety reasons. While this could mean spending more money for those items, it can be a wise investment to protect your baby from harm.
Car seats
A car seat is one of the most important pieces of baby gear that parents can purchase. If you’re involved in an accident, the right car seat can help to protect your baby. The American Academy of Pediatrics provides guidelines on choosing a car seat. Specifically, you should never use a car seat that:
Is past the manufacturer’s expiration date
Has visible cracks or damage
Is missing a label showing the manufacturing date and model number
Was recalled by the manufacturer or the National Highway Traffic Safety Administration (NHTSA)
Is missing instructions or parts
Has been in a crash
You can find out if a car seat is subject to a recall by contacting the manufacturer directly or checking the NHTSA’s online recall center for car seats. You will only need the brand name or model. If you have a complaint or concern regarding a car seat, you can call the NHTSA’s Vehicle Safety Hotline at 1-888-327-4236 or complete the online form.
Cribs and crib mattresses
Used cribs and crib mattresses can pose safety risks if the crib is damaged or has a drop rail or if the mattress has developed dips that could potentially create a suffocation hazard. When shopping for a crib, make sure it’s soundly constructed and that there are no missing parts. Slats should not be too widely spaced, as this can allow the baby’s head or body to slip through. (Older cribs may predate the most recent safely regulations on construction.) Crib mattresses should be firm and tight-fitting to reduce the possibility of the baby getting caught between the mattress and the crib’s sides.
Playpens, play yards, or pack-n-plays are better off being purchased new to prevent safety hazards as well as minimize wear and tear. If you decide to buy a used playpen, make sure to pick one made after 2012, when the U.S. Consumer Product Safety Commission approved strict regulations for safety standards.
Strollers
A baby stroller can make it easier to get out and about, but these items are generally best purchased new rather than used. Stroller safety standards were updated in 2015, and parents are advised against purchasing a stroller made before that date.
If cost is a concern, consider looking for an adaptable stroller that can grow with your baby. It may be a bit pricier, but investing in a stroller that can be used through your baby’s different growing stages means that you won’t have to spend more money replacing it as they move from newborn to infant to toddler.
Breast pumps
The U.S. Food and Drug Administration (FDA) considers breast pumps to be single-use devices, meaning that they’re not to be used by more than one person. Reusing one could put a breastfeeding mother at risk of potentially harmful bacteria or other infectious agents. For that reason, this is another item that is best purchased new to protect the health of mother and baby.
Bottles, pacifiers, and teething toys
While some parents prefer breastfeeding, bottle feeding may be more practical or even necessary for others. And many parents rely on pacifiers or teething toys to soothe and calm fussy infants. While these items can be purchased used, buying new may be preferable for a few reasons.
Buying bottles new is the best way to ensure that you’re getting BPA-free items. BPA, or bisphenol A, can present numerous health risks to babies and infants. Bottle nipples can also degrade over time, so buying new can help you avoid any health risks associated with degraded nipples. With teething rings and pacifiers, buying new ensures that you’re getting clean, germ-free items.
Is it OK to buy a used crib?
Cribs and crib mattresses are baby items that are best purchased new to minimize potential safety risks. Older cribs, particularly those with a drop rail feature, could present a safety hazard to newborns, infants, and toddlers.
Are used baby toys safe?
Used baby toys are generally safe as long as they’ve been thoroughly cleaned and are in good working order. Baby toys that have been recalled, are broken in some way, or have been allowed to collect mold could be unsafe to give to children. You can check the U.S. Consumer Product Safety Commission website for recalled toys and other baby products.
Are old strollers safe?
Strollers made before 2015 do not meet current safety standards. If you have a stroller made after 2015, it may be safe to use, but it’s important to inspect it thoroughly to look for excessive wear and tear or visible damage.
The Bottom Line
Deciding which baby items to buy new vs. used can help with fine-tuning a baby budget and potentially saving money. When buying used isn’t an option, there are still things that parents can do to save on baby gear, including adding essential items to a baby registry, using coupons or online promo codes to shop, and buying items on sale whenever possible.
|
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],
[
"recalled",
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],
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"complete the online form",
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],
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"Food and Drug Administration (FDA)",
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],
[
"Consumer Product Safety Commission website",
"https://www.cpsc.gov/Recalls"
]
] |
https://www.investopedia.com/how-find-personal-loan-after-bankruptcy-7969912
|
How to Find a Personal Loan After Bankruptcy
|
<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"> Filing for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a> can impact your finances in myriad ways, including your ability to get a credit card or a loan. Still, it may be possible to secure a personal loan after bankruptcy if you’re flexible with your lender and willing to pay higher interest rates and loan fees. You may also be able to secure the financing you need if you’re able to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/getting-personal-loan-cosigner-7557665">find a co-signer</a> who is willing to put their own credit on the line to help you out.
</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"> Read on to learn where to find personal loans after bankruptcy and steps you can take to apply once you’re ready.
</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>Both of the two primary kinds of bankruptcies, Chapter 7 and Chapter 13, will remain on your credit report for several years after filing.</li>
<li>A co-signer can increase your likelihood of being approved for a personal loan and potentially securing a lower <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>, but this requires your co-signer to put their own credit score at risk.</li>
<li>Outside of personal loans, additional funding options available to you after filing for bankruptcy include 401(k) loans, home equity loans, and credit cards.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-the-difference-between-filing-chapter-7-and-chapter-13"></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"> The Difference Between Filing Chapter 7 and Chapter 13 </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The type of bankruptcy you filed can play a role in your ability to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-4773300">qualify for a personal loan</a>, in addition to how long your bankruptcy will continue impacting your credit.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-subheading__text"> Chapter 7 </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> This type of bankruptcy involves the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidation.asp">liquidation</a> of assets that can be used to settle unpaid debts, although filers may be able to keep some personal property and real estate depending on the assets they have as well as state and federal laws that apply. Also note that some types of debt, including owed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/guidelines-for-child-support-5194353">child support</a>, most <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loans</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxliability.asp">tax debts</a>, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alimony.asp">alimony</a>, typically cannot be discharged during bankruptcy.<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_12-0"></div>
<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/c/chapter7.asp">Chapter 7 bankruptcy</a> stays on your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit reports</a> for up to 10 years.<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_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"> Chapter 13 </span> </h3>
<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/c/chapter13.asp">Chapter 13 bankruptcy</a> typically allows the filer to keep their personal property, but they must have regular <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> and agree to a payment plan that pays off their creditors over time. The court system approves the debtor’s payment plan and budget during the process, and a court trustee helps oversee the repayment of unpaid debts from start to finish.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Chapter 13 bankruptcy stays on credit reports for seven years after the filing date.<span class="ql-inline-citation" data-cite="10"></span>
</p>
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<span class="heading-toc" id="toc-where-to-find-a-personal-loan-after-bankruptcy"></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"> Where to Find a Personal Loan After Bankruptcy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Because both of the main types of bankruptcy are listed on credit reports for years after the filing date, going through a bankruptcy can make it difficult to 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>, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage</a>, a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">credit card</a>, or other types of financing. However, some personal loan companies offer borrowing options that can make post-bankruptcy borrowing a reality.<br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Consider this list of lenders that offer flexible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/loan-terms-5075341">loan terms</a> as well as a greater chance of getting approved with a low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> and a bankruptcy on your record:<br/>
</p>
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<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>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<tbody data-check="-1">
<tr>
<td></td>
<td><b>Loan Amounts</b></td>
<td><b>Interest Rates</b></td>
<td><b>Repayment Terms</b></td>
<td><b>Minimum Credit Score</b></td>
</tr>
<tr>
<td>Avant<span data-cite="1"></span></td>
<td>$2,000 to $35,000</td>
<td>9.95% to 35.99%</td>
<td>12 to 60 months</td>
<td>580<span data-cite="2"></span></td>
</tr>
<tr>
<td>LendingClub<span data-cite="3"></span></td>
<td>$1,000 to $40,000</td>
<td>8.98% to 35.99%</td>
<td>24 to 60 months</td>
<td>Not disclosed</td>
</tr>
<tr>
<td>OneMain Financial<span data-cite="4"></span></td>
<td>$1,500 to $20,000</td>
<td>18.00% to 35.99%</td>
<td>24 to 60 months</td>
<td>None</td>
</tr>
<tr>
<td>Upgrade<span data-cite="5"></span></td>
<td>$1,000 to $50,000</td>
<td>8.49% to 35.99%</td>
<td>24 to 84 months</td>
<td>Not disclosed</td>
</tr>
<tr>
<td>Upstart<span data-cite="6"></span></td>
<td>$1,000 to $50,000</td>
<td>7.8% to 35.99%</td>
<td>36 or 60 months</td>
<td>300<span data-cite="7"></span></td>
</tr>
</tbody>
</table>
</div></figure>
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<span class="heading-toc" id="toc-how-to-secure-your-first-personal-loan-after-bankruptcy"></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 Secure Your First Personal Loan After Bankruptcy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> If you need to borrow money after bankruptcy, there are a range of important steps that you’ll want to take. Also be aware that, if you can’t quite get approved for the funding you need, you can spend some time <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">improving your credit</a> and waiting things out before you apply.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Once you’re ready to move forward with a personal loan, you’ll need to make the following moves.<br>
</br></p>
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<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"> See If You Can Get a Co-signer </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Before you apply for a personal loan on your own, see if you have a trusted family member, partner, or friend with good credit who is willing to be the <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> on the loan. Having another person willing to co-sign can help you get a loan with considerably better <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-interest.asp">personal loan interest rates</a> and terms overall, and this can help you save money on interest and fees.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Note, however, that the co-signer on your loan is legally responsible for repayment if you fail to meet your responsibilities. A late payment on a personal loan with a co-signer can also damage both parties’ credit scores, so this should be avoided at all costs.<span class="ql-inline-citation" data-cite="8"></span><br>
</br></p>
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<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"> Pre-qualify Online </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Many online lenders let you <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> or “check your rate” online without a hard inquiry on your credit reports. This step can help you figure out the rates and fees you would probably have to pay for a personal loan. It’s also a great way to gauge your approval odds before you apply.<br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Generally speaking, you can pre-qualify for a personal loan online by supplying your:<br>
</br></p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0">
<li>Full name</li>
<li>Address</li>
<li>Contact information</li>
<li>Income</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security number</a>’s (SSN’s) last four digits<br/></li>
</ul>
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<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"> Create a Budget </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Once you have pre-qualified for a personal loan and have an idea of what your monthly payment would be, it makes sense to sit down with your bank statements and other bills to see what you can truly afford.<br>
</br></p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Ideally, you’ll have enough income to cover all your regular expenses and discretionary spending categories like food and entertainment. In the meantime, you’ll need to have money left over to cover your new personal loan payment while still having extra cash each month for savings.<br/>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></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"> Gather Documents </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Next, you’ll want to gather the documents you’ll need for your personal loan application. Items and information you ought to secure for this purpose can include your SSN, annual income, employment, pay stubs, driver’s license, and potentially your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax returns</a>.<br/>
</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"> The information that lenders need from you for the loan process can vary depending on how easily they can verify your identity and income, as well as how long it has been since your bankruptcy filing. Either way, you’ll want to gather all the documents you could potentially need and be willing to send in further documentation and information during the process if the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lender</a> requires it.<br/>
</p>
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<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"> Apply for a Personal Loan </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/010516/how-apply-personal-loan.asp">Applying for a personal loan</a> online can be a breeze, and that’s particularly true when you’ve gathered the information required well ahead of time. As you move through the application process, you’ll want to answer all questions as thoroughly and honestly as you can.
</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"> Make sure to list the true reason for the loan, and be honest and forthcoming about your income and employment situation, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/get-personal-loan-while-unemployed-8410063">or lack thereof</a>. Many lenders are able to reach a decision on personal loans within a few hours, whereas others may take a few business days.
</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"> Sign Loan Agreement </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Once you’ve been approved for a personal loan that suits your needs and goals, you can sign the loan agreement online and from the comfort of your home. From there, you will typically receive funding via an <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">Automated Clearing House (ACH) transfer</a> in your bank account within a few business days. <br/>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> After that, you should prepare to make on-time payments on your loan every month with the goal of improving your credit score and financial health over time.<br>
</br></p>
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<span class="heading-toc" id="toc-how-do-people-use-personal-loans"></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"> How Do People Use Personal Loans? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Investopedia commissioned <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574">a national survey</a> of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574">most common reason people borrowed money</a>, followed by home improvement and other large expenditures.
</p>
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<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_67-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/T6dEU/9/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="How People Use Personal Loans"></iframe></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-personal-loan-alternatives-after-bankruptcy"></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"> Personal Loan Alternatives After Bankruptcy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> As you consider loan options after bankruptcy, you should know about the alternatives that could also help you get the financing you need.
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0">
<li><strong>401(k) loan</strong>: A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/401k-loan.asp">401(k) loan</a> lets you borrow against your retirement plan and then pay yourself back, plus interest. However, not all program administrators allow 401(k) loans, and your plan may require you to immediately repay the loan in full if you leave your job.<span class="ql-inline-citation" data-cite="13"></span></li>
<li><strong>Home equity loan</strong>: If you have considerable <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/home_equity.asp">home equity</a> and a steady income, you may be able to borrow against the value of your home with a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeequityloan.asp">home equity loan</a>.</li>
<li><strong>Credit card</strong>: <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securedcard.asp">Secured credit cards</a> and other <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-get-a-credit-card-with-bad-credit-5069555">credit cards for bad credit</a> can give you a line of credit to borrow against when you need to, all while helping you build your credit score along the way. That said, secured credit cards do require you to put down a cash deposit as <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a>.</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_74-0"><span class="heading-toc" id="toc-which-lenders-offer-personal-loans-after-bankruptcy"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Lenders Offer Personal Loans After Bankruptcy?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Several different lenders may be able to approve you after bankruptcy, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/avant-personal-loans-review-4802261">Avant</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lendingclub-personal-loans-review-4800191">LendingClub</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/onemain-financial-personal-loans-review-4843162">OneMain Financial</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/upgrade-personal-loans-review-4842832">Upgrade</a>, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/upstart-personal-loans-review-4843810">Upstart</a>.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_76-0"><span class="heading-toc" id="toc-what-fees-can-personal-loans-charge"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Fees Can Personal Loans Charge?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most personal loans for borrowers with imperfect credit 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> or administration fees that can be for up to 12% of the original loan amount.<span class="ql-inline-citation" data-cite="9"></span> Also be sure to watch out for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prepaymentpenalty.asp">prepayment penalties</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/late-fee.asp">late fees</a>, and other hidden fees.</p></div>
</div>
<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-can-a-co-signer-help-me-get-a-personal-loan-after-bankruptcy"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Co-signer Help Me Get a Personal Loan After Bankruptcy?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A co-signer with good credit can help you get approved for a loan. Having a co-signer can also dramatically improve the interest rate and loan terms you can qualify for.<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_79-0"></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_80-0"> <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_81-0"> Getting a personal loan after bankruptcy can be difficult and expensive. However, there are times when you need to borrow money regardless of the long-term costs. Your best bet when seeking a loan after bankruptcy is making sure you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111715/when-are-personal-loans-good-idea.asp">only borrow what you need</a> and paying the money back as quickly as you can.
</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"> Also, make sure that you make every payment early or on time, and that you use the opportunity to learn positive financial habits to help you avoid financial problems in the future.
</p></div>
|
Filing for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) can impact your finances in myriad ways, including your ability to get a credit card or a loan. Still, it may be possible to secure a personal loan after bankruptcy if you’re flexible with your lender and willing to pay higher interest rates and loan fees. You may also be able to secure the financing you need if you’re able to [find a co-signer](https://www.investopedia.com/getting-personal-loan-cosigner-7557665) who is willing to put their own credit on the line to help you out.
Read on to learn where to find personal loans after bankruptcy and steps you can take to apply once you’re ready.
### Key Takeaways
* Both of the two primary kinds of bankruptcies, Chapter 7 and Chapter 13, will remain on your credit report for several years after filing.
* A co-signer can increase your likelihood of being approved for a personal loan and potentially securing a lower [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), but this requires your co-signer to put their own credit score at risk.
* Outside of personal loans, additional funding options available to you after filing for bankruptcy include 401(k) loans, home equity loans, and credit cards.
## The Difference Between Filing Chapter 7 and Chapter 13
The type of bankruptcy you filed can play a role in your ability to [qualify for a personal loan](https://www.investopedia.com/best-personal-loans-4773300), in addition to how long your bankruptcy will continue impacting your credit.
### Chapter 7
This type of bankruptcy involves the [liquidation](https://www.investopedia.com/terms/l/liquidation.asp) of assets that can be used to settle unpaid debts, although filers may be able to keep some personal property and real estate depending on the assets they have as well as state and federal laws that apply. Also note that some types of debt, including owed [child support](https://www.investopedia.com/guidelines-for-child-support-5194353), most [student loans](https://www.investopedia.com/student-loans-4689727), [tax debts](https://www.investopedia.com/terms/t/taxliability.asp), and [alimony](https://www.investopedia.com/terms/a/alimony.asp), typically cannot be discharged during bankruptcy.
[Chapter 7 bankruptcy](https://www.investopedia.com/terms/c/chapter7.asp) stays on your [credit reports](https://www.investopedia.com/terms/c/creditreport.asp) for up to 10 years.
### Chapter 13
[Chapter 13 bankruptcy](https://www.investopedia.com/terms/c/chapter13.asp) typically allows the filer to keep their personal property, but they must have regular [income](https://www.investopedia.com/terms/i/income.asp) and agree to a payment plan that pays off their creditors over time. The court system approves the debtor’s payment plan and budget during the process, and a court trustee helps oversee the repayment of unpaid debts from start to finish.
Chapter 13 bankruptcy stays on credit reports for seven years after the filing date.
## Where to Find a Personal Loan After Bankruptcy
Because both of the main types of bankruptcy are listed on credit reports for years after the filing date, going through a bankruptcy can make it difficult to get an [auto loan](https://www.investopedia.com/best-auto-loan-rates-4846394), a [mortgage](https://www.investopedia.com/best-mortgage-lenders-5076852), a [credit card](https://www.investopedia.com/best-credit-cards-4801582), or other types of financing. However, some personal loan companies offer borrowing options that can make post-bankruptcy borrowing a reality.
Consider this list of lenders that offer flexible [loan terms](https://www.investopedia.com/loan-terms-5075341) as well as a greater chance of getting approved with a low [credit score](https://www.investopedia.com/terms/c/credit_score.asp) and a bankruptcy on your record:
| | **Loan Amounts** | **Interest Rates** | **Repayment Terms** | **Minimum Credit Score** |
| --- | --- | --- | --- | --- |
| Avant | $2,000 to $35,000 | 9.95% to 35.99% | 12 to 60 months | 580 |
| LendingClub | $1,000 to $40,000 | 8.98% to 35.99% | 24 to 60 months | Not disclosed |
| OneMain Financial | $1,500 to $20,000 | 18.00% to 35.99% | 24 to 60 months | None |
| Upgrade | $1,000 to $50,000 | 8.49% to 35.99% | 24 to 84 months | Not disclosed |
| Upstart | $1,000 to $50,000 | 7.8% to 35.99% | 36 or 60 months | 300 |
## How to Secure Your First Personal Loan After Bankruptcy
If you need to borrow money after bankruptcy, there are a range of important steps that you’ll want to take. Also be aware that, if you can’t quite get approved for the funding you need, you can spend some time [improving your credit](https://www.investopedia.com/how-to-improve-your-credit-score-4590097) and waiting things out before you apply.
Once you’re ready to move forward with a personal loan, you’ll need to make the following moves.
### See If You Can Get a Co-signer
Before you apply for a personal loan on your own, see if you have a trusted family member, partner, or friend with good credit who is willing to be the [co-signer](https://www.investopedia.com/terms/c/co_sign.asp) on the loan. Having another person willing to co-sign can help you get a loan with considerably better [personal loan interest rates](https://www.investopedia.com/terms/p/personal-interest.asp) and terms overall, and this can help you save money on interest and fees.
Note, however, that the co-signer on your loan is legally responsible for repayment if you fail to meet your responsibilities. A late payment on a personal loan with a co-signer can also damage both parties’ credit scores, so this should be avoided at all costs.
### Pre-qualify Online
Many online lenders let you [pre-qualify](https://www.investopedia.com/terms/p/prequalification.asp) or “check your rate” online without a hard inquiry on your credit reports. This step can help you figure out the rates and fees you would probably have to pay for a personal loan. It’s also a great way to gauge your approval odds before you apply.
Generally speaking, you can pre-qualify for a personal loan online by supplying your:
* Full name
* Address
* Contact information
* Income
* [Social Security number](https://www.investopedia.com/terms/s/ssn.asp)’s (SSN’s) last four digits
### Create a Budget
Once you have pre-qualified for a personal loan and have an idea of what your monthly payment would be, it makes sense to sit down with your bank statements and other bills to see what you can truly afford.
Ideally, you’ll have enough income to cover all your regular expenses and discretionary spending categories like food and entertainment. In the meantime, you’ll need to have money left over to cover your new personal loan payment while still having extra cash each month for savings.
### Gather Documents
Next, you’ll want to gather the documents you’ll need for your personal loan application. Items and information you ought to secure for this purpose can include your SSN, annual income, employment, pay stubs, driver’s license, and potentially your [tax returns](https://www.investopedia.com/terms/t/taxreturn.asp).
The information that lenders need from you for the loan process can vary depending on how easily they can verify your identity and income, as well as how long it has been since your bankruptcy filing. Either way, you’ll want to gather all the documents you could potentially need and be willing to send in further documentation and information during the process if the [lender](https://www.investopedia.com/terms/l/lender.asp) requires it.
### Apply for a Personal Loan
[Applying for a personal loan](https://www.investopedia.com/articles/personal-finance/010516/how-apply-personal-loan.asp) online can be a breeze, and that’s particularly true when you’ve gathered the information required well ahead of time. As you move through the application process, you’ll want to answer all questions as thoroughly and honestly as you can.
Make sure to list the true reason for the loan, and be honest and forthcoming about your income and employment situation, [or lack thereof](https://www.investopedia.com/get-personal-loan-while-unemployed-8410063). Many lenders are able to reach a decision on personal loans within a few hours, whereas others may take a few business days.
### Sign Loan Agreement
Once you’ve been approved for a personal loan that suits your needs and goals, you can sign the loan agreement online and from the comfort of your home. From there, you will typically receive funding via an [Automated Clearing House (ACH) transfer](https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120) in your bank account within a few business days.
After that, you should prepare to make on-time payments on your loan every month with the goal of improving your credit score and financial health over time.
## How Do People Use Personal Loans?
Investopedia commissioned [a national survey](https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574) of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the [most common reason people borrowed money](https://www.investopedia.com/investopedia-2023-personal-loan-borrower-survey-8383574), followed by home improvement and other large expenditures.
## Personal Loan Alternatives After Bankruptcy
As you consider loan options after bankruptcy, you should know about the alternatives that could also help you get the financing you need.
* **401(k) loan**: A [401(k) loan](https://www.investopedia.com/ask/answers/09/401k-loan.asp) lets you borrow against your retirement plan and then pay yourself back, plus interest. However, not all program administrators allow 401(k) loans, and your plan may require you to immediately repay the loan in full if you leave your job.
* **Home equity loan**: If you have considerable [home equity](https://www.investopedia.com/terms/h/home_equity.asp) and a steady income, you may be able to borrow against the value of your home with a [home equity loan](https://www.investopedia.com/terms/h/homeequityloan.asp).
* **Credit card**: [Secured credit cards](https://www.investopedia.com/terms/s/securedcard.asp) and other [credit cards for bad credit](https://www.investopedia.com/how-to-get-a-credit-card-with-bad-credit-5069555) can give you a line of credit to borrow against when you need to, all while helping you build your credit score along the way. That said, secured credit cards do require you to put down a cash deposit as [collateral](https://www.investopedia.com/terms/c/collateral.asp).
## Which Lenders Offer Personal Loans After Bankruptcy?
Several different lenders may be able to approve you after bankruptcy, including [Avant](https://www.investopedia.com/avant-personal-loans-review-4802261), [LendingClub](https://www.investopedia.com/lendingclub-personal-loans-review-4800191), [OneMain Financial](https://www.investopedia.com/onemain-financial-personal-loans-review-4843162), [Upgrade](https://www.investopedia.com/upgrade-personal-loans-review-4842832), and [Upstart](https://www.investopedia.com/upstart-personal-loans-review-4843810).
## What Fees Can Personal Loans Charge?
Most personal loans for borrowers with imperfect credit charge [origination fees](https://www.investopedia.com/terms/o/origination-fee.asp) or administration fees that can be for up to 12% of the original loan amount. Also be sure to watch out for [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp), [late fees](https://www.investopedia.com/terms/l/late-fee.asp), and other hidden fees.
## Can a Co-signer Help Me Get a Personal Loan After Bankruptcy?
A co-signer with good credit can help you get approved for a loan. Having a co-signer can also dramatically improve the interest rate and loan terms you can qualify for.
## The Bottom Line
Getting a personal loan after bankruptcy can be difficult and expensive. However, there are times when you need to borrow money regardless of the long-term costs. Your best bet when seeking a loan after bankruptcy is making sure you [only borrow what you need](https://www.investopedia.com/articles/personal-finance/111715/when-are-personal-loans-good-idea.asp) and paying the money back as quickly as you can.
Also, make sure that you make every payment early or on time, and that you use the opportunity to learn positive financial habits to help you avoid financial problems in the future.
|
Filing for bankruptcy can impact your finances in myriad ways, including your ability to get a credit card or a loan. Still, it may be possible to secure a personal loan after bankruptcy if you’re flexible with your lender and willing to pay higher interest rates and loan fees. You may also be able to secure the financing you need if you’re able to find a co-signer who is willing to put their own credit on the line to help you out.
Read on to learn where to find personal loans after bankruptcy and steps you can take to apply once you’re ready.
Key Takeaways
Both of the two primary kinds of bankruptcies, Chapter 7 and Chapter 13, will remain on your credit report for several years after filing.
A co-signer can increase your likelihood of being approved for a personal loan and potentially securing a lower interest rate, but this requires your co-signer to put their own credit score at risk.
Outside of personal loans, additional funding options available to you after filing for bankruptcy include 401(k) loans, home equity loans, and credit cards.
The Difference Between Filing Chapter 7 and Chapter 13
The type of bankruptcy you filed can play a role in your ability to qualify for a personal loan, in addition to how long your bankruptcy will continue impacting your credit.
Chapter 7
This type of bankruptcy involves the liquidation of assets that can be used to settle unpaid debts, although filers may be able to keep some personal property and real estate depending on the assets they have as well as state and federal laws that apply. Also note that some types of debt, including owed child support, most student loans, tax debts, and alimony, typically cannot be discharged during bankruptcy.
Chapter 7 bankruptcy stays on your credit reports for up to 10 years.
Chapter 13
Chapter 13 bankruptcy typically allows the filer to keep their personal property, but they must have regular income and agree to a payment plan that pays off their creditors over time. The court system approves the debtor’s payment plan and budget during the process, and a court trustee helps oversee the repayment of unpaid debts from start to finish.
Chapter 13 bankruptcy stays on credit reports for seven years after the filing date.
Where to Find a Personal Loan After Bankruptcy
Because both of the main types of bankruptcy are listed on credit reports for years after the filing date, going through a bankruptcy can make it difficult to get an auto loan, a mortgage, a credit card, or other types of financing. However, some personal loan companies offer borrowing options that can make post-bankruptcy borrowing a reality.
Consider this list of lenders that offer flexible loan terms as well as a greater chance of getting approved with a low credit score and a bankruptcy on your record:
Loan Amounts
Interest Rates
Repayment Terms
Minimum Credit Score
Avant
$2,000 to $35,000
9.95% to 35.99%
12 to 60 months
580
LendingClub
$1,000 to $40,000
8.98% to 35.99%
24 to 60 months
Not disclosed
OneMain Financial
$1,500 to $20,000
18.00% to 35.99%
24 to 60 months
None
Upgrade
$1,000 to $50,000
8.49% to 35.99%
24 to 84 months
Not disclosed
Upstart
$1,000 to $50,000
7.8% to 35.99%
36 or 60 months
300
How to Secure Your First Personal Loan After Bankruptcy
If you need to borrow money after bankruptcy, there are a range of important steps that you’ll want to take. Also be aware that, if you can’t quite get approved for the funding you need, you can spend some time improving your credit and waiting things out before you apply.
Once you’re ready to move forward with a personal loan, you’ll need to make the following moves.
See If You Can Get a Co-signer
Before you apply for a personal loan on your own, see if you have a trusted family member, partner, or friend with good credit who is willing to be the co-signer on the loan. Having another person willing to co-sign can help you get a loan with considerably better personal loan interest rates and terms overall, and this can help you save money on interest and fees.
Note, however, that the co-signer on your loan is legally responsible for repayment if you fail to meet your responsibilities. A late payment on a personal loan with a co-signer can also damage both parties’ credit scores, so this should be avoided at all costs.
Pre-qualify Online
Many online lenders let you pre-qualify or “check your rate” online without a hard inquiry on your credit reports. This step can help you figure out the rates and fees you would probably have to pay for a personal loan. It’s also a great way to gauge your approval odds before you apply.
Generally speaking, you can pre-qualify for a personal loan online by supplying your:
Full name
Address
Contact information
Income
Social Security number’s (SSN’s) last four digits
Create a Budget
Once you have pre-qualified for a personal loan and have an idea of what your monthly payment would be, it makes sense to sit down with your bank statements and other bills to see what you can truly afford.
Ideally, you’ll have enough income to cover all your regular expenses and discretionary spending categories like food and entertainment. In the meantime, you’ll need to have money left over to cover your new personal loan payment while still having extra cash each month for savings.
Gather Documents
Next, you’ll want to gather the documents you’ll need for your personal loan application. Items and information you ought to secure for this purpose can include your SSN, annual income, employment, pay stubs, driver’s license, and potentially your tax returns.
The information that lenders need from you for the loan process can vary depending on how easily they can verify your identity and income, as well as how long it has been since your bankruptcy filing. Either way, you’ll want to gather all the documents you could potentially need and be willing to send in further documentation and information during the process if the lender requires it.
Apply for a Personal Loan
Applying for a personal loan online can be a breeze, and that’s particularly true when you’ve gathered the information required well ahead of time. As you move through the application process, you’ll want to answer all questions as thoroughly and honestly as you can.
Make sure to list the true reason for the loan, and be honest and forthcoming about your income and employment situation, or lack thereof. Many lenders are able to reach a decision on personal loans within a few hours, whereas others may take a few business days.
Sign Loan Agreement
Once you’ve been approved for a personal loan that suits your needs and goals, you can sign the loan agreement online and from the comfort of your home. From there, you will typically receive funding via an Automated Clearing House (ACH) transfer in your bank account within a few business days.
After that, you should prepare to make on-time payments on your loan every month with the goal of improving your credit score and financial health over time.
How Do People Use Personal Loans?
Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.
Personal Loan Alternatives After Bankruptcy
As you consider loan options after bankruptcy, you should know about the alternatives that could also help you get the financing you need.
401(k) loan: A 401(k) loan lets you borrow against your retirement plan and then pay yourself back, plus interest. However, not all program administrators allow 401(k) loans, and your plan may require you to immediately repay the loan in full if you leave your job.
Home equity loan: If you have considerable home equity and a steady income, you may be able to borrow against the value of your home with a home equity loan.
Credit card: Secured credit cards and other credit cards for bad credit can give you a line of credit to borrow against when you need to, all while helping you build your credit score along the way. That said, secured credit cards do require you to put down a cash deposit as collateral.
Which Lenders Offer Personal Loans After Bankruptcy?
Several different lenders may be able to approve you after bankruptcy, including Avant, LendingClub, OneMain Financial, Upgrade, and Upstart.
What Fees Can Personal Loans Charge?
Most personal loans for borrowers with imperfect credit charge origination fees or administration fees that can be for up to 12% of the original loan amount. Also be sure to watch out for prepayment penalties, late fees, and other hidden fees.
Can a Co-signer Help Me Get a Personal Loan After Bankruptcy?
A co-signer with good credit can help you get approved for a loan. Having a co-signer can also dramatically improve the interest rate and loan terms you can qualify for.
The Bottom Line
Getting a personal loan after bankruptcy can be difficult and expensive. However, there are times when you need to borrow money regardless of the long-term costs. Your best bet when seeking a loan after bankruptcy is making sure you only borrow what you need and paying the money back as quickly as you can.
Also, make sure that you make every payment early or on time, and that you use the opportunity to learn positive financial habits to help you avoid financial problems in the future.
|
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https://www.investopedia.com/terms/m/manditorily-redeemable-shares.asp
|
Mandatorily Redeemable Shares: 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-are-mandatorily-redeemable-shares"></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 Mandatorily Redeemable Shares? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event. Essentially, they are shares with a built-in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/calloption.asp" rel="noopener noreferrer">call option</a> that will be exercised by the issuer at a pre-determined point in the future.
</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"> Mandatorily redeemable <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shares.asp" rel="noopener noreferrer">shares</a> are often issued by employers to workers as a sort of compensation kicker. In this context, the employer usually requires the employees to redeem these shares for cash or bonds and attaches the redemption requirement to certain prescribed events or timelines.
</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>Mandatorily redeemable shares are shares that can be redeemed for cash or other property at a stated time or following a specific event.</li><li>They are often issued by by employers as part of a compensation package to entice new employees.</li><li>The SEC and FASB have issued regulations concerning how mandatorily redeemable shares should be accounted for on company financial statements.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-mandatorily-redeemable-shares"></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 Mandatorily Redeemable Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> One example of a situation where an employer would issue mandatorily redeemable shares would be in the case of an employee quitting the firm. The employer would exercise its "call" option on these shares, forcing the exiting employee to sell back their company shares. An employer might do this in a situation where the shares are restricted and greatly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inthemoney.asp" rel="noopener noreferrer">in the money</a>, or if it is a closely-held company with relatively few shares in float.
</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 the past, there have been irregularities and ambiguities surrounding how the issuer of mandatorily redeemable shares should account for them on their books. This is because mandatorily redeemable shares have characteristics of both liabilities and equity.
</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"> Under regulations from the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp" rel="noopener noreferrer">Securities and Exchange Commission</a>, securities must be classified outside of permanent equity if they can be redeemed for cash or other assets at a fixed or determinable price in the future; at the option of the holder; or upon the occurrence of an event outside the control of the issuer.<span class="ql-inline-citation" data-cite="2"></span> Statement 150 from the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fasb.asp" rel="noopener noreferrer">Financial Accounting Standards Board</a> outlines when mandatorily redeemable shares must be considered a liability on a company's financial statements.<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_14-0"></div>
<span class="heading-toc" id="toc-example-of-mandatorily-redeemable-shares"></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 Mandatorily Redeemable Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Company ABC issues redeemable stock that are mandatorily redeemable at a liquidation preference of $40 three years later. This means the company has the option to buy back the shares at the price of $40 after a set time period of three years. If the company has issued the stock to an employee or investors, then they will be forced to sell back the shares to the company at the stated price (irrespective of valuation in the private or public markets), if ABC exercises its call option.
</p></div>
|
## What Are Mandatorily Redeemable Shares?
Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event. Essentially, they are shares with a built-in [call option](https://www.investopedia.com/terms/c/calloption.asp) that will be exercised by the issuer at a pre-determined point in the future.
Mandatorily redeemable [shares](https://www.investopedia.com/terms/s/shares.asp) are often issued by employers to workers as a sort of compensation kicker. In this context, the employer usually requires the employees to redeem these shares for cash or bonds and attaches the redemption requirement to certain prescribed events or timelines.
### Key Takeaways
* Mandatorily redeemable shares are shares that can be redeemed for cash or other property at a stated time or following a specific event.
* They are often issued by by employers as part of a compensation package to entice new employees.
* The SEC and FASB have issued regulations concerning how mandatorily redeemable shares should be accounted for on company financial statements.
## Understanding Mandatorily Redeemable Shares
One example of a situation where an employer would issue mandatorily redeemable shares would be in the case of an employee quitting the firm. The employer would exercise its "call" option on these shares, forcing the exiting employee to sell back their company shares. An employer might do this in a situation where the shares are restricted and greatly [in the money](https://www.investopedia.com/terms/i/inthemoney.asp), or if it is a closely-held company with relatively few shares in float.
In the past, there have been irregularities and ambiguities surrounding how the issuer of mandatorily redeemable shares should account for them on their books. This is because mandatorily redeemable shares have characteristics of both liabilities and equity.
Under regulations from the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp), securities must be classified outside of permanent equity if they can be redeemed for cash or other assets at a fixed or determinable price in the future; at the option of the holder; or upon the occurrence of an event outside the control of the issuer. Statement 150 from the [Financial Accounting Standards Board](https://www.investopedia.com/terms/f/fasb.asp) outlines when mandatorily redeemable shares must be considered a liability on a company's financial statements.
## Example of Mandatorily Redeemable Shares
Company ABC issues redeemable stock that are mandatorily redeemable at a liquidation preference of $40 three years later. This means the company has the option to buy back the shares at the price of $40 after a set time period of three years. If the company has issued the stock to an employee or investors, then they will be forced to sell back the shares to the company at the stated price (irrespective of valuation in the private or public markets), if ABC exercises its call option.
|
What Are Mandatorily Redeemable Shares?
Mandatorily redeemable shares are shares owned by an individual or entity which are required to be redeemed for cash or another such property at a stated time or following a specific event. Essentially, they are shares with a built-in call option that will be exercised by the issuer at a pre-determined point in the future.
Mandatorily redeemable shares are often issued by employers to workers as a sort of compensation kicker. In this context, the employer usually requires the employees to redeem these shares for cash or bonds and attaches the redemption requirement to certain prescribed events or timelines.
Key Takeaways
Mandatorily redeemable shares are shares that can be redeemed for cash or other property at a stated time or following a specific event.They are often issued by by employers as part of a compensation package to entice new employees.The SEC and FASB have issued regulations concerning how mandatorily redeemable shares should be accounted for on company financial statements.
Understanding Mandatorily Redeemable Shares
One example of a situation where an employer would issue mandatorily redeemable shares would be in the case of an employee quitting the firm. The employer would exercise its "call" option on these shares, forcing the exiting employee to sell back their company shares. An employer might do this in a situation where the shares are restricted and greatly in the money, or if it is a closely-held company with relatively few shares in float.
In the past, there have been irregularities and ambiguities surrounding how the issuer of mandatorily redeemable shares should account for them on their books. This is because mandatorily redeemable shares have characteristics of both liabilities and equity.
Under regulations from the Securities and Exchange Commission, securities must be classified outside of permanent equity if they can be redeemed for cash or other assets at a fixed or determinable price in the future; at the option of the holder; or upon the occurrence of an event outside the control of the issuer. Statement 150 from the Financial Accounting Standards Board outlines when mandatorily redeemable shares must be considered a liability on a company's financial statements.
Example of Mandatorily Redeemable Shares
Company ABC issues redeemable stock that are mandatorily redeemable at a liquidation preference of $40 three years later. This means the company has the option to buy back the shares at the price of $40 after a set time period of three years. If the company has issued the stock to an employee or investors, then they will be forced to sell back the shares to the company at the stated price (irrespective of valuation in the private or public markets), if ABC exercises its call option.
|
[
[
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],
[
"shares",
"https://www.investopedia.com/terms/s/shares.asp"
],
[
"in the money",
"https://www.investopedia.com/terms/i/inthemoney.asp"
],
[
"Securities and Exchange Commission",
"https://www.investopedia.com/terms/s/sec.asp"
],
[
"Financial Accounting Standards Board",
"https://www.investopedia.com/terms/f/fasb.asp"
]
] |
https://www.investopedia.com/terms/o/oeic.asp
|
What Is an Open-Ended Investment Company (OEIC)? How They Work
|
<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-open-ended-investment-company-oeic"></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 Open Ended Investment Company (OEIC)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An open-ended investment company (OEIC) is a type of investment fund domiciled in the United Kingdom that is structured as a company in its own right to invest in stocks and other securities. OEIC shares do not trade on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lse.asp">London Stock Exchange</a>.
</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 price of the shares is based largely on the underlying assets of the fund. These funds can mix different types of investment strategies such as income and growth, <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> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large cap,</a> and can constantly adjust their investment criteria and fund size.
</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"> OEICs are called "open-ended" because they can create new shares to meet investor demand. Also, the fund will cancel the shares of investors who exit the fund. OEICs are regulated by the Financial Conduct Authority (FCA), which means services such as the Financial Ombudsman are available to investors if problems arise.<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>
<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>An open-ended investment company (OEIC) is a type of investment fund in the United Kingdom, similar to an open-ended mutual fund in the U.S.</li><li>OEICs offer a professionally managed portfolio of pooled investor funds that invests in different equities, bonds, and other securities.</li><li>OEICs are priced once a day, based on the net asset value of their underlying portfolio assets.</li><li>Most OEICs carry sales charges and annual management fees, known as the ongoing charges figure.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-an-open-ended-investment-company-oeic"></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"> Understanding an Open Ended Investment Company (OEIC) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> An open-ended investment company pools investors’ money and spreads it across a wide range of investments, such as equities or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-interest-security.asp">fixed-interest securities</a>. This diversification helps reduce the risk of losing an investor’s principal. OEIC funds offer the potential for growth or income. They usually function as a medium to long-term investment, held for five to ten years or longer.
</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"> Any U.K. investor, 18 years or older, may invest in a wide range of funds managed by industry experts. As in the United States, there are various levels of risk available for capital growth, income generation, or a combination of both. Shareholders may invest for themselves or their children. When children turn 18 years old, they hold the investment in their own right.
</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-charges-for-oeic-shares"></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"> Charges for OEIC Shares </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> As of 2021, investors pay an initial charge of between 0% to 5% when buying new shares. This type of front-end load lowers the amount of money going into the fund to purchase shares. In addition, there is an annual management charge (AMC) of around 1% to 1.5% of the value of an investor’s shares. The AMC covers the fund manager's services. Funds that are not actively managed, such as index trackers, have much lower fees.
</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 funds quote a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/ter.asp">total expense ratio</a> (TER) or an ongoing charges figure (OCF). Each charge includes the AMC and other expenses used for comparing different products. The TER and OCF do not include dealer charges that can add significantly to annual costs if the fund has a high turnover rate.
</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"> There may also be an exit charge for selling shares, based on a percentage of the total value of the sale. However, many OEICs do not charge exit fees.
</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-investing-in-oeics"></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"> Investing in OEICs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> OEICs are useful for investors who do not have the time, interest, or expertise to actively manage their investments. Investors may invest a single payment or monthly payments with minimum amounts depending on the fund. Also, access to funds online or over the phone is generally easy. Further, shareholders may pay a fee when moving between funds.
</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-comparisonlist mntl-block" id="mntl-sc-block_25-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_26-0"> <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>Offer professional money management</p></li>
<li><p>Have diversified portfolios, mitigating risk</p></li>
<li><p>Are highly liquid</p></li>
<li><p>Feature low investment minimums</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>Carry high annual fees, sales charges</p></li>
<li><p>Incur taxes</p></li>
<li><p>Must maintain cash reserves, restricting returns</p></li>
<li><p>Require mid-to-long-term investment horizon</p></li>
</ul>
</div>
</div></div>
<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"> OEIC are not tax-advantaged; so, interest and dividends are taxable, and selling shares may incur a capital gains tax. Of course, the amounts involved must exceed dividend and capital gains tax allowances. Also, shareholders may hold OEICs tax-free in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pep.asp">Individual Savings Account</a> (ISA) or other U.K. pension plan.<span class="ql-inline-citation" data-cite="2"></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_29-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> However, investment values and resulting income are not guaranteed and may increase or decrease, depending on investment performance and currency exchange rates for funds investing in foreign markets. Therefore, a shareholder may not get back the original amount invested.
</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"> U.S. residents may not hold shares in OEICs. U.S. shareholders must have the OEIC sell their shares or transfer their investments to U.K. residents.
</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-oeics-vs-unit-trusts"></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"> OEICs vs. Unit Trusts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> In the United Kingdom, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unittrust.asp">unit trusts</a> (UTs) and OEICs are the two most common types of investment funds, and they also have much in common.
</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"> Like OEICs, unit trusts consist of a manager who buys stocks and bonds for holders of a fund, in an open-ended format. The two mainly differ in the way they are priced. Unit trusts will have two prices:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <li>The bid price—the price per unit received for each unit sold back to the fund</li><li>The offer price—the price to purchase each unit of the fund</li>
</ol>
<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"> OEICs have only one price per day, based on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset value</a> (NAV) of the underlying assets of the fund. OIECs tend to have lower fees than UTs because they have a simpler structure. Many investment companies have been converting unit trusts into OEICs for this reason.<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_42-0"></div>
<span class="heading-toc" id="toc-real-world-example-of-oeics"></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"> Real-World Example of OEICs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> British OEICs are comparable to American mutual funds, and many U.S. investment companies that do business in the U.K. offer them. One such is Fidelity International, an overseas division of Fidelity Investments. In July 2018, the division announced it was instituting variable management fees for five UK-domiciled OEICs, including the Fidelity Special Situations, Fidelity European, Fidelity Asian Dividend, Fidelity Global Special Situations, and Fidelity American funds.<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_45-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> The change effectively reduced the base AMC of the funds by 10%.<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_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <em>Correction-Oct. 13, 2022: </em>This article previously misstated that shares of OEICs trade on the London Stock Exchange.
</p></div>
|
## What Is an Open Ended Investment Company (OEIC)?
An open-ended investment company (OEIC) is a type of investment fund domiciled in the United Kingdom that is structured as a company in its own right to invest in stocks and other securities. OEIC shares do not trade on the [London Stock Exchange](https://www.investopedia.com/terms/l/lse.asp).
The price of the shares is based largely on the underlying assets of the fund. These funds can mix different types of investment strategies such as income and growth, [small cap](https://www.investopedia.com/terms/s/small-cap.asp) and [large cap,](https://www.investopedia.com/terms/l/large-cap.asp) and can constantly adjust their investment criteria and fund size.
OEICs are called "open-ended" because they can create new shares to meet investor demand. Also, the fund will cancel the shares of investors who exit the fund. OEICs are regulated by the Financial Conduct Authority (FCA), which means services such as the Financial Ombudsman are available to investors if problems arise.
### Key Takeaways
* An open-ended investment company (OEIC) is a type of investment fund in the United Kingdom, similar to an open-ended mutual fund in the U.S.
* OEICs offer a professionally managed portfolio of pooled investor funds that invests in different equities, bonds, and other securities.
* OEICs are priced once a day, based on the net asset value of their underlying portfolio assets.
* Most OEICs carry sales charges and annual management fees, known as the ongoing charges figure.
## Understanding an Open Ended Investment Company (OEIC)
An open-ended investment company pools investors’ money and spreads it across a wide range of investments, such as equities or [fixed-interest securities](https://www.investopedia.com/terms/f/fixed-interest-security.asp). This diversification helps reduce the risk of losing an investor’s principal. OEIC funds offer the potential for growth or income. They usually function as a medium to long-term investment, held for five to ten years or longer.
Any U.K. investor, 18 years or older, may invest in a wide range of funds managed by industry experts. As in the United States, there are various levels of risk available for capital growth, income generation, or a combination of both. Shareholders may invest for themselves or their children. When children turn 18 years old, they hold the investment in their own right.
## Charges for OEIC Shares
As of 2021, investors pay an initial charge of between 0% to 5% when buying new shares. This type of front-end load lowers the amount of money going into the fund to purchase shares. In addition, there is an annual management charge (AMC) of around 1% to 1.5% of the value of an investor’s shares. The AMC covers the fund manager's services. Funds that are not actively managed, such as index trackers, have much lower fees.
Most funds quote a [total expense ratio](https://www.investopedia.com/terms/t/ter.asp) (TER) or an ongoing charges figure (OCF). Each charge includes the AMC and other expenses used for comparing different products. The TER and OCF do not include dealer charges that can add significantly to annual costs if the fund has a high turnover rate.
There may also be an exit charge for selling shares, based on a percentage of the total value of the sale. However, many OEICs do not charge exit fees.
## Investing in OEICs
OEICs are useful for investors who do not have the time, interest, or expertise to actively manage their investments. Investors may invest a single payment or monthly payments with minimum amounts depending on the fund. Also, access to funds online or over the phone is generally easy. Further, shareholders may pay a fee when moving between funds.
Pros
* Offer professional money management
* Have diversified portfolios, mitigating risk
* Are highly liquid
* Feature low investment minimums
Cons
* Carry high annual fees, sales charges
* Incur taxes
* Must maintain cash reserves, restricting returns
* Require mid-to-long-term investment horizon
OEIC are not tax-advantaged; so, interest and dividends are taxable, and selling shares may incur a capital gains tax. Of course, the amounts involved must exceed dividend and capital gains tax allowances. Also, shareholders may hold OEICs tax-free in an [Individual Savings Account](https://www.investopedia.com/terms/p/pep.asp) (ISA) or other U.K. pension plan.
However, investment values and resulting income are not guaranteed and may increase or decrease, depending on investment performance and currency exchange rates for funds investing in foreign markets. Therefore, a shareholder may not get back the original amount invested.
U.S. residents may not hold shares in OEICs. U.S. shareholders must have the OEIC sell their shares or transfer their investments to U.K. residents.
## OEICs vs. Unit Trusts
In the United Kingdom, [unit trusts](https://www.investopedia.com/terms/u/unittrust.asp) (UTs) and OEICs are the two most common types of investment funds, and they also have much in common.
Like OEICs, unit trusts consist of a manager who buys stocks and bonds for holders of a fund, in an open-ended format. The two mainly differ in the way they are priced. Unit trusts will have two prices:
1. The bid price—the price per unit received for each unit sold back to the fund
2. The offer price—the price to purchase each unit of the fund
OEICs have only one price per day, based on the [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) of the underlying assets of the fund. OIECs tend to have lower fees than UTs because they have a simpler structure. Many investment companies have been converting unit trusts into OEICs for this reason.
## Real-World Example of OEICs
British OEICs are comparable to American mutual funds, and many U.S. investment companies that do business in the U.K. offer them. One such is Fidelity International, an overseas division of Fidelity Investments. In July 2018, the division announced it was instituting variable management fees for five UK-domiciled OEICs, including the Fidelity Special Situations, Fidelity European, Fidelity Asian Dividend, Fidelity Global Special Situations, and Fidelity American funds.
The change effectively reduced the base AMC of the funds by 10%.
*Correction-Oct. 13, 2022:* This article previously misstated that shares of OEICs trade on the London Stock Exchange.
|
What Is an Open Ended Investment Company (OEIC)?
An open-ended investment company (OEIC) is a type of investment fund domiciled in the United Kingdom that is structured as a company in its own right to invest in stocks and other securities. OEIC shares do not trade on the London Stock Exchange.
The price of the shares is based largely on the underlying assets of the fund. These funds can mix different types of investment strategies such as income and growth, small cap and large cap, and can constantly adjust their investment criteria and fund size.
OEICs are called "open-ended" because they can create new shares to meet investor demand. Also, the fund will cancel the shares of investors who exit the fund. OEICs are regulated by the Financial Conduct Authority (FCA), which means services such as the Financial Ombudsman are available to investors if problems arise.
Key Takeaways
An open-ended investment company (OEIC) is a type of investment fund in the United Kingdom, similar to an open-ended mutual fund in the U.S.OEICs offer a professionally managed portfolio of pooled investor funds that invests in different equities, bonds, and other securities.OEICs are priced once a day, based on the net asset value of their underlying portfolio assets.Most OEICs carry sales charges and annual management fees, known as the ongoing charges figure.
Understanding an Open Ended Investment Company (OEIC)
An open-ended investment company pools investors’ money and spreads it across a wide range of investments, such as equities or fixed-interest securities. This diversification helps reduce the risk of losing an investor’s principal. OEIC funds offer the potential for growth or income. They usually function as a medium to long-term investment, held for five to ten years or longer.
Any U.K. investor, 18 years or older, may invest in a wide range of funds managed by industry experts. As in the United States, there are various levels of risk available for capital growth, income generation, or a combination of both. Shareholders may invest for themselves or their children. When children turn 18 years old, they hold the investment in their own right.
Charges for OEIC Shares
As of 2021, investors pay an initial charge of between 0% to 5% when buying new shares. This type of front-end load lowers the amount of money going into the fund to purchase shares. In addition, there is an annual management charge (AMC) of around 1% to 1.5% of the value of an investor’s shares. The AMC covers the fund manager's services. Funds that are not actively managed, such as index trackers, have much lower fees.
Most funds quote a total expense ratio (TER) or an ongoing charges figure (OCF). Each charge includes the AMC and other expenses used for comparing different products. The TER and OCF do not include dealer charges that can add significantly to annual costs if the fund has a high turnover rate.
There may also be an exit charge for selling shares, based on a percentage of the total value of the sale. However, many OEICs do not charge exit fees.
Investing in OEICs
OEICs are useful for investors who do not have the time, interest, or expertise to actively manage their investments. Investors may invest a single payment or monthly payments with minimum amounts depending on the fund. Also, access to funds online or over the phone is generally easy. Further, shareholders may pay a fee when moving between funds.
Pros
Offer professional money management
Have diversified portfolios, mitigating risk
Are highly liquid
Feature low investment minimums
Cons
Carry high annual fees, sales charges
Incur taxes
Must maintain cash reserves, restricting returns
Require mid-to-long-term investment horizon
OEIC are not tax-advantaged; so, interest and dividends are taxable, and selling shares may incur a capital gains tax. Of course, the amounts involved must exceed dividend and capital gains tax allowances. Also, shareholders may hold OEICs tax-free in an Individual Savings Account (ISA) or other U.K. pension plan.
However, investment values and resulting income are not guaranteed and may increase or decrease, depending on investment performance and currency exchange rates for funds investing in foreign markets. Therefore, a shareholder may not get back the original amount invested.
U.S. residents may not hold shares in OEICs. U.S. shareholders must have the OEIC sell their shares or transfer their investments to U.K. residents.
OEICs vs. Unit Trusts
In the United Kingdom, unit trusts (UTs) and OEICs are the two most common types of investment funds, and they also have much in common.
Like OEICs, unit trusts consist of a manager who buys stocks and bonds for holders of a fund, in an open-ended format. The two mainly differ in the way they are priced. Unit trusts will have two prices:
The bid price—the price per unit received for each unit sold back to the fundThe offer price—the price to purchase each unit of the fund
OEICs have only one price per day, based on the net asset value (NAV) of the underlying assets of the fund. OIECs tend to have lower fees than UTs because they have a simpler structure. Many investment companies have been converting unit trusts into OEICs for this reason.
Real-World Example of OEICs
British OEICs are comparable to American mutual funds, and many U.S. investment companies that do business in the U.K. offer them. One such is Fidelity International, an overseas division of Fidelity Investments. In July 2018, the division announced it was instituting variable management fees for five UK-domiciled OEICs, including the Fidelity Special Situations, Fidelity European, Fidelity Asian Dividend, Fidelity Global Special Situations, and Fidelity American funds.
The change effectively reduced the base AMC of the funds by 10%.
Correction-Oct. 13, 2022: This article previously misstated that shares of OEICs trade on the London Stock Exchange.
|
[
[
"London Stock Exchange",
"https://www.investopedia.com/terms/l/lse.asp"
],
[
"small cap",
"https://www.investopedia.com/terms/s/small-cap.asp"
],
[
"large cap,",
"https://www.investopedia.com/terms/l/large-cap.asp"
],
[
"fixed-interest securities",
"https://www.investopedia.com/terms/f/fixed-interest-security.asp"
],
[
"total expense ratio",
"https://www.investopedia.com/terms/t/ter.asp"
],
[
"Individual Savings Account",
"https://www.investopedia.com/terms/p/pep.asp"
],
[
"unit trusts",
"https://www.investopedia.com/terms/u/unittrust.asp"
],
[
"net asset value",
"https://www.investopedia.com/terms/n/nav.asp"
]
] |
https://www.investopedia.com/scotus-ipos-7480990
|
Supreme Court Case Could Turn Public Offerings Upside-Down
|
<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 relatively uncommon type of public offering called a “direct listing” could become a popular way for companies to go public-or could go extinct, depending on the outcome of a Supreme Court case, securities law experts said.
</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>Supreme Court is hearing arguments in the Slack vs. Pirani case Monday.</li><li>Case potentially has major implications for direct listings—either making them a more attractive option or removing them as a viable option.</li><li>Experts say the court is likely to rule in favor of Slack in some capacity.</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"> The high court will hear arguments on Monday in Slack vs. Pirani, a complex securities law case that will decide how easy it will be for investors to sue companies over alleged misstatements or omissions in their registration statements during direct listings.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/">direct listing</a> is a way for companies to go public with less red tape than a traditional <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering</a>. Instead of creating new shares and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041415/what-does-underwriter-do-new-stock-offering.asp">having a bank underwrite them</a>, as in a traditional IPO, a direct listing lets management, employees and private investors sell their existing shares on the public market.
</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"> Authorized by the Securities and Exchange Commission in 2018 to encourage more companies to go public and reverse a trend of businesses staying privately owned, direct listings haven't flourished.<span class="ql-inline-citation" data-cite="2"></span> As of last December, there had only been 11 significant direct listing offerings, Bloomberg reported.<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"> The case hinges on whether Fiyyaz Pirani, a California investor, has “standing,” or the right to sue Slack, the communications company that went public via direct listing in 2019.
</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-license-and-registration-please"></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"> License and Registration, Please </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <br/>The Supreme Court won’t decide whether Slack actually did anything wrong, just whether lead plaintiff Pirani, who bought shares in Slack’s direct listing, can have his day in court.<span class="ql-inline-citation" data-cite="4"></span> The court will judge the merits of the case: Whether Slack misrepresented its service disruption policies and other details about its business in the <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">registration statement</a> it filed in connection with its direct listing.<br/><br/>The case hinges on whether that registration statement—a document of legally required disclosures that are supposed to inform potential investors about the risks involved in buying a stock—actually applies to the 250,000 Slack shares that Pirani bought on the day of the direct listing and the following months.<span class="ql-inline-citation" data-cite="5"></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_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> SEC rules require that certain shares must be sold accompanied by a registration statement, and others are exempt and can go “unregistered.” The trouble is that on the day of its direct listing, Slack shareholders sold a mix of both registered and unregistered securities into the market—118 million were registered and 165 million weren't.<span class="ql-inline-citation" data-cite="7"></span><br><br>Determining months later which shares are registered and which aren't is almost impossible because of advances in trading technology, said Anat Alon-Beck, a professor of corporate law, and John Livingstone, recently a research fellow, both at Case Western Reserve University.<br><br/>“You would think that the record-keeping would be better and you would be able to trace much more easily,” Livingstone said. “But the shares are changing hands so rapidly and going through so many shares and are on such a fractional basis, that it's nearly impossible to trace literally hundreds of millions of shares, down to fractional levels, dispersed over tens of thousands of clients.”
</br></br></br></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"> Lower courts ruled that because the registered and unregistered shares are functionally identical and were offered at the same time, Pirani is allowed to sue over the registration statement.
</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 Supreme Court’s ruling is likely to have major implications for direct listings in the future, and is likely being closely watched by companies now considering whether to go public, Beck said. If it rules in favor of Slack, it could make it nearly impossible for investors to sue over misleading registration statements, making them an appealing option for companies, including those that might intentionally mislead investors.<br/><br/>“You're going to find that companies are flooding to direct listings for the wrong reasons,” Beck said.<br/><br/>If they rule completely in favor of Pirani, companies would find themselves exposed to more legal liability than they had bargained for from direct listings.<br/><br/>“It’s going to kill direct listings,” Beck said.<br/><br/>Beck and Livingstone said the conservative ideological makeup of the court gives Slack an advantage.<br/><br/>There are risks with either approach, Beck said. A ruling completely in favor of Slack could hurt financial markets by undermining the confidence that investors have in the U.S. legal system—that if they are defrauded in a transaction, they have the option of suing. On the other hand, ruling in favor of Pirani would discourage direct listings and lead more companies to stay private.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
A relatively uncommon type of public offering called a “direct listing” could become a popular way for companies to go public-or could go extinct, depending on the outcome of a Supreme Court case, securities law experts said.
### Key Takeaways
* Supreme Court is hearing arguments in the Slack vs. Pirani case Monday.
* Case potentially has major implications for direct listings—either making them a more attractive option or removing them as a viable option.
* Experts say the court is likely to rule in favor of Slack in some capacity.
The high court will hear arguments on Monday in Slack vs. Pirani, a complex securities law case that will decide how easy it will be for investors to sue companies over alleged misstatements or omissions in their registration statements during direct listings.
A [direct listing](https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/) is a way for companies to go public with less red tape than a traditional [initial public offering](https://www.investopedia.com/terms/i/ipo.asp). Instead of creating new shares and [having a bank underwrite them](https://www.investopedia.com/ask/answers/041415/what-does-underwriter-do-new-stock-offering.asp), as in a traditional IPO, a direct listing lets management, employees and private investors sell their existing shares on the public market.
Authorized by the Securities and Exchange Commission in 2018 to encourage more companies to go public and reverse a trend of businesses staying privately owned, direct listings haven't flourished. As of last December, there had only been 11 significant direct listing offerings, Bloomberg reported.
The case hinges on whether Fiyyaz Pirani, a California investor, has “standing,” or the right to sue Slack, the communications company that went public via direct listing in 2019.
## License and Registration, Please
The Supreme Court won’t decide whether Slack actually did anything wrong, just whether lead plaintiff Pirani, who bought shares in Slack’s direct listing, can have his day in court. The court will judge the merits of the case: Whether Slack misrepresented its service disruption policies and other details about its business in the [registration statement](https://www.investopedia.com/terms/s/sec-form-s-1.asp) it filed in connection with its direct listing.
The case hinges on whether that registration statement—a document of legally required disclosures that are supposed to inform potential investors about the risks involved in buying a stock—actually applies to the 250,000 Slack shares that Pirani bought on the day of the direct listing and the following months.
SEC rules require that certain shares must be sold accompanied by a registration statement, and others are exempt and can go “unregistered.” The trouble is that on the day of its direct listing, Slack shareholders sold a mix of both registered and unregistered securities into the market—118 million were registered and 165 million weren't.
Determining months later which shares are registered and which aren't is almost impossible because of advances in trading technology, said Anat Alon-Beck, a professor of corporate law, and John Livingstone, recently a research fellow, both at Case Western Reserve University.
Lower courts ruled that because the registered and unregistered shares are functionally identical and were offered at the same time, Pirani is allowed to sue over the registration statement.
The Supreme Court’s ruling is likely to have major implications for direct listings in the future, and is likely being closely watched by companies now considering whether to go public, Beck said. If it rules in favor of Slack, it could make it nearly impossible for investors to sue over misleading registration statements, making them an appealing option for companies, including those that might intentionally mislead investors.
“You're going to find that companies are flooding to direct listings for the wrong reasons,” Beck said.
If they rule completely in favor of Pirani, companies would find themselves exposed to more legal liability than they had bargained for from direct listings.
“It’s going to kill direct listings,” Beck said.
Beck and Livingstone said the conservative ideological makeup of the court gives Slack an advantage.
There are risks with either approach, Beck said. A ruling completely in favor of Slack could hurt financial markets by undermining the confidence that investors have in the U.S. legal system—that if they are defrauded in a transaction, they have the option of suing. On the other hand, ruling in favor of Pirani would discourage direct listings and lead more companies to stay private.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
A relatively uncommon type of public offering called a “direct listing” could become a popular way for companies to go public-or could go extinct, depending on the outcome of a Supreme Court case, securities law experts said.
Key Takeaways
Supreme Court is hearing arguments in the Slack vs. Pirani case Monday.Case potentially has major implications for direct listings—either making them a more attractive option or removing them as a viable option.Experts say the court is likely to rule in favor of Slack in some capacity.
The high court will hear arguments on Monday in Slack vs. Pirani, a complex securities law case that will decide how easy it will be for investors to sue companies over alleged misstatements or omissions in their registration statements during direct listings.
A direct listing is a way for companies to go public with less red tape than a traditional initial public offering. Instead of creating new shares and having a bank underwrite them, as in a traditional IPO, a direct listing lets management, employees and private investors sell their existing shares on the public market.
Authorized by the Securities and Exchange Commission in 2018 to encourage more companies to go public and reverse a trend of businesses staying privately owned, direct listings haven't flourished. As of last December, there had only been 11 significant direct listing offerings, Bloomberg reported.
The case hinges on whether Fiyyaz Pirani, a California investor, has “standing,” or the right to sue Slack, the communications company that went public via direct listing in 2019.
License and Registration, Please
The Supreme Court won’t decide whether Slack actually did anything wrong, just whether lead plaintiff Pirani, who bought shares in Slack’s direct listing, can have his day in court. The court will judge the merits of the case: Whether Slack misrepresented its service disruption policies and other details about its business in the registration statement it filed in connection with its direct listing.The case hinges on whether that registration statement—a document of legally required disclosures that are supposed to inform potential investors about the risks involved in buying a stock—actually applies to the 250,000 Slack shares that Pirani bought on the day of the direct listing and the following months.
SEC rules require that certain shares must be sold accompanied by a registration statement, and others are exempt and can go “unregistered.” The trouble is that on the day of its direct listing, Slack shareholders sold a mix of both registered and unregistered securities into the market—118 million were registered and 165 million weren't.Determining months later which shares are registered and which aren't is almost impossible because of advances in trading technology, said Anat Alon-Beck, a professor of corporate law, and John Livingstone, recently a research fellow, both at Case Western Reserve University.“You would think that the record-keeping would be better and you would be able to trace much more easily,” Livingstone said. “But the shares are changing hands so rapidly and going through so many shares and are on such a fractional basis, that it's nearly impossible to trace literally hundreds of millions of shares, down to fractional levels, dispersed over tens of thousands of clients.”
Lower courts ruled that because the registered and unregistered shares are functionally identical and were offered at the same time, Pirani is allowed to sue over the registration statement.
The Supreme Court’s ruling is likely to have major implications for direct listings in the future, and is likely being closely watched by companies now considering whether to go public, Beck said. If it rules in favor of Slack, it could make it nearly impossible for investors to sue over misleading registration statements, making them an appealing option for companies, including those that might intentionally mislead investors.“You're going to find that companies are flooding to direct listings for the wrong reasons,” Beck said.If they rule completely in favor of Pirani, companies would find themselves exposed to more legal liability than they had bargained for from direct listings.“It’s going to kill direct listings,” Beck said.Beck and Livingstone said the conservative ideological makeup of the court gives Slack an advantage.There are risks with either approach, Beck said. A ruling completely in favor of Slack could hurt financial markets by undermining the confidence that investors have in the U.S. legal system—that if they are defrauded in a transaction, they have the option of suing. On the other hand, ruling in favor of Pirani would discourage direct listings and lead more companies to stay private.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
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https://www.investopedia.com/articles/personal-finance/032515/masters-degrees-us-vs-uk.asp
|
Comparing Master's Degrees in the U.S. vs. the U.K.
|
<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"> For prospective graduate students, comparing master's degree programs in the United States versus the United Kingdom requires thoughtful consideration of factors such as time, cost, and effort.
</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"> Regardless of which side of the Atlantic you are on, whether you should <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/031915/should-i-go-grad-school-after-college.asp">go to grad school</a> after college depends on your goals. For many, an advanced degree leads to better career opportunities or a necessary step toward obtaining a Ph.D.
</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"> Here we compare master's degrees in the U.S. and the U.K., highlighting the key differences that could affect your decision.
</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>There are three types of master's degrees in the U.K.: taught master’s degrees, postgraduate diplomas, and research-based master’s degrees.</li><li>A British master's degree can take as little as nine to 12 months to finish, compared with two years in the U.S.</li><li>Universities in the U.S. and U.K. consistently rank among the top ten in the world.</li></ul></div></div></div>
<span class="heading-toc" id="toc-masters-degrees-in-the-uk"></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"> Master's Degrees in the U.K. </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Attending one of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/most-prestigious-universities-world/">most prestigious universities</a> is important to some people. The U.K. is home to renowned institutions such as the University of Oxford and the University of Cambridge.
</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"> Times Higher Education ranks these two schools, along with Imperial College London among the top ten out of nearly 1,400 universities across 92 countries it surveyed.<span class="ql-inline-citation" data-cite="2"></span> The rankings consider the school's teaching environment, resources devoted to research, and the international outlook of its staff and students.<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_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"> The 3 Types of UK Master's Degrees </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> One reason Americans choose to study in the U.K. is that the time to finish a degree is significantly shorter (and therefore less expensive) than at American universities.
</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 the U.K., there are three types of master’s degrees: taught master’s degrees (one year), postgraduate diplomas (two semesters, no thesis), and research-based master’s degrees (12-24 months).
</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"> Research-based master's degrees are the usual entry to Ph.D. programs.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Master's programs in the U.K. tend to require a great deal of independent study and research. They are not classroom-based and assignments and tests are rare. The student regularly meets with an academic advisor in order to discuss progress.<span class="ql-inline-citation" data-cite="15"></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-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>If your goal for obtaining a master’s degree is professional advancement, quicker might be better. In the UK, you can earn one in nine to 12 months. That two to three semesters. U.S. master's degrees are usually one-year or two-year programs.</p></div></div></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"> UK Master's Program Costs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Costs vary considerably based on program type. The average cost of tuition for a non-British or EU passport holder working toward a British master’s degree is about £15,000 per year, or $18,500 USD. A business degree is more than £20,000 per year, or $24,700 USD.<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_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> However, these amounts do not factor in living costs. Visa requirements mandate that students have access to £1,265 (about $1,555 USD) per month if they plan to study in London, or £11,385 (about $14,900 USD) over a period of nine months. If they will live outside of London, they must have at least £1,015 per month ($1,320 USD), or £9,135 over nine months ($12,000 USD).<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>
<span class="heading-toc" id="toc-masters-degrees-in-the-us"></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"> Master's Degrees in the U.S. </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> In that same Times Higher Education survey, the remaining seven universities in the top 10 were in the U.S. They were not just the East Coast <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112815/ivy-league-degree-worth-it.asp">Ivy League</a> schools you might expect. The California Institute of Technology and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stanford.asp">Stanford University</a> placed higher in the rankings than <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/harvard-business.asp">Harvard University</a>, the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/031915/what-does-mit-cost.asp">Massachusetts Institute of Technology</a>, and Princeton University.
</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"> In short, there are great schools on both sides of the Atlantic. Universities in the U.S. and U.K. account for 85 of the top 200 schools in the world.<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_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"> US Master's Program Costs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> For the 2021-2022 academic year, annual costs for undergraduate tuition, fees, room, and board at U.S. colleges and universities were estimated at $14,700 at public institutions, $28,400 at private nonprofit institutions, and $24,600 at private for-profit institutions.<br/>
</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 cost to attend Harvard Business School is significantly higher: expect to pay more than $115,000 per year for combined tuition and living expenses.<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_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Though tuition in the U.S. can be lower if attending a public school, and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cost-of-living.asp">cost of living</a> lower if living in a small town, the time to finish a graduate degree is potentially longer. This means the overall cost of an American master’s program is equal to or slightly more expensive than in the U.K.
</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"> Following a four-year degree, American master’s degree programs typically require two years of study and thesis work. Some degrees can be completed in one year, depending on the course load and the subject.
</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"> American master’s degrees can be professional or research-based. Research degrees are usually the starting point for those seeking Ph.D. degrees.
</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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> International attendance to graduate programs in both countries has been greatly reduced due to world events. In the United Kingdom, the residency barriers and increased tuition as a result of Brexit caused the number of students from the EU to drop by two-thirds.<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_48-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Universities in both the U.K. and the U.S. were also affected by the COVID-19 pandemic. In the United States, enrollment of new graduate students fell by 39% in the fall of 2020, according to surveys of higher education institutions.<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_50-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> They may never get back to their pre-pandemic enrollment numbers. Increasingly, young Americans are thinking hard about whether a college degree is worth the increasing cost, especially when it usually means long years ahead spent paying down their college loan debts.<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_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-are-masters-students-graded-in-the-uk-vs-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Are Master's Students Graded in the UK vs. the US?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In the U.S., most master's students are graded in the A through F system which is familiar to all from first grade on. As for undergraduates, the letters are translated into an overall grade point average of 4.0 to 0.</p><p>In the U.K., master's students are graded on a scale: distinction, merit, pass, or fail. Assignments are typically graded on a scale of 1 through 23.</p><p>In both countries, individual universities may have their own grading quirks.<span class="ql-inline-citation" data-cite="13"></span></p><p><br/></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-what-are-the-main-benefits-of-going-abroad-for-a-masters-degree-program"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Benefits of Going Abroad for a Master's Degree Program?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Would you like to "internationalize" your resume? One way to show potential employers that you're mobile and global is to have a master's degree from the U.S. (if you're British) or from the U.K. (if you're American).<span class="ql-inline-citation" data-cite="14"></span></p><p>Aside from the purely practical, studying abroad exposes you to a different culture and new horizons. Yes, we're cousins, but Americans and British people are not identical.</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-are-the-10-best-universities-in-the-world-as-of-2023"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the 10 Best Universities in the World as of 2023?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are a number of surveys out there with slightly different results, but one respected source is the Times Higher Education World University Rankings. For 2023, its top 10 are as follows: the University of Oxford, Harvard University, the University of Cambridge and Stanford University (in a tie for third place), Massachusetts Institute of Technology, California Institute of Technology, Princeton University, the University of California, Berkeley, and Yale University.</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"> A master's degree from a foreign university can interationalize your resume, and that's no small thing in these days of globalization.
</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"> Studying for a master's abroad may also add greatly to your enjoyment of the experience.
</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"> Depending on your area of academic interest, it could be worth comparing your options for master's programs in the U.K. and the U.S.
</p></div>
|
For prospective graduate students, comparing master's degree programs in the United States versus the United Kingdom requires thoughtful consideration of factors such as time, cost, and effort.
Regardless of which side of the Atlantic you are on, whether you should [go to grad school](https://www.investopedia.com/articles/personal-finance/031915/should-i-go-grad-school-after-college.asp) after college depends on your goals. For many, an advanced degree leads to better career opportunities or a necessary step toward obtaining a Ph.D.
Here we compare master's degrees in the U.S. and the U.K., highlighting the key differences that could affect your decision.
### Key Takeaways
* There are three types of master's degrees in the U.K.: taught master’s degrees, postgraduate diplomas, and research-based master’s degrees.
* A British master's degree can take as little as nine to 12 months to finish, compared with two years in the U.S.
* Universities in the U.S. and U.K. consistently rank among the top ten in the world.
## Master's Degrees in the U.K.
Attending one of the [most prestigious universities](https://www.investopedia.com/news/most-prestigious-universities-world/) is important to some people. The U.K. is home to renowned institutions such as the University of Oxford and the University of Cambridge.
Times Higher Education ranks these two schools, along with Imperial College London among the top ten out of nearly 1,400 universities across 92 countries it surveyed. The rankings consider the school's teaching environment, resources devoted to research, and the international outlook of its staff and students.
### The 3 Types of UK Master's Degrees
One reason Americans choose to study in the U.K. is that the time to finish a degree is significantly shorter (and therefore less expensive) than at American universities.
In the U.K., there are three types of master’s degrees: taught master’s degrees (one year), postgraduate diplomas (two semesters, no thesis), and research-based master’s degrees (12-24 months).
Research-based master's degrees are the usual entry to Ph.D. programs.
Master's programs in the U.K. tend to require a great deal of independent study and research. They are not classroom-based and assignments and tests are rare. The student regularly meets with an academic advisor in order to discuss progress.
###
If your goal for obtaining a master’s degree is professional advancement, quicker might be better. In the UK, you can earn one in nine to 12 months. That two to three semesters. U.S. master's degrees are usually one-year or two-year programs.
### UK Master's Program Costs
Costs vary considerably based on program type. The average cost of tuition for a non-British or EU passport holder working toward a British master’s degree is about £15,000 per year, or $18,500 USD. A business degree is more than £20,000 per year, or $24,700 USD.
However, these amounts do not factor in living costs. Visa requirements mandate that students have access to £1,265 (about $1,555 USD) per month if they plan to study in London, or £11,385 (about $14,900 USD) over a period of nine months. If they will live outside of London, they must have at least £1,015 per month ($1,320 USD), or £9,135 over nine months ($12,000 USD).
## Master's Degrees in the U.S.
In that same Times Higher Education survey, the remaining seven universities in the top 10 were in the U.S. They were not just the East Coast [Ivy League](https://www.investopedia.com/articles/personal-finance/112815/ivy-league-degree-worth-it.asp) schools you might expect. The California Institute of Technology and [Stanford University](https://www.investopedia.com/terms/s/stanford.asp) placed higher in the rankings than [Harvard University](https://www.investopedia.com/terms/h/harvard-business.asp), the [Massachusetts Institute of Technology](https://www.investopedia.com/articles/personal-finance/031915/what-does-mit-cost.asp), and Princeton University.
In short, there are great schools on both sides of the Atlantic. Universities in the U.S. and U.K. account for 85 of the top 200 schools in the world.
### US Master's Program Costs
For the 2021-2022 academic year, annual costs for undergraduate tuition, fees, room, and board at U.S. colleges and universities were estimated at $14,700 at public institutions, $28,400 at private nonprofit institutions, and $24,600 at private for-profit institutions.
The cost to attend Harvard Business School is significantly higher: expect to pay more than $115,000 per year for combined tuition and living expenses.
Though tuition in the U.S. can be lower if attending a public school, and the [cost of living](https://www.investopedia.com/terms/c/cost-of-living.asp) lower if living in a small town, the time to finish a graduate degree is potentially longer. This means the overall cost of an American master’s program is equal to or slightly more expensive than in the U.K.
Following a four-year degree, American master’s degree programs typically require two years of study and thesis work. Some degrees can be completed in one year, depending on the course load and the subject.
American master’s degrees can be professional or research-based. Research degrees are usually the starting point for those seeking Ph.D. degrees.
## Special Considerations
International attendance to graduate programs in both countries has been greatly reduced due to world events. In the United Kingdom, the residency barriers and increased tuition as a result of Brexit caused the number of students from the EU to drop by two-thirds.
Universities in both the U.K. and the U.S. were also affected by the COVID-19 pandemic. In the United States, enrollment of new graduate students fell by 39% in the fall of 2020, according to surveys of higher education institutions.
They may never get back to their pre-pandemic enrollment numbers. Increasingly, young Americans are thinking hard about whether a college degree is worth the increasing cost, especially when it usually means long years ahead spent paying down their college loan debts.
## How Are Master's Students Graded in the UK vs. the US?
In the U.S., most master's students are graded in the A through F system which is familiar to all from first grade on. As for undergraduates, the letters are translated into an overall grade point average of 4.0 to 0.
In the U.K., master's students are graded on a scale: distinction, merit, pass, or fail. Assignments are typically graded on a scale of 1 through 23.
In both countries, individual universities may have their own grading quirks.
## What Are the Main Benefits of Going Abroad for a Master's Degree Program?
Would you like to "internationalize" your resume? One way to show potential employers that you're mobile and global is to have a master's degree from the U.S. (if you're British) or from the U.K. (if you're American).
Aside from the purely practical, studying abroad exposes you to a different culture and new horizons. Yes, we're cousins, but Americans and British people are not identical.
## What Are the 10 Best Universities in the World as of 2023?
There are a number of surveys out there with slightly different results, but one respected source is the Times Higher Education World University Rankings. For 2023, its top 10 are as follows: the University of Oxford, Harvard University, the University of Cambridge and Stanford University (in a tie for third place), Massachusetts Institute of Technology, California Institute of Technology, Princeton University, the University of California, Berkeley, and Yale University.
## The Bottom Line
A master's degree from a foreign university can interationalize your resume, and that's no small thing in these days of globalization.
Studying for a master's abroad may also add greatly to your enjoyment of the experience.
Depending on your area of academic interest, it could be worth comparing your options for master's programs in the U.K. and the U.S.
|
For prospective graduate students, comparing master's degree programs in the United States versus the United Kingdom requires thoughtful consideration of factors such as time, cost, and effort.
Regardless of which side of the Atlantic you are on, whether you should go to grad school after college depends on your goals. For many, an advanced degree leads to better career opportunities or a necessary step toward obtaining a Ph.D.
Here we compare master's degrees in the U.S. and the U.K., highlighting the key differences that could affect your decision.
Key Takeaways
There are three types of master's degrees in the U.K.: taught master’s degrees, postgraduate diplomas, and research-based master’s degrees.A British master's degree can take as little as nine to 12 months to finish, compared with two years in the U.S.Universities in the U.S. and U.K. consistently rank among the top ten in the world.
Master's Degrees in the U.K.
Attending one of the most prestigious universities is important to some people. The U.K. is home to renowned institutions such as the University of Oxford and the University of Cambridge.
Times Higher Education ranks these two schools, along with Imperial College London among the top ten out of nearly 1,400 universities across 92 countries it surveyed. The rankings consider the school's teaching environment, resources devoted to research, and the international outlook of its staff and students.
The 3 Types of UK Master's Degrees
One reason Americans choose to study in the U.K. is that the time to finish a degree is significantly shorter (and therefore less expensive) than at American universities.
In the U.K., there are three types of master’s degrees: taught master’s degrees (one year), postgraduate diplomas (two semesters, no thesis), and research-based master’s degrees (12-24 months).
Research-based master's degrees are the usual entry to Ph.D. programs.
Master's programs in the U.K. tend to require a great deal of independent study and research. They are not classroom-based and assignments and tests are rare. The student regularly meets with an academic advisor in order to discuss progress.
If your goal for obtaining a master’s degree is professional advancement, quicker might be better. In the UK, you can earn one in nine to 12 months. That two to three semesters. U.S. master's degrees are usually one-year or two-year programs.
UK Master's Program Costs
Costs vary considerably based on program type. The average cost of tuition for a non-British or EU passport holder working toward a British master’s degree is about £15,000 per year, or $18,500 USD. A business degree is more than £20,000 per year, or $24,700 USD.
However, these amounts do not factor in living costs. Visa requirements mandate that students have access to £1,265 (about $1,555 USD) per month if they plan to study in London, or £11,385 (about $14,900 USD) over a period of nine months. If they will live outside of London, they must have at least £1,015 per month ($1,320 USD), or £9,135 over nine months ($12,000 USD).
Master's Degrees in the U.S.
In that same Times Higher Education survey, the remaining seven universities in the top 10 were in the U.S. They were not just the East Coast Ivy League schools you might expect. The California Institute of Technology and Stanford University placed higher in the rankings than Harvard University, the Massachusetts Institute of Technology, and Princeton University.
In short, there are great schools on both sides of the Atlantic. Universities in the U.S. and U.K. account for 85 of the top 200 schools in the world.
US Master's Program Costs
For the 2021-2022 academic year, annual costs for undergraduate tuition, fees, room, and board at U.S. colleges and universities were estimated at $14,700 at public institutions, $28,400 at private nonprofit institutions, and $24,600 at private for-profit institutions.
The cost to attend Harvard Business School is significantly higher: expect to pay more than $115,000 per year for combined tuition and living expenses.
Though tuition in the U.S. can be lower if attending a public school, and the cost of living lower if living in a small town, the time to finish a graduate degree is potentially longer. This means the overall cost of an American master’s program is equal to or slightly more expensive than in the U.K.
Following a four-year degree, American master’s degree programs typically require two years of study and thesis work. Some degrees can be completed in one year, depending on the course load and the subject.
American master’s degrees can be professional or research-based. Research degrees are usually the starting point for those seeking Ph.D. degrees.
Special Considerations
International attendance to graduate programs in both countries has been greatly reduced due to world events. In the United Kingdom, the residency barriers and increased tuition as a result of Brexit caused the number of students from the EU to drop by two-thirds.
Universities in both the U.K. and the U.S. were also affected by the COVID-19 pandemic. In the United States, enrollment of new graduate students fell by 39% in the fall of 2020, according to surveys of higher education institutions.
They may never get back to their pre-pandemic enrollment numbers. Increasingly, young Americans are thinking hard about whether a college degree is worth the increasing cost, especially when it usually means long years ahead spent paying down their college loan debts.
How Are Master's Students Graded in the UK vs. the US?
In the U.S., most master's students are graded in the A through F system which is familiar to all from first grade on. As for undergraduates, the letters are translated into an overall grade point average of 4.0 to 0.In the U.K., master's students are graded on a scale: distinction, merit, pass, or fail. Assignments are typically graded on a scale of 1 through 23.In both countries, individual universities may have their own grading quirks.
What Are the Main Benefits of Going Abroad for a Master's Degree Program?
Would you like to "internationalize" your resume? One way to show potential employers that you're mobile and global is to have a master's degree from the U.S. (if you're British) or from the U.K. (if you're American).Aside from the purely practical, studying abroad exposes you to a different culture and new horizons. Yes, we're cousins, but Americans and British people are not identical.
What Are the 10 Best Universities in the World as of 2023?
There are a number of surveys out there with slightly different results, but one respected source is the Times Higher Education World University Rankings. For 2023, its top 10 are as follows: the University of Oxford, Harvard University, the University of Cambridge and Stanford University (in a tie for third place), Massachusetts Institute of Technology, California Institute of Technology, Princeton University, the University of California, Berkeley, and Yale University.
The Bottom Line
A master's degree from a foreign university can interationalize your resume, and that's no small thing in these days of globalization.
Studying for a master's abroad may also add greatly to your enjoyment of the experience.
Depending on your area of academic interest, it could be worth comparing your options for master's programs in the U.K. and the U.S.
|
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https://www.investopedia.com/ask/answers/06/rejecttenderofferpublictoprivate.asp
|
Rejecting the Tender Offer of a Newly Private Company
|
<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"> Going public can offer companies many advantages. It gives them access to money to fund research and investments and gives them the ability to market their products and services. But what happens in the reverse situation and a company chooses to become private after being publicly 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"> If you're a shareholder in a company that is going private, there are a few things you should know. Below, we describe how public companies become private and what happens if you reject the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenderoffer.asp">tender offer</a> for acquisition of your stock.
</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>Sometimes a public company wishes to go private. This can occur for several reasons including increasing profitability or regaining corporate control.</li><li>In order to go private, a public company must buy back its outstanding shares from shareholders in what is known as a tender offer.</li><li>As a small shareholder, rejecting a tender will often be in vain since it takes a majority of votes to effect a corporate action such as that.</li><li>Large shareholders who reject a tender may prevent the company from going private, but may also trigger legal action by the issuer.</li></ul></div></div></div>
<span class="heading-toc" id="toc-when-public-companies-go-private"></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"> When Public Companies Go Private </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Since the passing of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sarbanesoxleyact.asp">Sarbanes-Oxley Act</a>, a significant number of public companies have chosen to go private.<span class="ql-inline-citation" data-cite="3"></span> The reasons why companies make this choice are as varied as the companies themselves.
</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 company's management or a private equity firm may decide to buy the company. During the plans, the new heads of the company may decide to delist it and make it private. Others may feel going private is the best way to pursue growth and larger profits. In other cases, it may be a way to get away from certain shareholders, including those who are activists.
</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 most cases, going private means saving money. The cost of being <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/publiccompany.asp">publicly traded</a> and having to comply with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">SEC</a> regulations is often cited as a reason for privatization. Private companies don't have to pay for accountants who are required to file regular paperwork with the SEC.<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_13-0"></div>
<span class="heading-toc" id="toc-what-is-a-tender-offer"></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 Is a Tender Offer? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Tender offers are usually made to buy some or all of a company's shareholders' shares. These offers usually come <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/at-a-premium.asp">at a premium</a> from current share prices.<span class="ql-inline-citation" data-cite="2"></span> If you're a shareholder in a company that is going private and there's a tender offer out on your stock, you may stand to gain substantially by selling the stock.
</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"> Although there isn't a set premium acquirers hoping to take a company private are required to pay, shareholders can reasonably expect to get a 10% premium over the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market-price.asp">market price</a> by selling their stock to offerers. Sometimes it can be much more.
</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-rejecting-the-offer"></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"> Rejecting the Offer </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Unless you hold a substantial block of shares of a prospective <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privatecompany.asp">private company</a>'s stock, rejecting a tender offer is probably not a smart move. Without a substantial block of shares, your influence on management is insignificant, to say the least.
</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"> Furthermore, your shares will become less liquid as the market for trading the company's stock becomes thinner. The effect on you, as a single shareholder with a relatively small position, will almost certainly be difficulty in selling the stock.
</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"> Eventually, the stock may become so <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">illiquid</a> that you could end up taking any offer at all to sell your stock after fighting to receive a higher price when the tender offer was made.
</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 you're really upset that the company in which you've invested is going private, you may elect to challenge the proposed transaction in court. But you must have reasonable grounds for the challenge. Of course, the financial burden of bringing a challenge to court rests on the dissenting shareholder. If the company's lawyers see they can make the challenge economically difficult for a dissenter, they may choose to drag the challenge out in court. Remember, corporate lawyers and corporate accountants, command very high fees for their time.
</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"> There's also this scenario. Even if you reject the offer, the acquirer may still have some leverage. If the acquirer also manages to buy a larger portion of the outstanding stock, it can force the rest of the shareholders to sell whatever they own and take the company private. So the fruits of your labor may not be so grand.
</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-the-bottom-line"></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 Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> It isn't uncommon for publicly traded companies to go private. But you should know what your rights are as a shareholder. You have the right to accept or reject the offer—as long as you know what the consequences are. Most people don't own enough shares to viably reject an offer, and therefore, won't have a big effect on how the company's management will react. In the end, you may even be forced to sell your shares. But remember, check with your financial advisor or broker to see how your specific situation applies in a case like this, and what your best options are.
</p></div>
|
Going public can offer companies many advantages. It gives them access to money to fund research and investments and gives them the ability to market their products and services. But what happens in the reverse situation and a company chooses to become private after being publicly traded?
If you're a shareholder in a company that is going private, there are a few things you should know. Below, we describe how public companies become private and what happens if you reject the [tender offer](https://www.investopedia.com/terms/t/tenderoffer.asp) for acquisition of your stock.
### Key Takeaways
* Sometimes a public company wishes to go private. This can occur for several reasons including increasing profitability or regaining corporate control.
* In order to go private, a public company must buy back its outstanding shares from shareholders in what is known as a tender offer.
* As a small shareholder, rejecting a tender will often be in vain since it takes a majority of votes to effect a corporate action such as that.
* Large shareholders who reject a tender may prevent the company from going private, but may also trigger legal action by the issuer.
## When Public Companies Go Private
Since the passing of the [Sarbanes-Oxley Act](https://www.investopedia.com/terms/s/sarbanesoxleyact.asp), a significant number of public companies have chosen to go private. The reasons why companies make this choice are as varied as the companies themselves.
A company's management or a private equity firm may decide to buy the company. During the plans, the new heads of the company may decide to delist it and make it private. Others may feel going private is the best way to pursue growth and larger profits. In other cases, it may be a way to get away from certain shareholders, including those who are activists.
In most cases, going private means saving money. The cost of being [publicly traded](https://www.investopedia.com/terms/p/publiccompany.asp) and having to comply with [SEC](https://www.investopedia.com/terms/s/sec.asp) regulations is often cited as a reason for privatization. Private companies don't have to pay for accountants who are required to file regular paperwork with the SEC.
## What Is a Tender Offer?
Tender offers are usually made to buy some or all of a company's shareholders' shares. These offers usually come [at a premium](https://www.investopedia.com/terms/a/at-a-premium.asp) from current share prices. If you're a shareholder in a company that is going private and there's a tender offer out on your stock, you may stand to gain substantially by selling the stock.
Although there isn't a set premium acquirers hoping to take a company private are required to pay, shareholders can reasonably expect to get a 10% premium over the [market price](https://www.investopedia.com/terms/m/market-price.asp) by selling their stock to offerers. Sometimes it can be much more.
## Rejecting the Offer
Unless you hold a substantial block of shares of a prospective [private company](https://www.investopedia.com/terms/p/privatecompany.asp)'s stock, rejecting a tender offer is probably not a smart move. Without a substantial block of shares, your influence on management is insignificant, to say the least.
Furthermore, your shares will become less liquid as the market for trading the company's stock becomes thinner. The effect on you, as a single shareholder with a relatively small position, will almost certainly be difficulty in selling the stock.
Eventually, the stock may become so [illiquid](https://www.investopedia.com/terms/i/illiquid.asp) that you could end up taking any offer at all to sell your stock after fighting to receive a higher price when the tender offer was made.
If you're really upset that the company in which you've invested is going private, you may elect to challenge the proposed transaction in court. But you must have reasonable grounds for the challenge. Of course, the financial burden of bringing a challenge to court rests on the dissenting shareholder. If the company's lawyers see they can make the challenge economically difficult for a dissenter, they may choose to drag the challenge out in court. Remember, corporate lawyers and corporate accountants, command very high fees for their time.
There's also this scenario. Even if you reject the offer, the acquirer may still have some leverage. If the acquirer also manages to buy a larger portion of the outstanding stock, it can force the rest of the shareholders to sell whatever they own and take the company private. So the fruits of your labor may not be so grand.
## The Bottom Line
It isn't uncommon for publicly traded companies to go private. But you should know what your rights are as a shareholder. You have the right to accept or reject the offer—as long as you know what the consequences are. Most people don't own enough shares to viably reject an offer, and therefore, won't have a big effect on how the company's management will react. In the end, you may even be forced to sell your shares. But remember, check with your financial advisor or broker to see how your specific situation applies in a case like this, and what your best options are.
|
Going public can offer companies many advantages. It gives them access to money to fund research and investments and gives them the ability to market their products and services. But what happens in the reverse situation and a company chooses to become private after being publicly traded?
If you're a shareholder in a company that is going private, there are a few things you should know. Below, we describe how public companies become private and what happens if you reject the tender offer for acquisition of your stock.
Key Takeaways
Sometimes a public company wishes to go private. This can occur for several reasons including increasing profitability or regaining corporate control.In order to go private, a public company must buy back its outstanding shares from shareholders in what is known as a tender offer.As a small shareholder, rejecting a tender will often be in vain since it takes a majority of votes to effect a corporate action such as that.Large shareholders who reject a tender may prevent the company from going private, but may also trigger legal action by the issuer.
When Public Companies Go Private
Since the passing of the Sarbanes-Oxley Act, a significant number of public companies have chosen to go private. The reasons why companies make this choice are as varied as the companies themselves.
A company's management or a private equity firm may decide to buy the company. During the plans, the new heads of the company may decide to delist it and make it private. Others may feel going private is the best way to pursue growth and larger profits. In other cases, it may be a way to get away from certain shareholders, including those who are activists.
In most cases, going private means saving money. The cost of being publicly traded and having to comply with SEC regulations is often cited as a reason for privatization. Private companies don't have to pay for accountants who are required to file regular paperwork with the SEC.
What Is a Tender Offer?
Tender offers are usually made to buy some or all of a company's shareholders' shares. These offers usually come at a premium from current share prices. If you're a shareholder in a company that is going private and there's a tender offer out on your stock, you may stand to gain substantially by selling the stock.
Although there isn't a set premium acquirers hoping to take a company private are required to pay, shareholders can reasonably expect to get a 10% premium over the market price by selling their stock to offerers. Sometimes it can be much more.
Rejecting the Offer
Unless you hold a substantial block of shares of a prospective private company's stock, rejecting a tender offer is probably not a smart move. Without a substantial block of shares, your influence on management is insignificant, to say the least.
Furthermore, your shares will become less liquid as the market for trading the company's stock becomes thinner. The effect on you, as a single shareholder with a relatively small position, will almost certainly be difficulty in selling the stock.
Eventually, the stock may become so illiquid that you could end up taking any offer at all to sell your stock after fighting to receive a higher price when the tender offer was made.
If you're really upset that the company in which you've invested is going private, you may elect to challenge the proposed transaction in court. But you must have reasonable grounds for the challenge. Of course, the financial burden of bringing a challenge to court rests on the dissenting shareholder. If the company's lawyers see they can make the challenge economically difficult for a dissenter, they may choose to drag the challenge out in court. Remember, corporate lawyers and corporate accountants, command very high fees for their time.
There's also this scenario. Even if you reject the offer, the acquirer may still have some leverage. If the acquirer also manages to buy a larger portion of the outstanding stock, it can force the rest of the shareholders to sell whatever they own and take the company private. So the fruits of your labor may not be so grand.
The Bottom Line
It isn't uncommon for publicly traded companies to go private. But you should know what your rights are as a shareholder. You have the right to accept or reject the offer—as long as you know what the consequences are. Most people don't own enough shares to viably reject an offer, and therefore, won't have a big effect on how the company's management will react. In the end, you may even be forced to sell your shares. But remember, check with your financial advisor or broker to see how your specific situation applies in a case like this, and what your best options are.
|
[
[
"tender offer",
"https://www.investopedia.com/terms/t/tenderoffer.asp"
],
[
"Sarbanes-Oxley Act",
"https://www.investopedia.com/terms/s/sarbanesoxleyact.asp"
],
[
"publicly traded",
"https://www.investopedia.com/terms/p/publiccompany.asp"
],
[
"SEC",
"https://www.investopedia.com/terms/s/sec.asp"
],
[
"at a premium",
"https://www.investopedia.com/terms/a/at-a-premium.asp"
],
[
"market price",
"https://www.investopedia.com/terms/m/market-price.asp"
],
[
"private company",
"https://www.investopedia.com/terms/p/privatecompany.asp"
],
[
"illiquid",
"https://www.investopedia.com/terms/i/illiquid.asp"
]
] |
https://www.investopedia.com/jpm-closes-frank-7094562
|
Citing Fraud, JPMorgan Shutters Site It Bought in 2021
|
<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>Firm had hoped acquisition would help it build relationships with Generation Z and other college students.</li><li>Website owner allegedly created 4 million fake accounts to boost chances of deal.</li><li>JPMorgan says it uncovered fraud in marketing email blast.</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"> JPMorgan Chase closed a student financial aid website it purchased for $175 million in September 2021, alleging the website's founder created 4 million fake customer accounts.<span class="ql-inline-citation" data-cite="3"></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_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The banking giant made the decision Thursday to shut down the website, Frank, a month after filing a lawsuit again Charlie Javice, the site's founder. That suit claims Javice created fake customer accounts to satisfy JPMorgan's questions about its customer base in due diligence discussions preceding the acquisition.
</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"> Purchasing the website exemplified JPMorgan's focus on boosting its financial technology capabilities to maintain its market-share expansion. Thursday's decision, for now, ends JPMorgan's brief foray into student financial aid planning, one it hoped would expand relationships with Generation Z and other college students.
</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 it purchased Frank, the bank claimed it was the "fastest-growing college financial aid planning platform," comprising 5 million students at 6,000 higher-education institutions. Javice joined JPMorgan as part of the acquisition.<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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Months after the deal, JPMorgan says it sent marketing emails to 400,000 supposed Frank customers. In its suit against Javice, the company said about 70% of those emails bounced back to the firm as non-deliverable.
</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"> JPMorgan alleges Javice used data scientists to help create fake Frank accounts. The bank said at the time of the acquisition, it was led to believe Frank had 4.25 million customers, when the site actually had fewer than 300,000.
</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"> Javice claims JPMorgan sought reasons to fire her late last year to avoid paying millions of dollars it owed her, according to <em>The Wall Street Journal</em>.<span class="ql-inline-citation" data-cite="4"></span> She sued the bank for misconduct to cover legal bills she incurred during the bank's internal investigation.
</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"> JPMorgan disputes Javice's claims, with spokesman Pablo Rodriguez telling CNBC "Ms. Javice was not and is not a whistleblower."
</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"> Shares of JPMorgan, scheduled to report its fourth-quarter earnings Friday morning, closed little changed at $139.50.
</p></div>
|
### KEY TAKEAWAYS
* Firm had hoped acquisition would help it build relationships with Generation Z and other college students.
* Website owner allegedly created 4 million fake accounts to boost chances of deal.
* JPMorgan says it uncovered fraud in marketing email blast.
JPMorgan Chase closed a student financial aid website it purchased for $175 million in September 2021, alleging the website's founder created 4 million fake customer accounts.
The banking giant made the decision Thursday to shut down the website, Frank, a month after filing a lawsuit again Charlie Javice, the site's founder. That suit claims Javice created fake customer accounts to satisfy JPMorgan's questions about its customer base in due diligence discussions preceding the acquisition.
Purchasing the website exemplified JPMorgan's focus on boosting its financial technology capabilities to maintain its market-share expansion. Thursday's decision, for now, ends JPMorgan's brief foray into student financial aid planning, one it hoped would expand relationships with Generation Z and other college students.
When it purchased Frank, the bank claimed it was the "fastest-growing college financial aid planning platform," comprising 5 million students at 6,000 higher-education institutions. Javice joined JPMorgan as part of the acquisition.
Months after the deal, JPMorgan says it sent marketing emails to 400,000 supposed Frank customers. In its suit against Javice, the company said about 70% of those emails bounced back to the firm as non-deliverable.
JPMorgan alleges Javice used data scientists to help create fake Frank accounts. The bank said at the time of the acquisition, it was led to believe Frank had 4.25 million customers, when the site actually had fewer than 300,000.
Javice claims JPMorgan sought reasons to fire her late last year to avoid paying millions of dollars it owed her, according to *The Wall Street Journal*. She sued the bank for misconduct to cover legal bills she incurred during the bank's internal investigation.
JPMorgan disputes Javice's claims, with spokesman Pablo Rodriguez telling CNBC "Ms. Javice was not and is not a whistleblower."
Shares of JPMorgan, scheduled to report its fourth-quarter earnings Friday morning, closed little changed at $139.50.
|
KEY TAKEAWAYS
Firm had hoped acquisition would help it build relationships with Generation Z and other college students.Website owner allegedly created 4 million fake accounts to boost chances of deal.JPMorgan says it uncovered fraud in marketing email blast.
JPMorgan Chase closed a student financial aid website it purchased for $175 million in September 2021, alleging the website's founder created 4 million fake customer accounts.
The banking giant made the decision Thursday to shut down the website, Frank, a month after filing a lawsuit again Charlie Javice, the site's founder. That suit claims Javice created fake customer accounts to satisfy JPMorgan's questions about its customer base in due diligence discussions preceding the acquisition.
Purchasing the website exemplified JPMorgan's focus on boosting its financial technology capabilities to maintain its market-share expansion. Thursday's decision, for now, ends JPMorgan's brief foray into student financial aid planning, one it hoped would expand relationships with Generation Z and other college students.
When it purchased Frank, the bank claimed it was the "fastest-growing college financial aid planning platform," comprising 5 million students at 6,000 higher-education institutions. Javice joined JPMorgan as part of the acquisition.
Months after the deal, JPMorgan says it sent marketing emails to 400,000 supposed Frank customers. In its suit against Javice, the company said about 70% of those emails bounced back to the firm as non-deliverable.
JPMorgan alleges Javice used data scientists to help create fake Frank accounts. The bank said at the time of the acquisition, it was led to believe Frank had 4.25 million customers, when the site actually had fewer than 300,000.
Javice claims JPMorgan sought reasons to fire her late last year to avoid paying millions of dollars it owed her, according to The Wall Street Journal. She sued the bank for misconduct to cover legal bills she incurred during the bank's internal investigation.
JPMorgan disputes Javice's claims, with spokesman Pablo Rodriguez telling CNBC "Ms. Javice was not and is not a whistleblower."
Shares of JPMorgan, scheduled to report its fourth-quarter earnings Friday morning, closed little changed at $139.50.
|
[] |
https://www.investopedia.com/30-year-mortgage-rates-continue-upward-movement-8620923
|
30-Year Mortgage Rates Continue Upward Movement
|
<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 purchase mortgages climbed again on Tuesday to 7.19%, 6 basis points higher than Monday's average. The flagship rate is still more than a quarter of a percent below its recent peak of 7.45% on March 15. Rates movements were varied across all other purchase and refinance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage rates</a>.<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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_3-0"> <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>7.19%</td>
<td>7.46%</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>7.13%</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>6.52%</td>
<td>6.76%</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>7.75%</td>
<td>7.84%</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_4-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> 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_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>
<div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_10-0"><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 - March 27, 2024</span></a></div>
<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-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_12-0"> <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_13-0"> Rates on 30-year new purchase mortgages rose by 6 basis points on Tuesday. Despite this week's increases, the flagship rate is still down 26 basis points since Friday, March 15, when it hit a recent high of 7.45%.
</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 30-year rate average is still far from its recent drop into 6.00% territory, which we saw at the start of February. Nevertheless, mortgage rates are still well off the records seen in 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_16-0"></div>
<div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_17-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/2R6Mc/2/" 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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The average rates for 10- and 15-year mortgages moderated by single-digit basis point drops on Tuesday after rising on Monday.
</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"> Jumbo rates for 30-year fixed and 7/6 ARMs moved up by an eighth of a point, while the jumbo 15-year fixed and jumbo 5/6 ARM remained flat. Although daily historical jumbo rates were 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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The biggest rate increase for new purchase, non-jumbo mortgages was on the 7/6 ARM, which rose 11 basis points yesterday, reversing a similar drop the day before, to land at 7.62%.
</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>7.19%</td>
<td>+0.06</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>7.13%</td>
<td>-0.02</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>6.82%</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>6.97%</td>
<td>+0.01</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.52%</td>
<td>-0.03</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>6.79%</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>6.42%</td>
<td>-0.02</td>
</tr>
<tr>
<td>10/6 ARM</td>
<td>7.50%</td>
<td>+0.04</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>7.62%</td>
<td>+0.11</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>6.58%</td>
<td>+0.13</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>7.75%</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/WC677/1/" 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 last week's reading added 13 basis points to the previous average to rise to 6.87%. 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_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"> Tuesday's refinancing rates were relatively stable, with the 30-year rate ticking up by a single basis point to 7.46%. The spread between 30-year new purchase and refi rates narrowed to 27 basis points. The biggest movers were the jumbo 30-year and jumbo 7/6 ARM rates, which saw jumps of 12 and 13 basis points, respectively. Other loan types saw slight increases or decreases or remained unchanged.
</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=""></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 - 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>7.46%</td>
<td>+0.01</td>
</tr>
<tr>
<td>FHA 30-Year Fixed</td>
<td>7.50%</td>
<td>+0.07</td>
</tr>
<tr>
<td>VA 30-Year Fixed</td>
<td>7.30%</td>
<td>-0.05</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>7.32%</td>
<td>+0.02</td>
</tr>
<tr>
<td>15-Year Fixed</td>
<td>6.76%</td>
<td>-0.02</td>
</tr>
<tr>
<td>FHA 15-Year Fixed</td>
<td>6.91%</td>
<td>-0.05</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>7.75%</td>
<td>+0.02</td>
</tr>
<tr>
<td>7/6 ARM</td>
<td>7.81%</td>
<td>+0.03</td>
</tr>
<tr>
<td>Jumbo 7/6 ARM</td>
<td>6.68%</td>
<td>+0.13</td>
</tr>
<tr>
<td>5/6 ARM</td>
<td>7.84%</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_38-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> 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_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_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_43-0"><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_44-0"></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_45-0"> <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_46-0"> 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_47-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> The states with the cheapest 30-year new purchase rates on Tuesday were Mississippi, Rhode Island, Louisiana, and Vermont. The states with the highest average mortgage rates were Minnesota, Arizona, and Nevada.
</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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_50-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/h9Y4h/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_51-0"></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_52-0"> <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_53-0"> 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_54-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0">
<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_56-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> 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_58-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> 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_60-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> 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_62-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> 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_64-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> 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_66-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> 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_68-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> 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_70-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> 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_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 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"> <em><strong>Correction - March 28, 2024:</strong> This article has been updated to state that the next Federal Open Market Committee is scheduled for April 30 to May 1, 2024.</em>
</p></div>
|
Rates on 30-year purchase mortgages climbed again on Tuesday to 7.19%, 6 basis points higher than Monday's average. The flagship rate is still more than a quarter of a percent below its recent peak of 7.45% on March 15. Rates movements were varied across all other purchase and refinance [mortgage rates](https://www.investopedia.com/mortgage-rates-5094943).
| National Averages of Lenders' Best Mortgage Rates | | |
| --- | --- | --- |
| **Loan Type** | **New Purchase** | **Refinance** |
| 30-Year Fixed | 7.19% | 7.46% |
| FHA 30-Year Fixed | 7.13% | 7.50% |
| Jumbo 30-Year Fixed | 6.95% | 6.95% |
| 15-Year Fixed | 6.52% | 6.76% |
| 5/6 ARM | 7.75% | 7.84% |
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 - March 27, 2024](https://www.investopedia.com/mortgage-rates-5094943)
## Today's Mortgage Rate Averages: New Purchase
Rates on 30-year new purchase mortgages rose by 6 basis points on Tuesday. Despite this week's increases, the flagship rate is still down 26 basis points since Friday, March 15, when it hit a recent high of 7.45%.
The 30-year rate average is still far from its recent drop into 6.00% territory, which we saw at the start of February. Nevertheless, mortgage rates are still well off the records seen in October, when the 30-year average notched a historic 23-year peak of 8.45%.
The average rates for 10- and 15-year mortgages moderated by single-digit basis point drops on Tuesday after rising on Monday.
Jumbo rates for 30-year fixed and 7/6 ARMs moved up by an eighth of a point, while the jumbo 15-year fixed and jumbo 5/6 ARM remained flat. Although daily historical jumbo rates were 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.
The biggest rate increase for new purchase, non-jumbo mortgages was on the 7/6 ARM, which rose 11 basis points yesterday, reversing a similar drop the day before, to land at 7.62%.
| National Averages of Lenders' Best Rates - New Purchase | | |
| --- | --- | --- |
| Loan Type | **New Purchase Rates** | **Daily Change** |
| 30-Year Fixed | 7.19% | +0.06 |
| FHA 30-Year Fixed | 7.13% | -0.02 |
| VA 30-Year Fixed | 6.82% | +0.01 |
| Jumbo 30-Year Fixed | 6.95% | +0.13 |
| 20-Year Fixed | 6.97% | +0.01 |
| 15-Year Fixed | 6.52% | -0.03 |
| FHA 15-Year Fixed | 6.79% | -0.01 |
| Jumbo 15-Year Fixed | 6.78% | No Change |
| 10-Year Fixed | 6.42% | -0.02 |
| 10/6 ARM | 7.50% | +0.04 |
| 7/6 ARM | 7.62% | +0.11 |
| Jumbo 7/6 ARM | 6.58% | +0.13 |
| 5/6 ARM | 7.75% | -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 last week's reading added 13 basis points to the previous average to rise to 6.87%. 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
Tuesday's refinancing rates were relatively stable, with the 30-year rate ticking up by a single basis point to 7.46%. The spread between 30-year new purchase and refi rates narrowed to 27 basis points. The biggest movers were the jumbo 30-year and jumbo 7/6 ARM rates, which saw jumps of 12 and 13 basis points, respectively. Other loan types saw slight increases or decreases or remained unchanged.
| National Averages of Lenders' Best Rates - Refinance | | |
| --- | --- | --- |
| Loan Type | **Refinance Rates** | Daily Change |
| 30-Year Fixed | 7.46% | +0.01 |
| FHA 30-Year Fixed | 7.50% | +0.07 |
| VA 30-Year Fixed | 7.30% | -0.05 |
| Jumbo 30-Year Fixed | 6.95% | +0.12 |
| 20-Year Fixed | 7.32% | +0.02 |
| 15-Year Fixed | 6.76% | -0.02 |
| FHA 15-Year Fixed | 6.91% | -0.05 |
| Jumbo 15-Year Fixed | 6.78% | No Change |
| 10-Year Fixed | 6.68% | -0.01 |
| 10/6 ARM | 7.75% | +0.02 |
| 7/6 ARM | 7.81% | +0.03 |
| Jumbo 7/6 ARM | 6.68% | +0.13 |
| 5/6 ARM | 7.84% | +0.01 |
| 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.
## 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 on Tuesday were Mississippi, Rhode Island, Louisiana, and Vermont. The states with the highest average mortgage rates were Minnesota, Arizona, 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.
***Correction - March 28, 2024:** This article has been updated to state that the next Federal Open Market Committee is scheduled for April 30 to May 1, 2024.*
|
Rates on 30-year purchase mortgages climbed again on Tuesday to 7.19%, 6 basis points higher than Monday's average. The flagship rate is still more than a quarter of a percent below its recent peak of 7.45% on March 15. Rates movements were varied across all other purchase and refinance mortgage rates.
National Averages of Lenders' Best Mortgage Rates
Loan Type
New Purchase
Refinance
30-Year Fixed
7.19%
7.46%
FHA 30-Year Fixed
7.13%
7.50%
Jumbo 30-Year Fixed
6.95%
6.95%
15-Year Fixed
6.52%
6.76%
5/6 ARM
7.75%
7.84%
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 - March 27, 2024
Today's Mortgage Rate Averages: New Purchase
Rates on 30-year new purchase mortgages rose by 6 basis points on Tuesday. Despite this week's increases, the flagship rate is still down 26 basis points since Friday, March 15, when it hit a recent high of 7.45%.
The 30-year rate average is still far from its recent drop into 6.00% territory, which we saw at the start of February. Nevertheless, mortgage rates are still well off the records seen in October, when the 30-year average notched a historic 23-year peak of 8.45%.
The average rates for 10- and 15-year mortgages moderated by single-digit basis point drops on Tuesday after rising on Monday.
Jumbo rates for 30-year fixed and 7/6 ARMs moved up by an eighth of a point, while the jumbo 15-year fixed and jumbo 5/6 ARM remained flat. Although daily historical jumbo rates were 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.
The biggest rate increase for new purchase, non-jumbo mortgages was on the 7/6 ARM, which rose 11 basis points yesterday, reversing a similar drop the day before, to land at 7.62%.
National Averages of Lenders' Best Rates - New Purchase
Loan Type
New Purchase Rates
Daily Change
30-Year Fixed
7.19%
+0.06
FHA 30-Year Fixed
7.13%
-0.02
VA 30-Year Fixed
6.82%
+0.01
Jumbo 30-Year Fixed
6.95%
+0.13
20-Year Fixed
6.97%
+0.01
15-Year Fixed
6.52%
-0.03
FHA 15-Year Fixed
6.79%
-0.01
Jumbo 15-Year Fixed
6.78%
No Change
10-Year Fixed
6.42%
-0.02
10/6 ARM
7.50%
+0.04
7/6 ARM
7.62%
+0.11
Jumbo 7/6 ARM
6.58%
+0.13
5/6 ARM
7.75%
-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 last week's reading added 13 basis points to the previous average to rise to 6.87%. 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
Tuesday's refinancing rates were relatively stable, with the 30-year rate ticking up by a single basis point to 7.46%. The spread between 30-year new purchase and refi rates narrowed to 27 basis points. The biggest movers were the jumbo 30-year and jumbo 7/6 ARM rates, which saw jumps of 12 and 13 basis points, respectively. Other loan types saw slight increases or decreases or remained unchanged.
National Averages of Lenders' Best Rates - Refinance
Loan Type
Refinance Rates
Daily Change
30-Year Fixed
7.46%
+0.01
FHA 30-Year Fixed
7.50%
+0.07
VA 30-Year Fixed
7.30%
-0.05
Jumbo 30-Year Fixed
6.95%
+0.12
20-Year Fixed
7.32%
+0.02
15-Year Fixed
6.76%
-0.02
FHA 15-Year Fixed
6.91%
-0.05
Jumbo 15-Year Fixed
6.78%
No Change
10-Year Fixed
6.68%
-0.01
10/6 ARM
7.75%
+0.02
7/6 ARM
7.81%
+0.03
Jumbo 7/6 ARM
6.68%
+0.13
5/6 ARM
7.84%
+0.01
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.
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 on Tuesday were Mississippi, Rhode Island, Louisiana, and Vermont. The states with the highest average mortgage rates were Minnesota, Arizona, 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.
Correction - March 28, 2024: This article has been updated to state that the next Federal Open Market Committee is scheduled for April 30 to May 1, 2024.
|
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https://www.investopedia.com/ftc-targets-h-and-r-block-for-deleting-customer-tax-prep-data-8599580
|
FTC Targets H&R Block For Deleting Customer Tax Prep Data
|
<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 Trade Commission (FTC) filed a complaint against H&R Block Friday.</li><li>Regulators allege that the company made it hard for customers to downgrade services.</li><li>The complaint also alleges H&R Block advertised “free” tax prep services without making it clear that most taxpayers don’t qualify.</li><li>The FTC’s move is the government’s latest in a series of actions against the tax prep industry.</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"> In their latest move against tax prep companies, federal regulators accused H&R Block (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=HRB">HRB</a>) of deliberately deleting customer data and airing misleading ads for free tax filing services.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ftc.asp">Federal Trade Commission (FTC)</a> filed a complaint against the firm Friday, saying the company made filing difficult for customers who started filling out their tax returns with a more expensive service than they needed and then tried to switch to a cheaper option.<span class="ql-inline-citation" data-cite="1"></span> The company required taxpayers to contact customer service to make the switch and then would delete all the information they entered, forcing them to start all over again.
</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"> “H&R Block designed its online products to present an obstacle course of tedious challenges to consumers, pressuring them into overpaying for its products,” Samuel Levine, director of the FTC’s Bureau of Consumer Protection, said in a press release. “Today’s action demonstrates that companies using coercive techniques that harm consumers can expect to hear from the FTC.”
</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 FTC, a government consumer watchdog agency, also accused the company of advertising “free” tax prep services without making it clear that most taxpayers don’t qualify for the company’s free services and would have to pay. The allegations are similar to those the FTC and state attorneys general have made against Intuit's (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTU">INTU</a>) TurboTax, which resulted in Intuit <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/those-turbotax-free-free-free-tax-filing-ads-were-misleading-judge-rules-7967480">paying a $141 million settlement</a> to the states. Intuit is disputing the FTC’s complaint.
</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"> H&R Block denied its pricing and services were unfair to customers.
</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"> “We believe we provide our clients with a great deal of value, unmatched tax expertise, and fair and transparent pricing,” said H&R Block Chief Legal Officer Dara Redler in a statement. “H&R Block allows consumers to downgrade to a less-expensive DIY Product via multiple mechanisms while ensuring the preparation of accurate tax returns.”
</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 FTC’s move is the government’s latest in a series of actions against the tax prep industry. On top of the regulatory actions by the FTC, the IRS is launching a pilot version website that allows taxpayers to file their federal returns online directly to the tax agency this tax season, bypassing the need for third-party tax prep software.
</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"> Consumer advocates and some politicians have long argued that taxpayers should be able to file their taxes online for free <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/most-americans-want-to-cut-out-the-tax-preparer-middleman-7499414">without a tax prep service acting as a middleman</a>, similar to how filing works in many other countries. Previous government efforts, such as the little-known and seldom-used <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free">“Free File” program</a>, worked with the private industry to offer free filing services to people with annual incomes of $79,000 or less.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-reduction-act-of-2022-6362263">Inflation Reduction Act</a>, signed by President Joe Biden in 2022, changed that approach and gave the IRS funding to set up an online tax filing service for the first time in its history.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* The Federal Trade Commission (FTC) filed a complaint against H&R Block Friday.
* Regulators allege that the company made it hard for customers to downgrade services.
* The complaint also alleges H&R Block advertised “free” tax prep services without making it clear that most taxpayers don’t qualify.
* The FTC’s move is the government’s latest in a series of actions against the tax prep industry.
In their latest move against tax prep companies, federal regulators accused H&R Block ([HRB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=HRB)) of deliberately deleting customer data and airing misleading ads for free tax filing services.
The [Federal Trade Commission (FTC)](https://www.investopedia.com/terms/f/ftc.asp) filed a complaint against the firm Friday, saying the company made filing difficult for customers who started filling out their tax returns with a more expensive service than they needed and then tried to switch to a cheaper option. The company required taxpayers to contact customer service to make the switch and then would delete all the information they entered, forcing them to start all over again.
“H&R Block designed its online products to present an obstacle course of tedious challenges to consumers, pressuring them into overpaying for its products,” Samuel Levine, director of the FTC’s Bureau of Consumer Protection, said in a press release. “Today’s action demonstrates that companies using coercive techniques that harm consumers can expect to hear from the FTC.”
The FTC, a government consumer watchdog agency, also accused the company of advertising “free” tax prep services without making it clear that most taxpayers don’t qualify for the company’s free services and would have to pay. The allegations are similar to those the FTC and state attorneys general have made against Intuit's ([INTU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTU)) TurboTax, which resulted in Intuit [paying a $141 million settlement](https://www.investopedia.com/those-turbotax-free-free-free-tax-filing-ads-were-misleading-judge-rules-7967480) to the states. Intuit is disputing the FTC’s complaint.
H&R Block denied its pricing and services were unfair to customers.
“We believe we provide our clients with a great deal of value, unmatched tax expertise, and fair and transparent pricing,” said H&R Block Chief Legal Officer Dara Redler in a statement. “H&R Block allows consumers to downgrade to a less-expensive DIY Product via multiple mechanisms while ensuring the preparation of accurate tax returns.”
The FTC’s move is the government’s latest in a series of actions against the tax prep industry. On top of the regulatory actions by the FTC, the IRS is launching a pilot version website that allows taxpayers to file their federal returns online directly to the tax agency this tax season, bypassing the need for third-party tax prep software.
Consumer advocates and some politicians have long argued that taxpayers should be able to file their taxes online for free [without a tax prep service acting as a middleman](https://www.investopedia.com/most-americans-want-to-cut-out-the-tax-preparer-middleman-7499414), similar to how filing works in many other countries. Previous government efforts, such as the little-known and seldom-used [“Free File” program](https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free), worked with the private industry to offer free filing services to people with annual incomes of $79,000 or less.
The [Inflation Reduction Act](https://www.investopedia.com/inflation-reduction-act-of-2022-6362263), signed by President Joe Biden in 2022, changed that approach and gave the IRS funding to set up an online tax filing service for the first time in its history.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
The Federal Trade Commission (FTC) filed a complaint against H&R Block Friday.Regulators allege that the company made it hard for customers to downgrade services.The complaint also alleges H&R Block advertised “free” tax prep services without making it clear that most taxpayers don’t qualify.The FTC’s move is the government’s latest in a series of actions against the tax prep industry.
In their latest move against tax prep companies, federal regulators accused H&R Block (HRB) of deliberately deleting customer data and airing misleading ads for free tax filing services.
The Federal Trade Commission (FTC) filed a complaint against the firm Friday, saying the company made filing difficult for customers who started filling out their tax returns with a more expensive service than they needed and then tried to switch to a cheaper option. The company required taxpayers to contact customer service to make the switch and then would delete all the information they entered, forcing them to start all over again.
“H&R Block designed its online products to present an obstacle course of tedious challenges to consumers, pressuring them into overpaying for its products,” Samuel Levine, director of the FTC’s Bureau of Consumer Protection, said in a press release. “Today’s action demonstrates that companies using coercive techniques that harm consumers can expect to hear from the FTC.”
The FTC, a government consumer watchdog agency, also accused the company of advertising “free” tax prep services without making it clear that most taxpayers don’t qualify for the company’s free services and would have to pay. The allegations are similar to those the FTC and state attorneys general have made against Intuit's (INTU) TurboTax, which resulted in Intuit paying a $141 million settlement to the states. Intuit is disputing the FTC’s complaint.
H&R Block denied its pricing and services were unfair to customers.
“We believe we provide our clients with a great deal of value, unmatched tax expertise, and fair and transparent pricing,” said H&R Block Chief Legal Officer Dara Redler in a statement. “H&R Block allows consumers to downgrade to a less-expensive DIY Product via multiple mechanisms while ensuring the preparation of accurate tax returns.”
The FTC’s move is the government’s latest in a series of actions against the tax prep industry. On top of the regulatory actions by the FTC, the IRS is launching a pilot version website that allows taxpayers to file their federal returns online directly to the tax agency this tax season, bypassing the need for third-party tax prep software.
Consumer advocates and some politicians have long argued that taxpayers should be able to file their taxes online for free without a tax prep service acting as a middleman, similar to how filing works in many other countries. Previous government efforts, such as the little-known and seldom-used “Free File” program, worked with the private industry to offer free filing services to people with annual incomes of $79,000 or less.
The Inflation Reduction Act, signed by President Joe Biden in 2022, changed that approach and gave the IRS funding to set up an online tax filing service for the first time in its history.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/banking-rights-for-immigrants-5218043
|
How Immigrants Can Access Financial Services
|
<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"> Access to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">banking</a> can help people establish good financial habits and avoid the high fees often associated with alternative financial services. While opening a bank account may seem simple, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/overcoming-language-barriers-in-banking-5218233">people who do not speak English</a> and those who are new to living in the U.S. may run into challenges.
</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"> To open a bank account and access other financial services, immigrants <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060415/can-foreign-individual-open-savings-account-united-states.asp">will need the right documentation</a> and identification. There are also other alternative financial products and services that may not require as much information and can be helpful in paying bills, building credit, cashing checks, and sending money to others. Understanding banking rights can ensure that immigrants are able to access the banking products and services they need.
</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>Access to financial products like bank accounts, credit cards, loans, and more can help people who are new to living in the U.S. establish good money habits and grow their wealth.</li><li>Collectively, there are 44.9 million immigrants in the U.S., 10.3 million of whom are undocumented.<span class="ql-inline-citation" data-cite="1"></span> In this case, a person may be able to get an ITIN, which is issued regardless of immigration status and can be used to open a bank account.</li><li>Bank accounts, credit cards, loans, and other traditional financial products and services may be helpful, but there are alternatives like the mobile-banking app MAJORITY, so not all financial access is difficult to obtain.</li><li>Being unaware of your banking rights can potentially cost you hundreds or even thousands of dollars in unnecessary fees, so ask for help if you're unsure where to start.</li></ul></div></div></div>
<span class="heading-toc" id="toc-bank-accounts-and-immigration-status"></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"> Bank Accounts and Immigration Status </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> One of the most commonly asked questions that immigrants may have is whether it’s possible to <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">open a bank account</a> without a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security number</a>. The short answer is yes, it’s possible to get a bank account without a Social Security number if you’re able to provide other forms of supporting documentation or identification. The typical information that banks need to open a new account include your:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> <li>Name</li><li>Date of birth</li><li>Address</li><li>Identification<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In place of a Social Security number, it’s possible for immigrants to open a bank account using an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-indentification-number-tin.asp">Individual Taxpayer Identification Number (ITIN)</a>. This number, issued by the Internal Revenue Service (IRS), is designed for people who do not have and are not eligible for a Social Security number. ITINs are issued regardless of immigration status and can be used to open a bank account.<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_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>An ITIN does not authorize you to work in the U.S., nor does it provide eligibility for Social Security benefits or qualify a dependent for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnedincomecredit.asp">Earned Income Tax Credit (EITC)</a> purposes.<span class="ql-inline-citation" data-cite="3"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> You can apply for an ITIN if you are:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0">
<li>A nonresident alien who’s required to file a U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax return</a></li>
<li>A U.S. resident alien filing a tax return</li>
<li>The dependent or spouse of a U.S. citizen/resident alien/nonresident alien visa holder</li>
<li>A nonresident alien claiming a tax treaty benefit</li>
<li>A nonresident alien student, professor, or researcher filing a U.S. tax return or claiming an exception<span class="ql-inline-citation" data-cite="3"></span><br/></li>
</ul>
<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 IRS has a web page about how to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/individuals/how-do-i-apply-for-an-itin">apply for an ITIN</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-credit-cards-and-loans-for-immigrants"></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"> Credit Cards and Loans for Immigrants </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Getting a credit card or loan can help to meet financial needs and can be a way to establish and build a U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>. Immigrants have the right to apply for loans and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/applying-for-a-credit-card-without-a-social-security-number-4684660">credit cards</a>, and a number of banks and lenders offer them. There are, however, some limitations and exceptions.
</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 example, Deferred Action for Childhood Arrivals (DACA) recipients are ineligible for federal student loan programs. However, they may be able to obtain private student loans from banks or other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lenders</a>, as well as personal loans or auto loans. Meanwhile, other noncitizens may be able to successfully apply for federal student loans if they can provide sufficient documentation.<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_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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Certain Native American students born in Canada with a status under the Jay Treaty of 1789 may also be eligible for federal student aid.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Qualification for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-student-loans-4775346">private student loans</a>, personal loans, auto loans, or mortgage loans can vary from lender to lender. For example, no verification of citizenship or immigration status may be required if the application can provide an ITIN and proof of income. A passport or other identification may also be requested to complete the loan application.
</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"> As far as credit cards go, a number 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> companies have developed credit products specifically for people who don’t have a Social Security number. Applicants may <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/getting-personal-loans-itin-7643887">use an ITIN instead to get approved</a>. If they’re able to open an account, they can then use that to establish and build a credit history, which could make it easier to qualify for loans.<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_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"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>MAJORITY is a mobile banking app designed just for immigrants that includes personalized access to banking with no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> fees or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-transaction-fee.asp">foreign transaction fees</a>.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div>
<span class="heading-toc" id="toc-mortgages-for-immigrants"></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"> Mortgages for Immigrants </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Buying a home typically means <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050115/getting-mortgage-non-us-citizens.asp">getting a mortgage</a>, and immigrants have the right to apply for a home loan in the U.S. The biggest challenge with getting approved is being able to meet the lender’s qualification requirements with regard to employment history, credit history, and proof of income. If you don’t have a credit history in the U.S., for instance, that can make it more difficult for lenders to assess your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthiness</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"> Opening a bank account with an international bank that has U.S. branches or with a U.S. bank can help you to establish a financial history. Again, you can open a bank account with an ITIN, and your lender may allow you to apply for a mortgage using your ITIN as well. Doing your research to compare mortgage options can help you find a bank that’s willing to work with you.
</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-tip" 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" 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>Offering a larger <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> could make it easier to qualify for a mortgage in the U.S. when you have immigrant status.</p></div></div></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-can-i-open-a-bank-account-without-a-social-security-number"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I open a bank account without a Social Security number?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, you can legally open a bank account whether or not you have a Social Security number and regardless of your immigration status. A number of banks and credit unions accept a wide range of identification documents, including an Individual Taxpayer Identification Number (ITIN), to open a bank account.<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_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-an-itin"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is an ITIN?</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/i/irs.asp">Internal Revenue Service (IRS)</a> issues ITINs to people who are required to file tax returns and are not eligible to get a Social Security number. The ITIN can be used in place of a Social Security number when opening a new bank account or applying for certain loans and credit cards.<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_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-show-immigration-papers-to-open-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I have to show immigration papers to open a bank account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. Banks and credit unions should not ask you to prove your immigration status to open a bank account. If you believe that a bank or another financial institution is discriminating against you based on your immigration status, you can file a complaint through 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 System</a>’s Consumer Complaint form online.<span class="ql-inline-citation" data-cite="9"></span><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_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-can-illegal-immigrants-have-a-bank-account"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can illegal immigrants have a bank account?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, undocumented immigrants to the United States have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/banking-rights-for-immigrants-5217844">the right to open a bank account</a>. Again, banks should not need you to prove your immigration status to open an account.<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_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"> Immigrating to the U.S. can be an opportunity to expand your horizons, and it’s important to understand what banking rights you have. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-banks-5190371">Opening a bank account</a> can be the first step toward building a solid financial foundation, and it can make it easier to apply for loans and credit cards later on. If a bank account isn't right for your situation, there are other alternative financial products and services that you can explore to ensure you're able to cash checks, pay bills, and more while living in the U.S.
</p></div>
|
Access to [banking](https://www.investopedia.com/terms/b/bank.asp) can help people establish good financial habits and avoid the high fees often associated with alternative financial services. While opening a bank account may seem simple, [people who do not speak English](https://www.investopedia.com/overcoming-language-barriers-in-banking-5218233) and those who are new to living in the U.S. may run into challenges.
To open a bank account and access other financial services, immigrants [will need the right documentation](https://www.investopedia.com/ask/answers/060415/can-foreign-individual-open-savings-account-united-states.asp) and identification. There are also other alternative financial products and services that may not require as much information and can be helpful in paying bills, building credit, cashing checks, and sending money to others. Understanding banking rights can ensure that immigrants are able to access the banking products and services they need.
### Key Takeaways
* Access to financial products like bank accounts, credit cards, loans, and more can help people who are new to living in the U.S. establish good money habits and grow their wealth.
* Collectively, there are 44.9 million immigrants in the U.S., 10.3 million of whom are undocumented. In this case, a person may be able to get an ITIN, which is issued regardless of immigration status and can be used to open a bank account.
* Bank accounts, credit cards, loans, and other traditional financial products and services may be helpful, but there are alternatives like the mobile-banking app MAJORITY, so not all financial access is difficult to obtain.
* Being unaware of your banking rights can potentially cost you hundreds or even thousands of dollars in unnecessary fees, so ask for help if you're unsure where to start.
## Bank Accounts and Immigration Status
One of the most commonly asked questions that immigrants may have is whether it’s possible to [open a bank account](https://www.investopedia.com/ask/answers/040715/what-should-you-bring-bank-open-checking-account.asp) without a [Social Security number](https://www.investopedia.com/terms/s/ssn.asp). The short answer is yes, it’s possible to get a bank account without a Social Security number if you’re able to provide other forms of supporting documentation or identification. The typical information that banks need to open a new account include your:
* Name
* Date of birth
* Address
* Identification
In place of a Social Security number, it’s possible for immigrants to open a bank account using an [Individual Taxpayer Identification Number (ITIN)](https://www.investopedia.com/terms/t/tax-indentification-number-tin.asp). This number, issued by the Internal Revenue Service (IRS), is designed for people who do not have and are not eligible for a Social Security number. ITINs are issued regardless of immigration status and can be used to open a bank account.
###
An ITIN does not authorize you to work in the U.S., nor does it provide eligibility for Social Security benefits or qualify a dependent for [Earned Income Tax Credit (EITC)](https://www.investopedia.com/terms/e/earnedincomecredit.asp) purposes.
You can apply for an ITIN if you are:
* A nonresident alien who’s required to file a U.S. [tax return](https://www.investopedia.com/terms/t/taxreturn.asp)
* A U.S. resident alien filing a tax return
* The dependent or spouse of a U.S. citizen/resident alien/nonresident alien visa holder
* A nonresident alien claiming a tax treaty benefit
* A nonresident alien student, professor, or researcher filing a U.S. tax return or claiming an exception
The IRS has a web page about how to [apply for an ITIN](https://www.irs.gov/individuals/how-do-i-apply-for-an-itin).
## Credit Cards and Loans for Immigrants
Getting a credit card or loan can help to meet financial needs and can be a way to establish and build a U.S. [credit history](https://www.investopedia.com/terms/c/credit-history.asp). Immigrants have the right to apply for loans and [credit cards](https://www.investopedia.com/applying-for-a-credit-card-without-a-social-security-number-4684660), and a number of banks and lenders offer them. There are, however, some limitations and exceptions.
For example, Deferred Action for Childhood Arrivals (DACA) recipients are ineligible for federal student loan programs. However, they may be able to obtain private student loans from banks or other [lenders](https://www.investopedia.com/terms/l/lender.asp), as well as personal loans or auto loans. Meanwhile, other noncitizens may be able to successfully apply for federal student loans if they can provide sufficient documentation.
###
Certain Native American students born in Canada with a status under the Jay Treaty of 1789 may also be eligible for federal student aid.
Qualification for [private student loans](https://www.investopedia.com/best-student-loans-4775346), personal loans, auto loans, or mortgage loans can vary from lender to lender. For example, no verification of citizenship or immigration status may be required if the application can provide an ITIN and proof of income. A passport or other identification may also be requested to complete the loan application.
As far as credit cards go, a number of [financial technology (fintech)](https://www.investopedia.com/terms/f/fintech.asp) companies have developed credit products specifically for people who don’t have a Social Security number. Applicants may [use an ITIN instead to get approved](https://www.investopedia.com/getting-personal-loans-itin-7643887). If they’re able to open an account, they can then use that to establish and build a credit history, which could make it easier to qualify for loans.
###
MAJORITY is a mobile banking app designed just for immigrants that includes personalized access to banking with no [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees or [foreign transaction fees](https://www.investopedia.com/terms/f/foreign-transaction-fee.asp).
## Mortgages for Immigrants
Buying a home typically means [getting a mortgage](https://www.investopedia.com/articles/personal-finance/050115/getting-mortgage-non-us-citizens.asp), and immigrants have the right to apply for a home loan in the U.S. The biggest challenge with getting approved is being able to meet the lender’s qualification requirements with regard to employment history, credit history, and proof of income. If you don’t have a credit history in the U.S., for instance, that can make it more difficult for lenders to assess your [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp).
Opening a bank account with an international bank that has U.S. branches or with a U.S. bank can help you to establish a financial history. Again, you can open a bank account with an ITIN, and your lender may allow you to apply for a mortgage using your ITIN as well. Doing your research to compare mortgage options can help you find a bank that’s willing to work with you.
###
Offering a larger [down payment](https://www.investopedia.com/terms/d/down_payment.asp) could make it easier to qualify for a mortgage in the U.S. when you have immigrant status.
## Can I open a bank account without a Social Security number?
Yes, you can legally open a bank account whether or not you have a Social Security number and regardless of your immigration status. A number of banks and credit unions accept a wide range of identification documents, including an Individual Taxpayer Identification Number (ITIN), to open a bank account.
## What is an ITIN?
The [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) issues ITINs to people who are required to file tax returns and are not eligible to get a Social Security number. The ITIN can be used in place of a Social Security number when opening a new bank account or applying for certain loans and credit cards.
## Do I have to show immigration papers to open a bank account?
No. Banks and credit unions should not ask you to prove your immigration status to open a bank account. If you believe that a bank or another financial institution is discriminating against you based on your immigration status, you can file a complaint through the [Federal Reserve System](https://www.investopedia.com/terms/f/federalreservebank.asp)’s Consumer Complaint form online.
## Can illegal immigrants have a bank account?
Yes, undocumented immigrants to the United States have [the right to open a bank account](https://www.investopedia.com/banking-rights-for-immigrants-5217844). Again, banks should not need you to prove your immigration status to open an account.
## The Bottom Line
Immigrating to the U.S. can be an opportunity to expand your horizons, and it’s important to understand what banking rights you have. [Opening a bank account](https://www.investopedia.com/best-online-banks-5190371) can be the first step toward building a solid financial foundation, and it can make it easier to apply for loans and credit cards later on. If a bank account isn't right for your situation, there are other alternative financial products and services that you can explore to ensure you're able to cash checks, pay bills, and more while living in the U.S.
|
Access to banking can help people establish good financial habits and avoid the high fees often associated with alternative financial services. While opening a bank account may seem simple, people who do not speak English and those who are new to living in the U.S. may run into challenges.
To open a bank account and access other financial services, immigrants will need the right documentation and identification. There are also other alternative financial products and services that may not require as much information and can be helpful in paying bills, building credit, cashing checks, and sending money to others. Understanding banking rights can ensure that immigrants are able to access the banking products and services they need.
Key Takeaways
Access to financial products like bank accounts, credit cards, loans, and more can help people who are new to living in the U.S. establish good money habits and grow their wealth.Collectively, there are 44.9 million immigrants in the U.S., 10.3 million of whom are undocumented. In this case, a person may be able to get an ITIN, which is issued regardless of immigration status and can be used to open a bank account.Bank accounts, credit cards, loans, and other traditional financial products and services may be helpful, but there are alternatives like the mobile-banking app MAJORITY, so not all financial access is difficult to obtain.Being unaware of your banking rights can potentially cost you hundreds or even thousands of dollars in unnecessary fees, so ask for help if you're unsure where to start.
Bank Accounts and Immigration Status
One of the most commonly asked questions that immigrants may have is whether it’s possible to open a bank account without a Social Security number. The short answer is yes, it’s possible to get a bank account without a Social Security number if you’re able to provide other forms of supporting documentation or identification. The typical information that banks need to open a new account include your:
NameDate of birthAddressIdentification
In place of a Social Security number, it’s possible for immigrants to open a bank account using an Individual Taxpayer Identification Number (ITIN). This number, issued by the Internal Revenue Service (IRS), is designed for people who do not have and are not eligible for a Social Security number. ITINs are issued regardless of immigration status and can be used to open a bank account.
An ITIN does not authorize you to work in the U.S., nor does it provide eligibility for Social Security benefits or qualify a dependent for Earned Income Tax Credit (EITC) purposes.
You can apply for an ITIN if you are:
A nonresident alien who’s required to file a U.S. tax return
A U.S. resident alien filing a tax return
The dependent or spouse of a U.S. citizen/resident alien/nonresident alien visa holder
A nonresident alien claiming a tax treaty benefit
A nonresident alien student, professor, or researcher filing a U.S. tax return or claiming an exception
The IRS has a web page about how to apply for an ITIN.
Credit Cards and Loans for Immigrants
Getting a credit card or loan can help to meet financial needs and can be a way to establish and build a U.S. credit history. Immigrants have the right to apply for loans and credit cards, and a number of banks and lenders offer them. There are, however, some limitations and exceptions.
For example, Deferred Action for Childhood Arrivals (DACA) recipients are ineligible for federal student loan programs. However, they may be able to obtain private student loans from banks or other lenders, as well as personal loans or auto loans. Meanwhile, other noncitizens may be able to successfully apply for federal student loans if they can provide sufficient documentation.
Certain Native American students born in Canada with a status under the Jay Treaty of 1789 may also be eligible for federal student aid.
Qualification for private student loans, personal loans, auto loans, or mortgage loans can vary from lender to lender. For example, no verification of citizenship or immigration status may be required if the application can provide an ITIN and proof of income. A passport or other identification may also be requested to complete the loan application.
As far as credit cards go, a number of financial technology (fintech) companies have developed credit products specifically for people who don’t have a Social Security number. Applicants may use an ITIN instead to get approved. If they’re able to open an account, they can then use that to establish and build a credit history, which could make it easier to qualify for loans.
MAJORITY is a mobile banking app designed just for immigrants that includes personalized access to banking with no overdraft fees or foreign transaction fees.
Mortgages for Immigrants
Buying a home typically means getting a mortgage, and immigrants have the right to apply for a home loan in the U.S. The biggest challenge with getting approved is being able to meet the lender’s qualification requirements with regard to employment history, credit history, and proof of income. If you don’t have a credit history in the U.S., for instance, that can make it more difficult for lenders to assess your creditworthiness.
Opening a bank account with an international bank that has U.S. branches or with a U.S. bank can help you to establish a financial history. Again, you can open a bank account with an ITIN, and your lender may allow you to apply for a mortgage using your ITIN as well. Doing your research to compare mortgage options can help you find a bank that’s willing to work with you.
Offering a larger down payment could make it easier to qualify for a mortgage in the U.S. when you have immigrant status.
Can I open a bank account without a Social Security number?
Yes, you can legally open a bank account whether or not you have a Social Security number and regardless of your immigration status. A number of banks and credit unions accept a wide range of identification documents, including an Individual Taxpayer Identification Number (ITIN), to open a bank account.
What is an ITIN?
The Internal Revenue Service (IRS) issues ITINs to people who are required to file tax returns and are not eligible to get a Social Security number. The ITIN can be used in place of a Social Security number when opening a new bank account or applying for certain loans and credit cards.
Do I have to show immigration papers to open a bank account?
No. Banks and credit unions should not ask you to prove your immigration status to open a bank account. If you believe that a bank or another financial institution is discriminating against you based on your immigration status, you can file a complaint through the Federal Reserve System’s Consumer Complaint form online.
Can illegal immigrants have a bank account?
Yes, undocumented immigrants to the United States have the right to open a bank account. Again, banks should not need you to prove your immigration status to open an account.
The Bottom Line
Immigrating to the U.S. can be an opportunity to expand your horizons, and it’s important to understand what banking rights you have. Opening a bank account can be the first step toward building a solid financial foundation, and it can make it easier to apply for loans and credit cards later on. If a bank account isn't right for your situation, there are other alternative financial products and services that you can explore to ensure you're able to cash checks, pay bills, and more while living in the U.S.
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https://www.investopedia.com/articles/investing/031115/5-top-portfolio-management-apps.asp
|
The 4 Top Portfolio Management Apps
|
<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"> Your portfolio might include any combination of financial assets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), 401(k)s, and individual retirement accounts (IRA). Keeping track of all these assets can be a challenging, if not daunting, task. It's important to routinely know what’s going on with all your investments—not just once a year when you get your tax forms.
</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"> Fortunately, several mobile apps offer real-time information on all your investments in a one-stop place. Here are four popular portfolio management apps that track your investments at a glance.
</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>Mobile portfolio management apps can provide information on your investments from 401k(s) to IRAs.</li><li>Some portfolio management apps can sync with your existing accounts, and most are free.</li><li>Some of the most popular apps include Empower (formerly Personal Capital), SigFig Wealth Management, Sharesight, and Yahoo Finance.</li><li>Key features include the ability to sync data from financial accounts and measure performance against a benchmark index or fund.</li><li>Some portfolio apps offer retirement tracking and planning as well as asset allocation to measure a portfolio's diversification.<br/></li></ul></div></div></div>
<span class="heading-toc" id="toc-1-empower-formerly-personal-capital"></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"> 1. Empower (Formerly Personal Capital) </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <li>Platform: iOS, Android</li><li>Cost: Free</li>
</ul>
<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"> More than three million people track their finances with Empower, which has more than $1.4 trillion in <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> as of Dec. 31, 2023.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Besides the ability to track your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/networth.asp">net worth</a> and create a savings plan, clients can sync nearly any investment and bank account, including credit cards, retirement, and taxable accounts. After downloading all of your financial data, the app can track performance, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a>, and fees with easy-to-read graphs and charts.
</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"> Investment Checkup </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The Investment Checkup feature allows clients to track investments by account, asset class, or individual security. The app allows you to view your asset allocation and whether you're <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underweight.asp">underweight </a>or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overweight.asp">overweight</a> in a particular <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sector</a>. You can also establish a benchmark such as the S&P 500 index, and the app will help provide Smart Weighting recommendations. You can also track your holdings and their performance against other major market indices, exchange-traded funds (ETFs), and mutual fund positions.
</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"> By analyzing asset allocation, the app helps assess your portfolio's risk level and recommends a target asset allocation to reduce the risk of loss. Investors can examine past performance to see how the portfolio would have performed and compare that performance against your target asset allocation. The Investment Checkup feature also monitors the costs of your investments, including mutual fund fees, to help save you money.<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_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Retirement Planning </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The Retirement Planner function can help determine if you're meeting your savings and retirement goals. From there, you can create a spending plan to meet those goals.<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_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"> Wealth Advisor </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Clients also have the option to work with a personal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wealthmanagement.asp">wealth management</a> advisor to discuss their investment needs via FaceTime, email, or phone. The app's bank-level security uses a two-step remote authentication process. However, the wealth management function charges a fee.<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_24-0"></div>
<span class="heading-toc" id="toc-2-sigfig-wealth-management"></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. SigFig Wealth Management </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <li>Platform: iOS</li><li>Cost: Free</li>
</ul>
<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"> SigFig's Wealth Management app can help you track all your investment accounts for free. There is also a fee-based version that allows investors to create a personalized plan that incorporates your risk tolerance and time horizon, but charges 0.25% per year. However, you can get your first $10,000 managed for free.<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_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"> Investment Sync </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> SigFig free app automatically pulls your investment accounts into a single dashboard to give you a real-time view of your stocks, mutual funds, and exchange-traded funds (ETFs). SigFig can connect with over 50 brokerages, including Schwab and Fidelity. The Reporting Dashboard feature allows you to create reports on performance, key stats, fees, and holdings.<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_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"> Portfolio Tracker </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The SigFig free app provides snapshots of your 401(k) plan and IRAs. You’ll get weekly email summaries of account performance, news that impacts your portfolio, and alerts that focus on your top gainers and losers.
</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 Portfolio Tracker automatically analyzes your portfolio to find hidden fees and overexposure to a single stock, fund, or sector. The External Analysis feature allows you to analyze your external holdings to determine the proper allocation. From there, the app provides recommendations on proper asset allocation to optimize gains and manage market risk.<span class="ql-inline-citation" data-cite="15"></span><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_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"> Automated Investing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> For a fee, users can optimize their returns with automated investing. SigFig will optimize your portfolio and provide daily monitoring to keep it on track with rebalancing, dividend reinvestment, and tax-efficient strategies.<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>
<span class="heading-toc" id="toc-3-sharesight"></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"> 3. Sharesight </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <li>Platform: iOS, Android</li><li>Cost: Limited free version and fee-based options</li>
</ul>
<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"> Sharesight is a portfolio tracker that can monitor the performance of your investments using data that's imported from 60 stock exchanges.<span class="ql-inline-citation" data-cite="16"></span> The service is free for up to ten holdings or one portfolio with limited reporting. Those with more than ten investments who want additional reporting features can opt for the fee-based service, which ranges from $7 to $23 per month (billed annually).<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_45-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Portfolio Tracking </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> With Sharesight, investors can automatically track the price and performance of over 240,000 stocks ETFs, and mutual funds globally.<span class="ql-inline-citation" data-cite="16"></span> The app can also monitor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a>, real estate, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-careers/09/private-equity.asp">private equity</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp">fixed-income investments</a>. The annualized return feature can factor in capital gains, dividends, fees, and currency exchange fluctuations showing their impact on the overall portfolio.<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_48-0"></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"> Performance Reporting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Sharesight allows for charting your investment performance against various <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmarks</a>, including stocks, ETFs, and indices such as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a>. Investors can monitor their asset allocation to measure the level of diversification based on a particular sector or country. Sharesight also allows for customization when comparing a portfolio versus a benchmark.<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_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"> Tracking Income </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Sharesight can monitor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a> income, distributions and calculate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendyield.asp">dividend yield</a> as well as the impact of the investment portfolio. Sharesight can project expected dividend income based on companies’ announced dividend payments. This feature is helpful to investors who rely on <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveincome.asp">passive income</a> from income-generating assets.<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_54-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> The service also offers a Taxable Income Report for tax reporting that includes dividends, distributions, and interest payments categorized by local and foreign income.<span class="ql-inline-citation" data-cite="10"></span><br>
</br></p>
<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-4-yahoo-finance"></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"> 4. Yahoo! Finance </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li>Platform: iOS, Android</li><li>Cost: Free</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"> The Yahoo Finance app has a simple-to-use design, so you can easily track your stocks, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity-market.asp">commodities</a>, bonds, and currencies. You can create and track the performance of your personal portfolio and sync multiple portfolios across all your devices.
</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"> Customized Alerts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> The Yahoo Finance app provides real-time stock and investment information to stay on top of the market. Yahoo Finance allows you to create personalized alerts and follow market movements in real-time. The features include multiple watchlists to organize stocks in any manner, such as by sector. Monitor your portfolio's performance with live quotes and establish price alerts. The app also includes full-screen interactive charting.<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_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"> Real-Time News </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Yahoo! Finance is one of the largest business news sites in the U.S., with data, commentary, and press releases among its daily content. Of course, Yahoo Finance app users also have fast access to this breaking information and can enable notifications for news, earnings reports, and financial information.<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_67-0"></div>
<span class="heading-toc" id="toc-key-features-of-a-portfolio-tracker"></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"> Key Features of a Portfolio Tracker </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> A portfolio tracker should help monitor investments within your financial portfolio, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Although each investor is unique, some of the key features and benefits for portfolio management apps include:<br/>
</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 free version of the app</li><li>Easy to use financial syncing of all your investment and banking accounts</li><li>Dashboard with reporting functions that track your financial progress</li><li>Asset allocation and portfolio monitoring that allows for customizing</li><li>Retirement planner tool that incorporates your 401(k) and IRAs</li><li>Access to charts to track portfolio performance and research stocks</li><li>Dividend tracker or monitoring of companies with increasing dividends</li><li>Fee monitor to avoid paying for brokerage and mutual fund fees</li><li>An upgradable version of the free app for a low fee</li>
</ul>
<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"> Most trackers offer a free version of portfolio monitoring and additional fee-based upgrades. If you think you might like other services, such as wealth management or portfolio review, look for apps that offer advisory services. Many offer a free one-time consultation up to a certain amount of assets.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_75-0"> <span class="mntl-sc-block-subheading__text"> Asset Allocation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> A key feature of any solid portfolio tracker app is the ability to view your asset allocation and compare the allocation to benchmark indices such as the S&P 500. Designing a target allocation based on your <a data-component="link" data-ordinal="1" 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="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timehorizon.asp">time horizon</a> is also important. For example, retirees would likely have a lower risk tolerance than someone who has 20 years until retirement. As a result, the asset allocation would differ depending on when you need the money.
</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"> Sometimes market conditions or life events can change your target asset allocation. As a result, an app that allows for rebalancing your portfolio to bring it in line with your long-term financial goals is essential.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_80-0"> <span class="mntl-sc-block-subheading__text"> Real-Time Data and Monitoring </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Being able to sync all of your investment accounts and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-portfolio-management-software-tools-7552649">manage your portfolio</a> from a user-friendly dashboard with access to real-time data is critical when monitoring a portfolio.
</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"> Other features include backtesting, which allows you to analyze how your portfolio would have performed if you had a different asset allocation. Also, a critical feature is monitoring your risk levels and determining if the portfolio is overexposed or underexposed to a particular investment or sector.<br/>
</p>
<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-is-the-best-way-to-track-your-portfolio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Best Way to Track Your Portfolio?</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/best-asset-management-software-5090064">Using a software application</a> (app for short) can help you monitor your investment portfolio. Portfolio tracking apps can sync and download financial information from your banking and brokerage accounts, including your 401(k).<br/></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-should-i-look-for-in-a-portfolio-tracker"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Should I Look for in a Portfolio Tracker?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Although each investor has specific financial goals, key features to look for include:</p><ul><li>A free version of the app so you can test it out</li><li>Ability to sync all of your financial accounts</li><li>A retirement planning tool that includes your 401(k) and IRAs</li><li>Asset allocation to monitor your portfolio's diversification</li><li>Ability to compare your portfolio's return against a benchmark index<br/></li></ul></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-are-most-portfolio-tracker-apps-free"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Most Portfolio Tracker Apps Free?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most portfolio trackers offer both a free and paid version of their app. The free app usually provides several features, but those with multiple investments might opt for a fee-based app with advanced reporting, real-time data, and tax information.</p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Portfolio management apps track your investments easily from anywhere and at any time. Some apps sync with your existing accounts, while others require you to manually enter information on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdings.asp">holdings</a>. In either case, such apps provide up-to-the-minute information—so you know where you stand now—as well as provide <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/050715/10-best-tools-financial-advisors.asp">tools to help you</a> get where you want to be in the future.
</p></div>
|
Your portfolio might include any combination of financial assets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), 401(k)s, and individual retirement accounts (IRA). Keeping track of all these assets can be a challenging, if not daunting, task. It's important to routinely know what’s going on with all your investments—not just once a year when you get your tax forms.
Fortunately, several mobile apps offer real-time information on all your investments in a one-stop place. Here are four popular portfolio management apps that track your investments at a glance.
### Key Takeaways
* Mobile portfolio management apps can provide information on your investments from 401k(s) to IRAs.
* Some portfolio management apps can sync with your existing accounts, and most are free.
* Some of the most popular apps include Empower (formerly Personal Capital), SigFig Wealth Management, Sharesight, and Yahoo Finance.
* Key features include the ability to sync data from financial accounts and measure performance against a benchmark index or fund.
* Some portfolio apps offer retirement tracking and planning as well as asset allocation to measure a portfolio's diversification.
## 1. Empower (Formerly Personal Capital)
* Platform: iOS, Android
* Cost: Free
More than three million people track their finances with Empower, which has more than $1.4 trillion in [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp) as of Dec. 31, 2023.
Besides the ability to track your [net worth](https://www.investopedia.com/terms/n/networth.asp) and create a savings plan, clients can sync nearly any investment and bank account, including credit cards, retirement, and taxable accounts. After downloading all of your financial data, the app can track performance, [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp), and fees with easy-to-read graphs and charts.
### Investment Checkup
The Investment Checkup feature allows clients to track investments by account, asset class, or individual security. The app allows you to view your asset allocation and whether you're [underweight](https://www.investopedia.com/terms/u/underweight.asp) or [overweight](https://www.investopedia.com/terms/o/overweight.asp) in a particular [sector](https://www.investopedia.com/terms/s/sector.asp). You can also establish a benchmark such as the S&P 500 index, and the app will help provide Smart Weighting recommendations. You can also track your holdings and their performance against other major market indices, exchange-traded funds (ETFs), and mutual fund positions.
By analyzing asset allocation, the app helps assess your portfolio's risk level and recommends a target asset allocation to reduce the risk of loss. Investors can examine past performance to see how the portfolio would have performed and compare that performance against your target asset allocation. The Investment Checkup feature also monitors the costs of your investments, including mutual fund fees, to help save you money.
### Retirement Planning
The Retirement Planner function can help determine if you're meeting your savings and retirement goals. From there, you can create a spending plan to meet those goals.
### Wealth Advisor
Clients also have the option to work with a personal [wealth management](https://www.investopedia.com/terms/w/wealthmanagement.asp) advisor to discuss their investment needs via FaceTime, email, or phone. The app's bank-level security uses a two-step remote authentication process. However, the wealth management function charges a fee.
## 2. SigFig Wealth Management
* Platform: iOS
* Cost: Free
SigFig's Wealth Management app can help you track all your investment accounts for free. There is also a fee-based version that allows investors to create a personalized plan that incorporates your risk tolerance and time horizon, but charges 0.25% per year. However, you can get your first $10,000 managed for free.
### Investment Sync
SigFig free app automatically pulls your investment accounts into a single dashboard to give you a real-time view of your stocks, mutual funds, and exchange-traded funds (ETFs). SigFig can connect with over 50 brokerages, including Schwab and Fidelity. The Reporting Dashboard feature allows you to create reports on performance, key stats, fees, and holdings.
### Portfolio Tracker
The SigFig free app provides snapshots of your 401(k) plan and IRAs. You’ll get weekly email summaries of account performance, news that impacts your portfolio, and alerts that focus on your top gainers and losers.
The Portfolio Tracker automatically analyzes your portfolio to find hidden fees and overexposure to a single stock, fund, or sector. The External Analysis feature allows you to analyze your external holdings to determine the proper allocation. From there, the app provides recommendations on proper asset allocation to optimize gains and manage market risk.
### Automated Investing
For a fee, users can optimize their returns with automated investing. SigFig will optimize your portfolio and provide daily monitoring to keep it on track with rebalancing, dividend reinvestment, and tax-efficient strategies.
## 3. Sharesight
* Platform: iOS, Android
* Cost: Limited free version and fee-based options
Sharesight is a portfolio tracker that can monitor the performance of your investments using data that's imported from 60 stock exchanges. The service is free for up to ten holdings or one portfolio with limited reporting. Those with more than ten investments who want additional reporting features can opt for the fee-based service, which ranges from $7 to $23 per month (billed annually).
### Portfolio Tracking
With Sharesight, investors can automatically track the price and performance of over 240,000 stocks ETFs, and mutual funds globally. The app can also monitor [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp), real estate, [private equity](https://www.investopedia.com/articles/financial-careers/09/private-equity.asp), and [fixed-income investments](https://www.investopedia.com/terms/f/fixedincome.asp). The annualized return feature can factor in capital gains, dividends, fees, and currency exchange fluctuations showing their impact on the overall portfolio.
### Performance Reporting
Sharesight allows for charting your investment performance against various [benchmarks](https://www.investopedia.com/terms/b/benchmark.asp), including stocks, ETFs, and indices such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). Investors can monitor their asset allocation to measure the level of diversification based on a particular sector or country. Sharesight also allows for customization when comparing a portfolio versus a benchmark.
### Tracking Income
Sharesight can monitor [dividend](https://www.investopedia.com/terms/d/dividend.asp) income, distributions and calculate [dividend yield](https://www.investopedia.com/terms/d/dividendyield.asp) as well as the impact of the investment portfolio. Sharesight can project expected dividend income based on companies’ announced dividend payments. This feature is helpful to investors who rely on [passive income](https://www.investopedia.com/terms/p/passiveincome.asp) from income-generating assets.
The service also offers a Taxable Income Report for tax reporting that includes dividends, distributions, and interest payments categorized by local and foreign income.
## 4. Yahoo! Finance
* Platform: iOS, Android
* Cost: Free
The Yahoo Finance app has a simple-to-use design, so you can easily track your stocks, [commodities](https://www.investopedia.com/terms/c/commodity-market.asp), bonds, and currencies. You can create and track the performance of your personal portfolio and sync multiple portfolios across all your devices.
### Customized Alerts
The Yahoo Finance app provides real-time stock and investment information to stay on top of the market. Yahoo Finance allows you to create personalized alerts and follow market movements in real-time. The features include multiple watchlists to organize stocks in any manner, such as by sector. Monitor your portfolio's performance with live quotes and establish price alerts. The app also includes full-screen interactive charting.
### Real-Time News
Yahoo! Finance is one of the largest business news sites in the U.S., with data, commentary, and press releases among its daily content. Of course, Yahoo Finance app users also have fast access to this breaking information and can enable notifications for news, earnings reports, and financial information.
## Key Features of a Portfolio Tracker
A portfolio tracker should help monitor investments within your financial portfolio, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Although each investor is unique, some of the key features and benefits for portfolio management apps include:
* A free version of the app
* Easy to use financial syncing of all your investment and banking accounts
* Dashboard with reporting functions that track your financial progress
* Asset allocation and portfolio monitoring that allows for customizing
* Retirement planner tool that incorporates your 401(k) and IRAs
* Access to charts to track portfolio performance and research stocks
* Dividend tracker or monitoring of companies with increasing dividends
* Fee monitor to avoid paying for brokerage and mutual fund fees
* An upgradable version of the free app for a low fee
Most trackers offer a free version of portfolio monitoring and additional fee-based upgrades. If you think you might like other services, such as wealth management or portfolio review, look for apps that offer advisory services. Many offer a free one-time consultation up to a certain amount of assets.
### Asset Allocation
A key feature of any solid portfolio tracker app is the ability to view your asset allocation and compare the allocation to benchmark indices such as the S&P 500. Designing a target allocation based on your [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and [time horizon](https://www.investopedia.com/terms/t/timehorizon.asp) is also important. For example, retirees would likely have a lower risk tolerance than someone who has 20 years until retirement. As a result, the asset allocation would differ depending on when you need the money.
Sometimes market conditions or life events can change your target asset allocation. As a result, an app that allows for rebalancing your portfolio to bring it in line with your long-term financial goals is essential.
### Real-Time Data and Monitoring
Being able to sync all of your investment accounts and [manage your portfolio](https://www.investopedia.com/best-portfolio-management-software-tools-7552649) from a user-friendly dashboard with access to real-time data is critical when monitoring a portfolio.
Other features include backtesting, which allows you to analyze how your portfolio would have performed if you had a different asset allocation. Also, a critical feature is monitoring your risk levels and determining if the portfolio is overexposed or underexposed to a particular investment or sector.
## What Is the Best Way to Track Your Portfolio?
[Using a software application](https://www.investopedia.com/best-asset-management-software-5090064) (app for short) can help you monitor your investment portfolio. Portfolio tracking apps can sync and download financial information from your banking and brokerage accounts, including your 401(k).
## What Should I Look for in a Portfolio Tracker?
Although each investor has specific financial goals, key features to look for include:
* A free version of the app so you can test it out
* Ability to sync all of your financial accounts
* A retirement planning tool that includes your 401(k) and IRAs
* Asset allocation to monitor your portfolio's diversification
* Ability to compare your portfolio's return against a benchmark index
## Are Most Portfolio Tracker Apps Free?
Most portfolio trackers offer both a free and paid version of their app. The free app usually provides several features, but those with multiple investments might opt for a fee-based app with advanced reporting, real-time data, and tax information.
## The Bottom Line
Portfolio management apps track your investments easily from anywhere and at any time. Some apps sync with your existing accounts, while others require you to manually enter information on your [holdings](https://www.investopedia.com/terms/h/holdings.asp). In either case, such apps provide up-to-the-minute information—so you know where you stand now—as well as provide [tools to help you](https://www.investopedia.com/articles/financial-advisors/050715/10-best-tools-financial-advisors.asp) get where you want to be in the future.
|
Your portfolio might include any combination of financial assets, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), 401(k)s, and individual retirement accounts (IRA). Keeping track of all these assets can be a challenging, if not daunting, task. It's important to routinely know what’s going on with all your investments—not just once a year when you get your tax forms.
Fortunately, several mobile apps offer real-time information on all your investments in a one-stop place. Here are four popular portfolio management apps that track your investments at a glance.
Key Takeaways
Mobile portfolio management apps can provide information on your investments from 401k(s) to IRAs.Some portfolio management apps can sync with your existing accounts, and most are free.Some of the most popular apps include Empower (formerly Personal Capital), SigFig Wealth Management, Sharesight, and Yahoo Finance.Key features include the ability to sync data from financial accounts and measure performance against a benchmark index or fund.Some portfolio apps offer retirement tracking and planning as well as asset allocation to measure a portfolio's diversification.
1. Empower (Formerly Personal Capital)
Platform: iOS, AndroidCost: Free
More than three million people track their finances with Empower, which has more than $1.4 trillion in assets under management (AUM) as of Dec. 31, 2023.
Besides the ability to track your net worth and create a savings plan, clients can sync nearly any investment and bank account, including credit cards, retirement, and taxable accounts. After downloading all of your financial data, the app can track performance, asset allocation, and fees with easy-to-read graphs and charts.
Investment Checkup
The Investment Checkup feature allows clients to track investments by account, asset class, or individual security. The app allows you to view your asset allocation and whether you're underweight or overweight in a particular sector. You can also establish a benchmark such as the S&P 500 index, and the app will help provide Smart Weighting recommendations. You can also track your holdings and their performance against other major market indices, exchange-traded funds (ETFs), and mutual fund positions.
By analyzing asset allocation, the app helps assess your portfolio's risk level and recommends a target asset allocation to reduce the risk of loss. Investors can examine past performance to see how the portfolio would have performed and compare that performance against your target asset allocation. The Investment Checkup feature also monitors the costs of your investments, including mutual fund fees, to help save you money.
Retirement Planning
The Retirement Planner function can help determine if you're meeting your savings and retirement goals. From there, you can create a spending plan to meet those goals.
Wealth Advisor
Clients also have the option to work with a personal wealth management advisor to discuss their investment needs via FaceTime, email, or phone. The app's bank-level security uses a two-step remote authentication process. However, the wealth management function charges a fee.
2. SigFig Wealth Management
Platform: iOSCost: Free
SigFig's Wealth Management app can help you track all your investment accounts for free. There is also a fee-based version that allows investors to create a personalized plan that incorporates your risk tolerance and time horizon, but charges 0.25% per year. However, you can get your first $10,000 managed for free.
Investment Sync
SigFig free app automatically pulls your investment accounts into a single dashboard to give you a real-time view of your stocks, mutual funds, and exchange-traded funds (ETFs). SigFig can connect with over 50 brokerages, including Schwab and Fidelity. The Reporting Dashboard feature allows you to create reports on performance, key stats, fees, and holdings.
Portfolio Tracker
The SigFig free app provides snapshots of your 401(k) plan and IRAs. You’ll get weekly email summaries of account performance, news that impacts your portfolio, and alerts that focus on your top gainers and losers.
The Portfolio Tracker automatically analyzes your portfolio to find hidden fees and overexposure to a single stock, fund, or sector. The External Analysis feature allows you to analyze your external holdings to determine the proper allocation. From there, the app provides recommendations on proper asset allocation to optimize gains and manage market risk.
Automated Investing
For a fee, users can optimize their returns with automated investing. SigFig will optimize your portfolio and provide daily monitoring to keep it on track with rebalancing, dividend reinvestment, and tax-efficient strategies.
3. Sharesight
Platform: iOS, AndroidCost: Limited free version and fee-based options
Sharesight is a portfolio tracker that can monitor the performance of your investments using data that's imported from 60 stock exchanges. The service is free for up to ten holdings or one portfolio with limited reporting. Those with more than ten investments who want additional reporting features can opt for the fee-based service, which ranges from $7 to $23 per month (billed annually).
Portfolio Tracking
With Sharesight, investors can automatically track the price and performance of over 240,000 stocks ETFs, and mutual funds globally. The app can also monitor cryptocurrencies, real estate, private equity, and fixed-income investments. The annualized return feature can factor in capital gains, dividends, fees, and currency exchange fluctuations showing their impact on the overall portfolio.
Performance Reporting
Sharesight allows for charting your investment performance against various benchmarks, including stocks, ETFs, and indices such as the S&P 500. Investors can monitor their asset allocation to measure the level of diversification based on a particular sector or country. Sharesight also allows for customization when comparing a portfolio versus a benchmark.
Tracking Income
Sharesight can monitor dividend income, distributions and calculate dividend yield as well as the impact of the investment portfolio. Sharesight can project expected dividend income based on companies’ announced dividend payments. This feature is helpful to investors who rely on passive income from income-generating assets.
The service also offers a Taxable Income Report for tax reporting that includes dividends, distributions, and interest payments categorized by local and foreign income.
4. Yahoo! Finance
Platform: iOS, AndroidCost: Free
The Yahoo Finance app has a simple-to-use design, so you can easily track your stocks, commodities, bonds, and currencies. You can create and track the performance of your personal portfolio and sync multiple portfolios across all your devices.
Customized Alerts
The Yahoo Finance app provides real-time stock and investment information to stay on top of the market. Yahoo Finance allows you to create personalized alerts and follow market movements in real-time. The features include multiple watchlists to organize stocks in any manner, such as by sector. Monitor your portfolio's performance with live quotes and establish price alerts. The app also includes full-screen interactive charting.
Real-Time News
Yahoo! Finance is one of the largest business news sites in the U.S., with data, commentary, and press releases among its daily content. Of course, Yahoo Finance app users also have fast access to this breaking information and can enable notifications for news, earnings reports, and financial information.
Key Features of a Portfolio Tracker
A portfolio tracker should help monitor investments within your financial portfolio, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Although each investor is unique, some of the key features and benefits for portfolio management apps include:
A free version of the appEasy to use financial syncing of all your investment and banking accountsDashboard with reporting functions that track your financial progressAsset allocation and portfolio monitoring that allows for customizingRetirement planner tool that incorporates your 401(k) and IRAsAccess to charts to track portfolio performance and research stocksDividend tracker or monitoring of companies with increasing dividendsFee monitor to avoid paying for brokerage and mutual fund feesAn upgradable version of the free app for a low fee
Most trackers offer a free version of portfolio monitoring and additional fee-based upgrades. If you think you might like other services, such as wealth management or portfolio review, look for apps that offer advisory services. Many offer a free one-time consultation up to a certain amount of assets.
Asset Allocation
A key feature of any solid portfolio tracker app is the ability to view your asset allocation and compare the allocation to benchmark indices such as the S&P 500. Designing a target allocation based on your risk tolerance and time horizon is also important. For example, retirees would likely have a lower risk tolerance than someone who has 20 years until retirement. As a result, the asset allocation would differ depending on when you need the money.
Sometimes market conditions or life events can change your target asset allocation. As a result, an app that allows for rebalancing your portfolio to bring it in line with your long-term financial goals is essential.
Real-Time Data and Monitoring
Being able to sync all of your investment accounts and manage your portfolio from a user-friendly dashboard with access to real-time data is critical when monitoring a portfolio.
Other features include backtesting, which allows you to analyze how your portfolio would have performed if you had a different asset allocation. Also, a critical feature is monitoring your risk levels and determining if the portfolio is overexposed or underexposed to a particular investment or sector.
What Is the Best Way to Track Your Portfolio?
Using a software application (app for short) can help you monitor your investment portfolio. Portfolio tracking apps can sync and download financial information from your banking and brokerage accounts, including your 401(k).
What Should I Look for in a Portfolio Tracker?
Although each investor has specific financial goals, key features to look for include:A free version of the app so you can test it outAbility to sync all of your financial accountsA retirement planning tool that includes your 401(k) and IRAsAsset allocation to monitor your portfolio's diversificationAbility to compare your portfolio's return against a benchmark index
Are Most Portfolio Tracker Apps Free?
Most portfolio trackers offer both a free and paid version of their app. The free app usually provides several features, but those with multiple investments might opt for a fee-based app with advanced reporting, real-time data, and tax information.
The Bottom Line
Portfolio management apps track your investments easily from anywhere and at any time. Some apps sync with your existing accounts, while others require you to manually enter information on your holdings. In either case, such apps provide up-to-the-minute information—so you know where you stand now—as well as provide tools to help you get where you want to be in the future.
|
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],
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],
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"https://www.investopedia.com/terms/w/wealthmanagement.asp"
],
[
"cryptocurrencies",
"https://www.investopedia.com/terms/c/cryptocurrency.asp"
],
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"private equity",
"https://www.investopedia.com/articles/financial-careers/09/private-equity.asp"
],
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"fixed-income investments",
"https://www.investopedia.com/terms/f/fixedincome.asp"
],
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"benchmarks",
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],
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"S&P 500",
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],
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],
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https://www.investopedia.com/ask/answers/070815/what-are-some-examples-foreign-institutional-investor-fii.asp
|
What are some examples of a Foreign Institutional Investor (FII)?
|
<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-foreign-institutional-investors"></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"> Foreign Institutional Investors </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fii.asp">foreign institutional investor</a>, or FII, is a hedge fund manager, pension fund manager, mutual fund, bank, insurance firm or representative agent of these entities who is registered to invest in a foreign country. The FII takes equity positions in foreign financial markets on behalf of the entity that is based in another country.
</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"> This term is frequently used in reference to investing in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergingmarketeconomy.asp">emerging market economies</a>. Direct access to the equities markets in some countries is limited and regulated. For example, foreign institutional investors seeking to invest in Indian companies must register with the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sebi.asp">Securities and Exchange Board of India</a>, or SEBI.
</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-foreign-institutional-investments"></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"> Foreign Institutional Investments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Emerging markets offer significant potential for growth in the near future. This potential is attracting large numbers of investors from the United States and other countries. Many investments are made in the form of foreign institutional investments. These investments are sometimes referred to as "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/hot-money.asp">hot money</a>," since they often represent substantial sums that can be withdrawn from the markets at any time, potentially increasing volatility in foreign equity markets.
</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 the past few decades, developing economies began to appreciate the value of, and need for, foreign investments, and made moves to provide easier access to their financial markets.
</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"> Foreign institutional investments have favored the banking and construction sectors, as well as information technology companies. Major multinational companies involved in foreign institutional investment include Citigroup (C), HSBC (ADR -HSBC) and Merrill Lynch (MER).
</p></div>
|
## Foreign Institutional Investors
A [foreign institutional investor](https://www.investopedia.com/terms/f/fii.asp), or FII, is a hedge fund manager, pension fund manager, mutual fund, bank, insurance firm or representative agent of these entities who is registered to invest in a foreign country. The FII takes equity positions in foreign financial markets on behalf of the entity that is based in another country.
This term is frequently used in reference to investing in [emerging market economies](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp). Direct access to the equities markets in some countries is limited and regulated. For example, foreign institutional investors seeking to invest in Indian companies must register with the [Securities and Exchange Board of India](https://www.investopedia.com/terms/s/sebi.asp), or SEBI.
## Foreign Institutional Investments
Emerging markets offer significant potential for growth in the near future. This potential is attracting large numbers of investors from the United States and other countries. Many investments are made in the form of foreign institutional investments. These investments are sometimes referred to as "[hot money](https://www.investopedia.com/ask/answers/09/hot-money.asp)," since they often represent substantial sums that can be withdrawn from the markets at any time, potentially increasing volatility in foreign equity markets.
In the past few decades, developing economies began to appreciate the value of, and need for, foreign investments, and made moves to provide easier access to their financial markets.
Foreign institutional investments have favored the banking and construction sectors, as well as information technology companies. Major multinational companies involved in foreign institutional investment include Citigroup (C), HSBC (ADR -HSBC) and Merrill Lynch (MER).
|
Foreign Institutional Investors
A foreign institutional investor, or FII, is a hedge fund manager, pension fund manager, mutual fund, bank, insurance firm or representative agent of these entities who is registered to invest in a foreign country. The FII takes equity positions in foreign financial markets on behalf of the entity that is based in another country.
This term is frequently used in reference to investing in emerging market economies. Direct access to the equities markets in some countries is limited and regulated. For example, foreign institutional investors seeking to invest in Indian companies must register with the Securities and Exchange Board of India, or SEBI.
Foreign Institutional Investments
Emerging markets offer significant potential for growth in the near future. This potential is attracting large numbers of investors from the United States and other countries. Many investments are made in the form of foreign institutional investments. These investments are sometimes referred to as "hot money," since they often represent substantial sums that can be withdrawn from the markets at any time, potentially increasing volatility in foreign equity markets.
In the past few decades, developing economies began to appreciate the value of, and need for, foreign investments, and made moves to provide easier access to their financial markets.
Foreign institutional investments have favored the banking and construction sectors, as well as information technology companies. Major multinational companies involved in foreign institutional investment include Citigroup (C), HSBC (ADR -HSBC) and Merrill Lynch (MER).
|
[
[
"foreign institutional investor",
"https://www.investopedia.com/terms/f/fii.asp"
],
[
"emerging market economies",
"https://www.investopedia.com/terms/e/emergingmarketeconomy.asp"
],
[
"Securities and Exchange Board of India",
"https://www.investopedia.com/terms/s/sebi.asp"
],
[
"hot money",
"https://www.investopedia.com/ask/answers/09/hot-money.asp"
]
] |
https://www.investopedia.com/rising-oil-prices-have-fueled-a-surge-in-oil-etfs-7969297
|
Oil ETFs Power Higher With Rising Oil Prices
|
<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"> Rising oil prices have boosted some of the biggest <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> that track the price of crude, many of which have risen more than 20% since late June, the start of the current rally.
</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>Rising oil prices have boosted the asset values of some of the biggest exchange-traded funds (ETFs) that track the price of crude.</li><li>The best-performing oil ETF, the ProShares Ultra Bloomberg Crude Oil ETF (UCO), which seeks to double crude oil's price gains, has risen almost 60% since June 28.</li><li>Crude oil prices have climbed to the highest level since November last year, with WTI crude approaching $90 per barrel.</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"> Many of the biggest crude oil ETFs available to investors have risen as much as 30% since June 28, the last time the price of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wti.asp">West Texas Intermediate (WTI)</a> crude traded below $68 per barrel. The United States Oil Fund (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=USO">USO</a>), the biggest oil ETF with more than $1.5 billion in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management (AUM)</a>, has returned almost 30% since, while the iShares U.S. Oil & Gas Exploration & Production ETF (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.tradingview.com/chart/?symbol=AMEX%3AIEO" rel="nofollow">IEO</a>)—the second-biggest oil ETF—has delivered 22% returns, according to YCharts data.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The best-performing oil ETF over this period has been the ProShares Ultra Bloomberg Crude Oil ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=UCO">UCO</a>), a fund that seeks to double the return of crude oil over a given period. It's risen almost 60% since late June, roughly double the rise in crude 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_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Among other large oil ETFs, the Invesco DB Oil Fund (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBO">DBO</a>) has returned 28%, while the SPDR S&P Oil & Gas Exploration & Production ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOP">XOP</a>) has added 22%.<span class="ql-inline-citation" data-cite="3"></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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> On the flip side, ETFs that aim to short the price of oil have declined considerably in value. The ProShares Ultra Short Bloomberg ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SCO">SCO</a>), which inversely tracks oil prices, has shed almost 40% of its 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_12-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Crude oil prices have surged in recent weeks due to OPEC+ production cuts and dwindling inventories in the U.S. The price of WTI crude—the U.S. benchmark—breached $89 per barrel yesterday for the first time since November 2022. That's up more than 30% from an intraday low of $67.05 per barrel on June 28.<span class="ql-inline-citation" data-cite="5"></span> Rising oil prices have also helped power a rise in shares of energy companies, with the S&P 500 energy sector up 15% since late June.<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_14-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Prices <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/saudi-arabias-extended-production-cuts-could-mean-higher-oil-prices-ahead-7965416">could climb higher still</a> after Saudi Arabia announced last week it's extending its latest production cut—equal to 1 million barrels per day of supply—until December.<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_16-0"></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_17-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:73.5%;">
<img alt="Select Oil ETF Performance" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/zKc-bVG2em7cTpeTJV3sM2C2Mu4=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/0j0OrUPlbH7cv3kMmMaMA-dg8Qg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png" data-srcset="https://www.investopedia.com/thmb/GQk-cRXf9Chkw_P4c1X1S5Xjfus=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png 750w" data-tracking-container="true" height="882" id="mntl-sc-block-image_1-0" width="1200"/>
<noscript>
<img alt="Select Oil ETF Performance" class="img--noscript universal-image__image" height="882" sizes="750px" src="https://www.investopedia.com/thmb/0j0OrUPlbH7cv3kMmMaMA-dg8Qg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png" srcset="https://www.investopedia.com/thmb/GQk-cRXf9Chkw_P4c1X1S5Xjfus=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png 750w" width="1200"/>
</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>YCharts</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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
Rising oil prices have boosted some of the biggest [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp) that track the price of crude, many of which have risen more than 20% since late June, the start of the current rally.
### Key Takeaways
* Rising oil prices have boosted the asset values of some of the biggest exchange-traded funds (ETFs) that track the price of crude.
* The best-performing oil ETF, the ProShares Ultra Bloomberg Crude Oil ETF (UCO), which seeks to double crude oil's price gains, has risen almost 60% since June 28.
* Crude oil prices have climbed to the highest level since November last year, with WTI crude approaching $90 per barrel.
Many of the biggest crude oil ETFs available to investors have risen as much as 30% since June 28, the last time the price of [West Texas Intermediate (WTI)](https://www.investopedia.com/terms/w/wti.asp) crude traded below $68 per barrel. The United States Oil Fund ([USO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=USO)), the biggest oil ETF with more than $1.5 billion in [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp), has returned almost 30% since, while the iShares U.S. Oil & Gas Exploration & Production ETF ([IEO](https://www.tradingview.com/chart/?symbol=AMEX%3AIEO))—the second-biggest oil ETF—has delivered 22% returns, according to YCharts data.
The best-performing oil ETF over this period has been the ProShares Ultra Bloomberg Crude Oil ETF ([UCO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=UCO)), a fund that seeks to double the return of crude oil over a given period. It's risen almost 60% since late June, roughly double the rise in crude prices.
Among other large oil ETFs, the Invesco DB Oil Fund ([DBO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DBO)) has returned 28%, while the SPDR S&P Oil & Gas Exploration & Production ETF ([XOP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOP)) has added 22%.
On the flip side, ETFs that aim to short the price of oil have declined considerably in value. The ProShares Ultra Short Bloomberg ETF ([SCO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SCO)), which inversely tracks oil prices, has shed almost 40% of its value.
Crude oil prices have surged in recent weeks due to OPEC+ production cuts and dwindling inventories in the U.S. The price of WTI crude—the U.S. benchmark—breached $89 per barrel yesterday for the first time since November 2022. That's up more than 30% from an intraday low of $67.05 per barrel on June 28. Rising oil prices have also helped power a rise in shares of energy companies, with the S&P 500 energy sector up 15% since late June.
Prices [could climb higher still](https://www.investopedia.com/saudi-arabias-extended-production-cuts-could-mean-higher-oil-prices-ahead-7965416) after Saudi Arabia announced last week it's extending its latest production cut—equal to 1 million barrels per day of supply—until December.
![Select Oil ETF Performance]()
:max_bytes(150000):strip_icc()/USO_UCO_DBO_XOP_BNO_IEO_SCO_chart-4287344ab3d34a46a39c62e4d255fcf3.png)
YCharts
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
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Rising oil prices have boosted some of the biggest exchange-traded funds (ETFs) that track the price of crude, many of which have risen more than 20% since late June, the start of the current rally.
Key Takeaways
Rising oil prices have boosted the asset values of some of the biggest exchange-traded funds (ETFs) that track the price of crude.The best-performing oil ETF, the ProShares Ultra Bloomberg Crude Oil ETF (UCO), which seeks to double crude oil's price gains, has risen almost 60% since June 28.Crude oil prices have climbed to the highest level since November last year, with WTI crude approaching $90 per barrel.
Many of the biggest crude oil ETFs available to investors have risen as much as 30% since June 28, the last time the price of West Texas Intermediate (WTI) crude traded below $68 per barrel. The United States Oil Fund (USO), the biggest oil ETF with more than $1.5 billion in assets under management (AUM), has returned almost 30% since, while the iShares U.S. Oil & Gas Exploration & Production ETF (IEO)—the second-biggest oil ETF—has delivered 22% returns, according to YCharts data.
The best-performing oil ETF over this period has been the ProShares Ultra Bloomberg Crude Oil ETF (UCO), a fund that seeks to double the return of crude oil over a given period. It's risen almost 60% since late June, roughly double the rise in crude prices.
Among other large oil ETFs, the Invesco DB Oil Fund (DBO) has returned 28%, while the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has added 22%.
On the flip side, ETFs that aim to short the price of oil have declined considerably in value. The ProShares Ultra Short Bloomberg ETF (SCO), which inversely tracks oil prices, has shed almost 40% of its value.
Crude oil prices have surged in recent weeks due to OPEC+ production cuts and dwindling inventories in the U.S. The price of WTI crude—the U.S. benchmark—breached $89 per barrel yesterday for the first time since November 2022. That's up more than 30% from an intraday low of $67.05 per barrel on June 28. Rising oil prices have also helped power a rise in shares of energy companies, with the S&P 500 energy sector up 15% since late June.
Prices could climb higher still after Saudi Arabia announced last week it's extending its latest production cut—equal to 1 million barrels per day of supply—until December.
YCharts
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https://www.investopedia.com/articles/younginvestors/07/shoestring_budget.asp
|
How to Invest on a Shoestring Budget
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<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 would like to invest but think you don't have the money, think again. Even when money is tight, you can find ways to start setting aside small amounts and investing them, taking advantage of compound interest over the course of your lifetime.
</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 beauty of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/06/invest1000.asp">investing</a> is that unlike purchasing a car or even a home, it doesn't require a significant down payment. But the cost of living, as well as unplanned expenses, can make anyone feel that saving to invest is an uphill battle.
</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"> If you're living on a tight budget, though, it's possible to start investing small amounts and letting them add up over time. Here are some thoughtful ways to put away extra cash without breaking the bank, which will provide you with the means to start investing.
</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>Investing is possible even when money is tight, and saving small amounts now lets you take advantage of years of compound interest.</li><li>A high-yield savings account can help you start building wealth.</li><li>Consider signing up for an automatic savings plan and putting away bonuses and income tax refunds.</li><li>Make use of tax-advantaged retirement plans, including those sponsored by your employer.</li><li>New investment platforms like micro-investing, robo-advisors, and real estate crowdfunding can allow you to invest small amounts regularly.</li></ul></div></div></div>
<span class="heading-toc" id="toc-start-with-a-budget"></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"> Start With a Budget </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Investing is great if you have plenty of extra money lying around. But what if you don't? A lot of people put off saving and investing because they think they don't have enough money, or because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement.asp">retirement</a> is too far away to think about. Others have a lot of debt to shoulder and aren't sure how to tackle both financial tasks responsibly.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><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_13-0"><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 have a lot of high-interest debt, such as credit card debt, you may want to consider paying it off first. Otherwise, you may lose more to interest payments than you can earn from saving and investing. Look into using the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp">snowball or the avalanche methods</a> to begin paying down debt.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Other than money, one of the key things you need to have is discipline. Saving and investing are a commitment, and you'll have an easier time sticking to that commitment if your whole financial picture is organized.
</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"> Start by making a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">budget</a> and setting financial goals. Determine your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> and monthly spending obligations, such as rent, insurance, or student loan payments. Once you know what you must spend, look at what's left to figure out how much you can reasonably afford to set aside each month.
</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"> This will likely be a small amount at first. That's okay. The goal isn't to save thousands of dollars immediately. You want to start building the habit of saving and eventually invest that money to build wealth. Even if you initially have as little as $10 each month, it's better than nothing.<br/>
</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-open-a-high-yield-savings-account"></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"> Open a High-Yield Savings Account </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> An easy way to start building wealth is to open 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>. Unlike a standard checking or savings account, high-yield accounts earn significantly higher interest rates. This means that the money you set aside will earn more money for you every month just by being in the bank.
</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"> Traditional banks may require a minimum deposit for high-yield savings accounts, but many credit unions and online banks have no minimum deposit. You can start with just a few dollars at a time.
</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-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>If you're trying to save up enough to begin investing in a mutual fund or another investing vehicle with a minimum deposit, a high-yield savings account is a smart place to keep your money until you have saved enough.</p></div></div></div>
<span class="heading-toc" id="toc-make-saving-automatic"></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"> Make Saving Automatic </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Consider an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/automatic_savings_plan.asp">automatic savings plan</a>, a savings program offered by many banks and financial institutions, such as Bank of America's Keep the Change Program.
</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"> These automatic plans don't require you to do much. You can continue your normal spending and banking. The bank will round purchases made with your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit card</a> to the nearest dollar, then deposit the change daily into your savings account for free. At the end of the year, you receive a statement letting you know how much you've saved.
</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 account into which your bank deposits round-ups won't earn much interest. But automatic saving is a small, easy step you can take toward beginning to create a savings cushion. Best of all, it will happen whether you are planning for it or not.
</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"> Once you've started to build up a good cushion in your account, you can transfer it to a high-yield account or look into investing it elsewhere.
</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-set-aside-bonuses-and-refunds"></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"> Set Aside Bonuses and Refunds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> If you get an employee bonus or a tax refund, it can be tempting to use it as extra income. But since it's money you weren't counting on, a better long-term strategy is to treat it as an extra investment. Since these are generally additional to regular earnings, you're less likely to feel the pinch if you put them away.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loyalty-program.asp">Loyalty programs</a> and credit cards that offer <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-back.asp">cash-back</a> rewards are other tools that can further your savings goals. Since this is extra money that you're not actually earning from your job—meaning it won't affect your monthly budget if you put it aside—you may want to consider participating in these types of programs as well. Then, when you get cash-back rewards, set them aside in a separate account for investing.
</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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>If you are using a cash-back credit card to get the rewards, make sure you are paying off your balance each month. Otherwise, you may spend far more in interest payments than you can earn in rewards.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> If your bonus or tax refund is large enough, you can use it to open an account at a brokerage and start investing. Rather than picking individual stocks, which can be challenging for new investors, look into exchange-traded funds or mutual funds.
</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"> Mutual Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> 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 single fund that invests in a variety of stocks, bonds, and other assets. They are run by professional money managers. Different funds have different goals; for example, some may focus on stocks from specific types of companies. Others may focus on dividends (regular payments made to investors). Either way, since a professional is running the fund, you don't need to pick the assets. You choose one fund, and someone else takes it from there.
</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"> For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less. Morningstar’s mutual fund screener lists 200 different mutual funds that will accept a $500 minimum deposit.<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_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_5-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>When you are just starting to invest, any dividends your mutual fund pays will likely be quite small. Instead of getting a check for a few dollars every month, look for funds that will automatically reinvest your dividends, which grows your investment portfolio.</p></div></div></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"> Exchange-Traded Funds </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stock-etf.asp">Exchange-traded funds</a> (ETFs) are similar to mutual funds, except that while mutual funds' prices are set at the end of the trading day, ETFs trade like stocks, and their values change based on each trade<em>.</em> For example, you can buy an ETF like the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spiders.asp">Standard & Poor's depository receipt (SPDR)</a> Trust, which attempts to mimic the performance of the S&P 500 without the hassle and costs associated with purchasing 500 individual stocks.
</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"> ETFs not only provide the opportunity to own a single investment that encompasses a large number of stocks but also offer the opportunity 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>. Like mutual funds, a variety of ETFs are available to match your investing goals. A number of financial websites contain readily available information the average investor can use to research ETFs and their performance simply by searching the ETF ticker symbol.<br/>
</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"> For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less.<br>
</br></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-tip" 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_6-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>Once you're ready to invest, check out low-cost online brokers. A good place to start is Investopedia's list of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-low-costs-4587874">best discount brokers</a>.</p></div></div></div>
<span class="heading-toc" id="toc-use-alternate-forms-of-investing"></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"> Use Alternate Forms of Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> New technologies and software companies have also created other ways of investing outside of managing your own brokerage account. For many new investors, these platforms are more accessible and can help you start investing sooner.
</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"> Micro-Investing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/microinvesting-platform.asp">Micro-investing apps</a> let you invest small sums of money to buy fractional shares of mutual funds or stocks. For many, minimum investments start around $5. This low barrier to entry means you can start investing, even if you don't yet have much saved.
</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"> For example, Acorns, a micro-investing app, works like an automatic savings account. You choose what type of investment account you want to open and connect the app to your bank account. When you make a purchase, the amount is rounded up to the nearest dollar, and the extra is automatically invested in your Acorns account.<br/>
</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_7-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_7-0"><p>Before beginning to use an investing app, check the platform's security features to make sure that your money will be protected with FDIC insurance.</p></div></div></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"> Robo-Advisors </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-robo-advisors-4693125">Robo-advisors</a> are automated financial planning platforms driven by algorithms. They were created to make investing as simple and accessible as possible. With little to no human contact, these companies collect your financial information and goals, offer advice, then invest your assets automatically, enabling you to pay lower fees.<br/>
</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"> These platforms can be especially helpful for those at the beginning of their journey to financial independence. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-literacy-survey-5223919">The 2022 Investopedia Financial Literacy Survey</a> found that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/generation-z-stepping-into-financial-independence-5224362">Generation Z</a> adults (i.e., those 18 to 25 years old) were more financially sophisticated than any prior generation was at their age. However, even though 26% of those surveyed were already invested in the stock market, only one-fourth of this group felt they understood the market well enough to explain it to someone else.
</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-get-your-401k-match"></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"> Get Your 401(k) Match </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Participate in your employer's <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>, especially if it includes a match. Take time to read the descriptions of each investment the plan offers, figure out how much you can set aside from each paycheck, and determine your level of comfort with the various tiers of risk the plan's investments hold. <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 a good start for people who aren't familiar with the particulars of investing, and most, if not all, 401(k) plans offer them.<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_78-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> Researching your options is a critical step if you want to maximize your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">returns</a>. Take time once a year to reassess your plan to ensure that your fund is meeting your investing goals. Don't forget to rebalance your investments. Past performance is a good predictor of the future, but remember, it's not always a guarantee.
</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"> Many financial websites have excellent resources to research the performance of individual stocks as well specific mutual funds. Keep in mind that a fund's performance is only one of many important parts of the equation. Watch out for excessive administrative fees, which can eat away at your earnings.
</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"> In 2006, a flurry of lawsuits over 401(k) plan fees prompted an investigation by a congressional committee into fee disclosure.<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_84-0"></div>
<span class="heading-toc" id="toc-open-a-roth-ira"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_85-0"> <span class="mntl-sc-block-heading__text"> Open a Roth IRA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Approximately 57 million Americans work for employers that don't offer a 401(k) plan, but that doesn't mean those workers can't successfully save and invest on their own.<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_87-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> If you don't have a workplace retirement plan, you can still open 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> for yourself. (You can also open a Roth IRA even if you have a 401(k) at work.) This is a tax-advantaged retirement savings account, and most banks and brokerages will allow you to open one. If your bank has a minimum initial investment that is too high for you, many micro-investing apps offer IRAs as well.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_89-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> In 2023, you can contribute up to $6,500, or $7,500 if you are over age 50. This money won't be taxed when you withdraw it after retirement.<span class="ql-inline-citation" data-cite="14"></span><br>
</br></p>
<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-real-estate-crowdfunding"></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"> Real Estate Crowdfunding </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> In the past, investing in real estate was a lofty ideal for the average investor, but not anymore. Real estate crowdfunding is a new style of investing that raises capital for real estate projects and investments via the internet and social media outlets.
</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"> When investors engage with a crowdfunding company, that company invests their cash in a series of real estate projects, including hotels, medical facilities, and condominiums. Many of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790">best real estate crowdfunding sites</a> will accept low initial investments, allowing average investors to reap the rewards of owning real estate while cutting out the headaches and large expenses related to property ownership.
</p>
<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-how-do-i-start-investing-on-a-small-budget"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Start Investing on a Small Budget?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To start investing on a small budget, sign up for an automatic savings plan through your bank, then transfer your money to a high-yield savings account where it can start to earn interest. If you receive a bonus at work or a tax refund, set it aside for investing, rather than spending. If your employer offers a 401(k) match, make sure you are contributing enough from your paycheck to get the full match. If you want to invest in traditional mutual funds, look for one that has an initial investment of $500 or less.</p><p><br/></p></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-how-can-i-minimize-investing-fees"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Minimize Investing Fees?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You can minimize investing fees by using a micro-investing app or a robo-advisor. Since most of these platforms are automated, they can charge lower fees than traditional brokerage firms. If you do use a traditional brokerage, always check the fees before you make an investment decision.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_100-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_101-0"><span class="heading-toc" id="toc-is-100-too-little-to-invest"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is $100 Too Little to Invest?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There are many ways to start investing with as little as $100 or less. Instead of opening a traditional brokerage account, look into a micro-investing app or a robo-advisor. Many of these investment platforms have low minimum initial investments. It is better to start investing sooner rather than later, even if you can only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/twenty-five-dollar-investment.asp">contribute a small amount</a>. This lets your money grow over time through compound interest.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></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_103-0"> <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_104-0"> When it comes to investing, it isn't the amount that matters—it's getting started. Start by getting your finances organized with a budget and by paying down debt. Then begin setting aside small amounts of money every month, even if it's just $5 to start.
</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"> By using high-yield savings accounts and new investment platforms, you may be able to start investing sooner than you thought possible. And when you invest now, your money has more time to grow and build wealth.
</p></div>
|
If you would like to invest but think you don't have the money, think again. Even when money is tight, you can find ways to start setting aside small amounts and investing them, taking advantage of compound interest over the course of your lifetime.
The beauty of [investing](https://www.investopedia.com/articles/basics/06/invest1000.asp) is that unlike purchasing a car or even a home, it doesn't require a significant down payment. But the cost of living, as well as unplanned expenses, can make anyone feel that saving to invest is an uphill battle.
If you're living on a tight budget, though, it's possible to start investing small amounts and letting them add up over time. Here are some thoughtful ways to put away extra cash without breaking the bank, which will provide you with the means to start investing.
### Key Takeaways
* Investing is possible even when money is tight, and saving small amounts now lets you take advantage of years of compound interest.
* A high-yield savings account can help you start building wealth.
* Consider signing up for an automatic savings plan and putting away bonuses and income tax refunds.
* Make use of tax-advantaged retirement plans, including those sponsored by your employer.
* New investment platforms like micro-investing, robo-advisors, and real estate crowdfunding can allow you to invest small amounts regularly.
## Start With a Budget
Investing is great if you have plenty of extra money lying around. But what if you don't? A lot of people put off saving and investing because they think they don't have enough money, or because [retirement](https://www.investopedia.com/terms/r/retirement.asp) is too far away to think about. Others have a lot of debt to shoulder and aren't sure how to tackle both financial tasks responsibly.
###
If you have a lot of high-interest debt, such as credit card debt, you may want to consider paying it off first. Otherwise, you may lose more to interest payments than you can earn from saving and investing. Look into using the [snowball or the avalanche methods](https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp) to begin paying down debt.
Other than money, one of the key things you need to have is discipline. Saving and investing are a commitment, and you'll have an easier time sticking to that commitment if your whole financial picture is organized.
Start by making a [budget](https://www.investopedia.com/terms/b/budget.asp) and setting financial goals. Determine your [income](https://www.investopedia.com/terms/i/income.asp) and monthly spending obligations, such as rent, insurance, or student loan payments. Once you know what you must spend, look at what's left to figure out how much you can reasonably afford to set aside each month.
This will likely be a small amount at first. That's okay. The goal isn't to save thousands of dollars immediately. You want to start building the habit of saving and eventually invest that money to build wealth. Even if you initially have as little as $10 each month, it's better than nothing.
## Open a High-Yield Savings Account
An easy way to start building wealth is to open a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp). Unlike a standard checking or savings account, high-yield accounts earn significantly higher interest rates. This means that the money you set aside will earn more money for you every month just by being in the bank.
Traditional banks may require a minimum deposit for high-yield savings accounts, but many credit unions and online banks have no minimum deposit. You can start with just a few dollars at a time.
###
If you're trying to save up enough to begin investing in a mutual fund or another investing vehicle with a minimum deposit, a high-yield savings account is a smart place to keep your money until you have saved enough.
## Make Saving Automatic
Consider an [automatic savings plan](https://www.investopedia.com/terms/a/automatic_savings_plan.asp), a savings program offered by many banks and financial institutions, such as Bank of America's Keep the Change Program.
These automatic plans don't require you to do much. You can continue your normal spending and banking. The bank will round purchases made with your [debit card](https://www.investopedia.com/terms/d/debitcard.asp) to the nearest dollar, then deposit the change daily into your savings account for free. At the end of the year, you receive a statement letting you know how much you've saved.
The account into which your bank deposits round-ups won't earn much interest. But automatic saving is a small, easy step you can take toward beginning to create a savings cushion. Best of all, it will happen whether you are planning for it or not.
Once you've started to build up a good cushion in your account, you can transfer it to a high-yield account or look into investing it elsewhere.
## Set Aside Bonuses and Refunds
If you get an employee bonus or a tax refund, it can be tempting to use it as extra income. But since it's money you weren't counting on, a better long-term strategy is to treat it as an extra investment. Since these are generally additional to regular earnings, you're less likely to feel the pinch if you put them away.
[Loyalty programs](https://www.investopedia.com/terms/l/loyalty-program.asp) and credit cards that offer [cash-back](https://www.investopedia.com/terms/c/cash-back.asp) rewards are other tools that can further your savings goals. Since this is extra money that you're not actually earning from your job—meaning it won't affect your monthly budget if you put it aside—you may want to consider participating in these types of programs as well. Then, when you get cash-back rewards, set them aside in a separate account for investing.
###
If you are using a cash-back credit card to get the rewards, make sure you are paying off your balance each month. Otherwise, you may spend far more in interest payments than you can earn in rewards.
If your bonus or tax refund is large enough, you can use it to open an account at a brokerage and start investing. Rather than picking individual stocks, which can be challenging for new investors, look into exchange-traded funds or mutual funds.
### Mutual Funds
A [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) is a single fund that invests in a variety of stocks, bonds, and other assets. They are run by professional money managers. Different funds have different goals; for example, some may focus on stocks from specific types of companies. Others may focus on dividends (regular payments made to investors). Either way, since a professional is running the fund, you don't need to pick the assets. You choose one fund, and someone else takes it from there.
For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less. Morningstar’s mutual fund screener lists 200 different mutual funds that will accept a $500 minimum deposit.
###
When you are just starting to invest, any dividends your mutual fund pays will likely be quite small. Instead of getting a check for a few dollars every month, look for funds that will automatically reinvest your dividends, which grows your investment portfolio.
### Exchange-Traded Funds
[Exchange-traded funds](https://www.investopedia.com/terms/s/stock-etf.asp) (ETFs) are similar to mutual funds, except that while mutual funds' prices are set at the end of the trading day, ETFs trade like stocks, and their values change based on each trade*.* For example, you can buy an ETF like the [Standard & Poor's depository receipt (SPDR)](https://www.investopedia.com/terms/s/spiders.asp) Trust, which attempts to mimic the performance of the S&P 500 without the hassle and costs associated with purchasing 500 individual stocks.
ETFs not only provide the opportunity to own a single investment that encompasses a large number of stocks but also offer the opportunity to diversify your [portfolio](https://www.investopedia.com/terms/p/portfolio.asp). Like mutual funds, a variety of ETFs are available to match your investing goals. A number of financial websites contain readily available information the average investor can use to research ETFs and their performance simply by searching the ETF ticker symbol.
For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less.
###
Once you're ready to invest, check out low-cost online brokers. A good place to start is Investopedia's list of the [best discount brokers](https://www.investopedia.com/best-brokers-for-low-costs-4587874).
## Use Alternate Forms of Investing
New technologies and software companies have also created other ways of investing outside of managing your own brokerage account. For many new investors, these platforms are more accessible and can help you start investing sooner.
### Micro-Investing
[Micro-investing apps](https://www.investopedia.com/terms/m/microinvesting-platform.asp) let you invest small sums of money to buy fractional shares of mutual funds or stocks. For many, minimum investments start around $5. This low barrier to entry means you can start investing, even if you don't yet have much saved.
For example, Acorns, a micro-investing app, works like an automatic savings account. You choose what type of investment account you want to open and connect the app to your bank account. When you make a purchase, the amount is rounded up to the nearest dollar, and the extra is automatically invested in your Acorns account.
###
Before beginning to use an investing app, check the platform's security features to make sure that your money will be protected with FDIC insurance.
### Robo-Advisors
[Robo-advisors](https://www.investopedia.com/best-robo-advisors-4693125) are automated financial planning platforms driven by algorithms. They were created to make investing as simple and accessible as possible. With little to no human contact, these companies collect your financial information and goals, offer advice, then invest your assets automatically, enabling you to pay lower fees.
These platforms can be especially helpful for those at the beginning of their journey to financial independence. [The 2022 Investopedia Financial Literacy Survey](https://www.investopedia.com/financial-literacy-survey-5223919) found that [Generation Z](https://www.investopedia.com/generation-z-stepping-into-financial-independence-5224362) adults (i.e., those 18 to 25 years old) were more financially sophisticated than any prior generation was at their age. However, even though 26% of those surveyed were already invested in the stock market, only one-fourth of this group felt they understood the market well enough to explain it to someone else.
## Get Your 401(k) Match
Participate in your employer's [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp), especially if it includes a match. Take time to read the descriptions of each investment the plan offers, figure out how much you can set aside from each paycheck, and determine your level of comfort with the various tiers of risk the plan's investments hold. [Index funds](https://www.investopedia.com/terms/i/indexfund.asp) are a good start for people who aren't familiar with the particulars of investing, and most, if not all, 401(k) plans offer them.
Researching your options is a critical step if you want to maximize your [returns](https://www.investopedia.com/terms/r/return.asp). Take time once a year to reassess your plan to ensure that your fund is meeting your investing goals. Don't forget to rebalance your investments. Past performance is a good predictor of the future, but remember, it's not always a guarantee.
Many financial websites have excellent resources to research the performance of individual stocks as well specific mutual funds. Keep in mind that a fund's performance is only one of many important parts of the equation. Watch out for excessive administrative fees, which can eat away at your earnings.
In 2006, a flurry of lawsuits over 401(k) plan fees prompted an investigation by a congressional committee into fee disclosure.
## Open a Roth IRA
Approximately 57 million Americans work for employers that don't offer a 401(k) plan, but that doesn't mean those workers can't successfully save and invest on their own.
If you don't have a workplace retirement plan, you can still open a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) for yourself. (You can also open a Roth IRA even if you have a 401(k) at work.) This is a tax-advantaged retirement savings account, and most banks and brokerages will allow you to open one. If your bank has a minimum initial investment that is too high for you, many micro-investing apps offer IRAs as well.
In 2023, you can contribute up to $6,500, or $7,500 if you are over age 50. This money won't be taxed when you withdraw it after retirement.
## Real Estate Crowdfunding
In the past, investing in real estate was a lofty ideal for the average investor, but not anymore. Real estate crowdfunding is a new style of investing that raises capital for real estate projects and investments via the internet and social media outlets.
When investors engage with a crowdfunding company, that company invests their cash in a series of real estate projects, including hotels, medical facilities, and condominiums. Many of the [best real estate crowdfunding sites](https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790) will accept low initial investments, allowing average investors to reap the rewards of owning real estate while cutting out the headaches and large expenses related to property ownership.
## How Do I Start Investing on a Small Budget?
To start investing on a small budget, sign up for an automatic savings plan through your bank, then transfer your money to a high-yield savings account where it can start to earn interest. If you receive a bonus at work or a tax refund, set it aside for investing, rather than spending. If your employer offers a 401(k) match, make sure you are contributing enough from your paycheck to get the full match. If you want to invest in traditional mutual funds, look for one that has an initial investment of $500 or less.
## How Can I Minimize Investing Fees?
You can minimize investing fees by using a micro-investing app or a robo-advisor. Since most of these platforms are automated, they can charge lower fees than traditional brokerage firms. If you do use a traditional brokerage, always check the fees before you make an investment decision.
## Is $100 Too Little to Invest?
There are many ways to start investing with as little as $100 or less. Instead of opening a traditional brokerage account, look into a micro-investing app or a robo-advisor. Many of these investment platforms have low minimum initial investments. It is better to start investing sooner rather than later, even if you can only [contribute a small amount](https://www.investopedia.com/articles/pf/08/twenty-five-dollar-investment.asp). This lets your money grow over time through compound interest.
## The Bottom Line
When it comes to investing, it isn't the amount that matters—it's getting started. Start by getting your finances organized with a budget and by paying down debt. Then begin setting aside small amounts of money every month, even if it's just $5 to start.
By using high-yield savings accounts and new investment platforms, you may be able to start investing sooner than you thought possible. And when you invest now, your money has more time to grow and build wealth.
|
If you would like to invest but think you don't have the money, think again. Even when money is tight, you can find ways to start setting aside small amounts and investing them, taking advantage of compound interest over the course of your lifetime.
The beauty of investing is that unlike purchasing a car or even a home, it doesn't require a significant down payment. But the cost of living, as well as unplanned expenses, can make anyone feel that saving to invest is an uphill battle.
If you're living on a tight budget, though, it's possible to start investing small amounts and letting them add up over time. Here are some thoughtful ways to put away extra cash without breaking the bank, which will provide you with the means to start investing.
Key Takeaways
Investing is possible even when money is tight, and saving small amounts now lets you take advantage of years of compound interest.A high-yield savings account can help you start building wealth.Consider signing up for an automatic savings plan and putting away bonuses and income tax refunds.Make use of tax-advantaged retirement plans, including those sponsored by your employer.New investment platforms like micro-investing, robo-advisors, and real estate crowdfunding can allow you to invest small amounts regularly.
Start With a Budget
Investing is great if you have plenty of extra money lying around. But what if you don't? A lot of people put off saving and investing because they think they don't have enough money, or because retirement is too far away to think about. Others have a lot of debt to shoulder and aren't sure how to tackle both financial tasks responsibly.
If you have a lot of high-interest debt, such as credit card debt, you may want to consider paying it off first. Otherwise, you may lose more to interest payments than you can earn from saving and investing. Look into using the snowball or the avalanche methods to begin paying down debt.
Other than money, one of the key things you need to have is discipline. Saving and investing are a commitment, and you'll have an easier time sticking to that commitment if your whole financial picture is organized.
Start by making a budget and setting financial goals. Determine your income and monthly spending obligations, such as rent, insurance, or student loan payments. Once you know what you must spend, look at what's left to figure out how much you can reasonably afford to set aside each month.
This will likely be a small amount at first. That's okay. The goal isn't to save thousands of dollars immediately. You want to start building the habit of saving and eventually invest that money to build wealth. Even if you initially have as little as $10 each month, it's better than nothing.
Open a High-Yield Savings Account
An easy way to start building wealth is to open a high-yield savings account. Unlike a standard checking or savings account, high-yield accounts earn significantly higher interest rates. This means that the money you set aside will earn more money for you every month just by being in the bank.
Traditional banks may require a minimum deposit for high-yield savings accounts, but many credit unions and online banks have no minimum deposit. You can start with just a few dollars at a time.
If you're trying to save up enough to begin investing in a mutual fund or another investing vehicle with a minimum deposit, a high-yield savings account is a smart place to keep your money until you have saved enough.
Make Saving Automatic
Consider an automatic savings plan, a savings program offered by many banks and financial institutions, such as Bank of America's Keep the Change Program.
These automatic plans don't require you to do much. You can continue your normal spending and banking. The bank will round purchases made with your debit card to the nearest dollar, then deposit the change daily into your savings account for free. At the end of the year, you receive a statement letting you know how much you've saved.
The account into which your bank deposits round-ups won't earn much interest. But automatic saving is a small, easy step you can take toward beginning to create a savings cushion. Best of all, it will happen whether you are planning for it or not.
Once you've started to build up a good cushion in your account, you can transfer it to a high-yield account or look into investing it elsewhere.
Set Aside Bonuses and Refunds
If you get an employee bonus or a tax refund, it can be tempting to use it as extra income. But since it's money you weren't counting on, a better long-term strategy is to treat it as an extra investment. Since these are generally additional to regular earnings, you're less likely to feel the pinch if you put them away.
Loyalty programs and credit cards that offer cash-back rewards are other tools that can further your savings goals. Since this is extra money that you're not actually earning from your job—meaning it won't affect your monthly budget if you put it aside—you may want to consider participating in these types of programs as well. Then, when you get cash-back rewards, set them aside in a separate account for investing.
If you are using a cash-back credit card to get the rewards, make sure you are paying off your balance each month. Otherwise, you may spend far more in interest payments than you can earn in rewards.
If your bonus or tax refund is large enough, you can use it to open an account at a brokerage and start investing. Rather than picking individual stocks, which can be challenging for new investors, look into exchange-traded funds or mutual funds.
Mutual Funds
A mutual fund is a single fund that invests in a variety of stocks, bonds, and other assets. They are run by professional money managers. Different funds have different goals; for example, some may focus on stocks from specific types of companies. Others may focus on dividends (regular payments made to investors). Either way, since a professional is running the fund, you don't need to pick the assets. You choose one fund, and someone else takes it from there.
For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less. Morningstar’s mutual fund screener lists 200 different mutual funds that will accept a $500 minimum deposit.
When you are just starting to invest, any dividends your mutual fund pays will likely be quite small. Instead of getting a check for a few dollars every month, look for funds that will automatically reinvest your dividends, which grows your investment portfolio.
Exchange-Traded Funds
Exchange-traded funds (ETFs) are similar to mutual funds, except that while mutual funds' prices are set at the end of the trading day, ETFs trade like stocks, and their values change based on each trade. For example, you can buy an ETF like the Standard & Poor's depository receipt (SPDR) Trust, which attempts to mimic the performance of the S&P 500 without the hassle and costs associated with purchasing 500 individual stocks.
ETFs not only provide the opportunity to own a single investment that encompasses a large number of stocks but also offer the opportunity to diversify your portfolio. Like mutual funds, a variety of ETFs are available to match your investing goals. A number of financial websites contain readily available information the average investor can use to research ETFs and their performance simply by searching the ETF ticker symbol.
For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less.
Once you're ready to invest, check out low-cost online brokers. A good place to start is Investopedia's list of the best discount brokers.
Use Alternate Forms of Investing
New technologies and software companies have also created other ways of investing outside of managing your own brokerage account. For many new investors, these platforms are more accessible and can help you start investing sooner.
Micro-Investing
Micro-investing apps let you invest small sums of money to buy fractional shares of mutual funds or stocks. For many, minimum investments start around $5. This low barrier to entry means you can start investing, even if you don't yet have much saved.
For example, Acorns, a micro-investing app, works like an automatic savings account. You choose what type of investment account you want to open and connect the app to your bank account. When you make a purchase, the amount is rounded up to the nearest dollar, and the extra is automatically invested in your Acorns account.
Before beginning to use an investing app, check the platform's security features to make sure that your money will be protected with FDIC insurance.
Robo-Advisors
Robo-advisors are automated financial planning platforms driven by algorithms. They were created to make investing as simple and accessible as possible. With little to no human contact, these companies collect your financial information and goals, offer advice, then invest your assets automatically, enabling you to pay lower fees.
These platforms can be especially helpful for those at the beginning of their journey to financial independence. The 2022 Investopedia Financial Literacy Survey found that Generation Z adults (i.e., those 18 to 25 years old) were more financially sophisticated than any prior generation was at their age. However, even though 26% of those surveyed were already invested in the stock market, only one-fourth of this group felt they understood the market well enough to explain it to someone else.
Get Your 401(k) Match
Participate in your employer's 401(k) plan, especially if it includes a match. Take time to read the descriptions of each investment the plan offers, figure out how much you can set aside from each paycheck, and determine your level of comfort with the various tiers of risk the plan's investments hold. Index funds are a good start for people who aren't familiar with the particulars of investing, and most, if not all, 401(k) plans offer them.
Researching your options is a critical step if you want to maximize your returns. Take time once a year to reassess your plan to ensure that your fund is meeting your investing goals. Don't forget to rebalance your investments. Past performance is a good predictor of the future, but remember, it's not always a guarantee.
Many financial websites have excellent resources to research the performance of individual stocks as well specific mutual funds. Keep in mind that a fund's performance is only one of many important parts of the equation. Watch out for excessive administrative fees, which can eat away at your earnings.
In 2006, a flurry of lawsuits over 401(k) plan fees prompted an investigation by a congressional committee into fee disclosure.
Open a Roth IRA
Approximately 57 million Americans work for employers that don't offer a 401(k) plan, but that doesn't mean those workers can't successfully save and invest on their own.
If you don't have a workplace retirement plan, you can still open a Roth IRA for yourself. (You can also open a Roth IRA even if you have a 401(k) at work.) This is a tax-advantaged retirement savings account, and most banks and brokerages will allow you to open one. If your bank has a minimum initial investment that is too high for you, many micro-investing apps offer IRAs as well.
In 2023, you can contribute up to $6,500, or $7,500 if you are over age 50. This money won't be taxed when you withdraw it after retirement.
Real Estate Crowdfunding
In the past, investing in real estate was a lofty ideal for the average investor, but not anymore. Real estate crowdfunding is a new style of investing that raises capital for real estate projects and investments via the internet and social media outlets.
When investors engage with a crowdfunding company, that company invests their cash in a series of real estate projects, including hotels, medical facilities, and condominiums. Many of the best real estate crowdfunding sites will accept low initial investments, allowing average investors to reap the rewards of owning real estate while cutting out the headaches and large expenses related to property ownership.
How Do I Start Investing on a Small Budget?
To start investing on a small budget, sign up for an automatic savings plan through your bank, then transfer your money to a high-yield savings account where it can start to earn interest. If you receive a bonus at work or a tax refund, set it aside for investing, rather than spending. If your employer offers a 401(k) match, make sure you are contributing enough from your paycheck to get the full match. If you want to invest in traditional mutual funds, look for one that has an initial investment of $500 or less.
How Can I Minimize Investing Fees?
You can minimize investing fees by using a micro-investing app or a robo-advisor. Since most of these platforms are automated, they can charge lower fees than traditional brokerage firms. If you do use a traditional brokerage, always check the fees before you make an investment decision.
Is $100 Too Little to Invest?
There are many ways to start investing with as little as $100 or less. Instead of opening a traditional brokerage account, look into a micro-investing app or a robo-advisor. Many of these investment platforms have low minimum initial investments. It is better to start investing sooner rather than later, even if you can only contribute a small amount. This lets your money grow over time through compound interest.
The Bottom Line
When it comes to investing, it isn't the amount that matters—it's getting started. Start by getting your finances organized with a budget and by paying down debt. Then begin setting aside small amounts of money every month, even if it's just $5 to start.
By using high-yield savings accounts and new investment platforms, you may be able to start investing sooner than you thought possible. And when you invest now, your money has more time to grow and build wealth.
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https://www.investopedia.com/top-cds-may-2-2024-six-deals-let-you-lock-in-5-40-or-5-50-until-2025-8642726
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Top CDs May 2, 2024 - Six Deals Let You Lock in 5.40% or 5.50%—Until 2025
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<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">
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<img alt="Six CDs that pay 5.40% or 5.50% with terms of 9 to 15 months. Rates current as of May 2, 2024." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/TX-3QmpOlZrqIQlVJMX5aXxCZ6k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/TX-3QmpOlZrqIQlVJMX5aXxCZ6k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png" data-srcset="https://www.investopedia.com/thmb/BrmZATlvkmlf4lqkbqiVeF4VzSE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png 750w" data-tracking-container="true" height="1312" id="mntl-sc-block-image_1-0" width="2480"/>
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<img alt="Six CDs that pay 5.40% or 5.50% with terms of 9 to 15 months. Rates current as of May 2, 2024." class="img--noscript universal-image__image" height="1312" sizes="750px" src="https://www.investopedia.com/thmb/TX-3QmpOlZrqIQlVJMX5aXxCZ6k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png" srcset="https://www.investopedia.com/thmb/BrmZATlvkmlf4lqkbqiVeF4VzSE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png 750w" width="2480"/>
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<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>
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<li>The leading nationally available CD rate continues to be 5.65% APY, available from <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&lender=MutualOne%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">MutualOne Bank</a> for a 3-month term.</li>
<li>The runner-up rate of 5.55% APY is available for a longer 6 months, offered by <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Newtek Bank</a>.</li>
<li>Want to secure one of today's rate until 2025? A half dozen offers pay 5.40% to 5.50% for terms of 9 to 15 months.</li>
<li>You can also snag rates as high as 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> softened a bit earlier this year, in anticipation of 2024 Fed rate cuts. But recent inflation readings suggest it could be a while before the Fed is ready to lower rates.</li>
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<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.
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<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.
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<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.
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<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 5.40% to 5.50% from one of six options that range from 9 months to 15 months. That could keep your rate lock in place as long as August 2025. For a slightly longer lock, though, you might prefer <a data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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&lender=Credit%20Human&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, potentially extending your guaranteed return until spring 2026.<br/>
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<img alt="Range of the Top 15 CD Rates per Term - May 2, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/fOxjfqT9kqLRzZhgvtObS9CYhdU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/fOxjfqT9kqLRzZhgvtObS9CYhdU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.png" data-srcset="https://www.investopedia.com/thmb/S7Hw-doWQ7JuRycg45i0bzJPbsA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.png 750w" data-tracking-container="true" height="1096" id="mntl-sc-block-image_2-0" width="2480"/>
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<img alt="Range of the Top 15 CD Rates per Term - May 2, 2024" class="img--noscript universal-image__image" height="1096" sizes="750px" src="https://www.investopedia.com/thmb/fOxjfqT9kqLRzZhgvtObS9CYhdU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.png" srcset="https://www.investopedia.com/thmb/S7Hw-doWQ7JuRycg45i0bzJPbsA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.png 750w" width="2480"/>
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<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.
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<colgroup span="1" style="width: 100px;"></colgroup>
<colgroup span="1" style="width: 121px;"></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}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.mutualone.com/client-services/rates-calculators/deposit-rates/&lender=MutualOne%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">MutualOne Bank</a></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-6-month-cd-rates-4783267" rel="noopener noreferrer">6 months</a></td>
<td>5.55% APY</td>
<td>5.55% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.newtekbank.com/certificate-of-deposit/&lender=Newtek%20Bank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Newtek Bank</a></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-1-year-cd-rates-4796650" rel="noopener noreferrer">1 year</a></td>
<td>5.40% APY</td>
<td>5.40% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.applefcu.org/rates&lender=Apple%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">Apple Federal Credit Union</a> and <a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.nexbankpersonal.com/certificates-of-deposit-cds&lender=NexBank&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">NexBank</a></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-18-month-cd-rates-5272348" rel="noopener noreferrer">18 months</a></td>
<td>5.40% APY</td>
<td>5.40% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.northernbankdirect.com/cds&lender=Northern%20Bank%20Direct&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Northern Bank Direct</a></td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.xcelfcu.org/Explore/Resources/Rates&lender=XCEL%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">2 years</a></td>
<td>5.30% APY</td>
<td>5.30% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.credithuman.com/investments-planning/certificates-iras/share-certificate&lender=Credit%20Human&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Credit Human</a></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-3-year-cd-rates-4782938" rel="noopener noreferrer">3 years</a></td>
<td>5.00% APY</td>
<td>5.00% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.dollarsavingsdirect.com/securebanking/cdInfo.do&lender=DollarSavingsDirect&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">DollarSavingsDirect</a></td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-5-year-cd-rates-4801473" rel="noopener noreferrer">4 years</a></td>
<td>4.86% APY</td>
<td>4.86% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.wellbyfinancial.com/savings/certificates/&lender=Wellby%20Financial&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="noopener noreferrer nofollow">Wellby Financial</a></td>
</tr>
<tr>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&sub_2=${DOC_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://finance.mediaalpha.com/dotdash/direct-link.html?cu=https://www.lfcu.org/rates/personal-certificate-rates/&lender=Lafayette%20Federal%20Credit%20Union&type=CD;rENpvBV_7IwwTpHRgbEQg9JlSH1hUgpLivAI0es52Cmr1l6igsUu2KIAy6Xb-greXxpicNNpXRTca2hxVAxvB75b-Hs8JQ" rel="nofollow">5 years</a></td>
<td>4.70% APY</td>
<td>4.70% APY</td>
<td>No change</td>
<td><a class="null" data-affiliate-link-rewriter="sub_1=${REQUEST_ID}&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&lender=Credit%20Human&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/RnqtZ/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 2, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/39ffctEvD7rMpahljYYzvgP3SSs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/39ffctEvD7rMpahljYYzvgP3SSs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.png" data-srcset="https://www.investopedia.com/thmb/RCMOlydYsFQMUEa5-DY38CVo7Fg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.png 750w" data-tracking-container="true" height="2204" id="mntl-sc-block-image_3-0" width="2480"/>
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<img alt="Line graph showing the top CD rate by term each month from Dec 2021 to the present - May 2, 2024" class="img--noscript universal-image__image" height="2204" sizes="750px" src="https://www.investopedia.com/thmb/39ffctEvD7rMpahljYYzvgP3SSs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.png" srcset="https://www.investopedia.com/thmb/RCMOlydYsFQMUEa5-DY38CVo7Fg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.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 yesterday</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. Yet, 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"> The Fed's written statement yesterday 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 yesterday'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>
|
![Six CDs that pay 5.40% or 5.50% with terms of 9 to 15 months. Rates current as of May 2, 2024.]()
:max_bytes(150000):strip_icc()/5-2Top-d85dfa5856eb4be3a1ba6a6dd0683abf.png)
### Key Takeaways
* The leading nationally available CD rate continues to be 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.
* The runner-up rate of 5.55% APY is available for a longer 6 months, offered by [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).
* Want to secure one of today's rate until 2025? A half dozen offers pay 5.40% to 5.50% for terms of 9 to 15 months.
* You can also snag rates as high as 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) softened a bit earlier this year, in anticipation of 2024 Fed rate cuts. But recent inflation readings suggest it could be a while before the Fed is ready to lower 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 5.40% to 5.50% from one of six options that range from 9 months to 15 months. That could keep your rate lock in place as long as August 2025. For a slightly longer lock, though, you might prefer [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, potentially extending your guaranteed return until spring 2026.
![Range of the Top 15 CD Rates per Term - May 2, 2024]()
:max_bytes(150000):strip_icc()/5-2Ranges-b4813436dbeb4b80aec21599d9e9b9fa.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) | 5.40% APY | 5.40% APY | No change | [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) | 4.86% APY | 4.86% APY | No change | [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 2, 2024]()
:max_bytes(150000):strip_icc()/5-2Lines-58d921d2b2a644939e398b210a49baec.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 yesterday](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. Yet, 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.
The Fed's written statement yesterday 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 yesterday'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 CD rate continues to be 5.65% APY, available from MutualOne Bank for a 3-month term.
The runner-up rate of 5.55% APY is available for a longer 6 months, offered by Newtek Bank.
Want to secure one of today's rate until 2025? A half dozen offers pay 5.40% to 5.50% for terms of 9 to 15 months.
You can also snag rates as high as 5.30% for 2 years, or between 4.70% and 5.00% for 3 to 5 years.
The best CD rates softened a bit earlier this year, in anticipation of 2024 Fed rate cuts. But recent inflation readings suggest it could be a while before the Fed is ready to lower 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 5.40% to 5.50% from one of six options that range from 9 months to 15 months. That could keep your rate lock in place as long as August 2025. For a slightly longer lock, though, you might prefer Credit Human's offer of 5.30% on a take-your-pick term of 18-23 months, potentially extending your guaranteed return until spring 2026.
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
5.40% APY
5.40% APY
No change
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
4.86% APY
4.86% APY
No change
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 yesterday 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. Yet, 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.
The Fed's written statement yesterday 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 yesterday'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.
|
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https://www.investopedia.com/terms/o/offlinedebitcard.asp
|
Offline Debit Card: What They Are and How They Work
|
<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-offline-debit-card"></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 Offline Debit Card? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An offline debit card is a type of automated payment card, similar to a traditional (online) <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit card</a>, that allows a cardholder to pay for goods and services directly from their bank account. As it is not "online," there is a delay before the incurred cost is debited from the account and it does not require a PIN for use. It is similar to writing a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/check.asp">check</a>. These types of cards are not common in the U.S. but are available in some foreign countries. Offline debit cards may also be known as “check cards.”
</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>An offline debit card is not connected to an online system when used. Funds are therefore withdrawn from an account 24 to 72 hours later.</li><li>An offline debit card does not require a PIN for use, only a signature, and can be compared to writing a check.</li><li>Offline debit cards are primarily used for payments and cannot be used for withdrawing or depositing funds at an ATM.</li><li>Card network providers, such as Visa and Mastercard, sponsor offline debit cards.</li><li>The same overdraft fees and returned payment fees of a debit card apply to offline debit cards.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-an-offline-debit-card-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 an Offline Debit Card Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Offline debit cards work in a similar way as traditional debit cards but can also be compared to the process of writing a check. An offline debit card transaction creates a debit against the cardholder's bank account with delayed processing and only requires a signature rather than a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-identification-number.asp">PIN</a> number.
</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"> Offline debit cards are issued by banks in partnership with a card network processing service provider such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/visa-card.asp">Visa</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mastercard-card.asp">Mastercard</a>. These cards are associated with a customer’s bank account and are used for payments and are not available for making withdrawals or deposits from an ATM.
</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-offline-debit-card-transactions"></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"> Offline Debit Card Transactions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Offline debit cards will often have a maximum daily limit that is lower than a standard debit card. If this is not the case, the maximum amount is based on the funds held in the underlying bank account. Because this debit card is "offline," the bank account is not accessed directly, meaning there's a delay of 24 to 72 hours before the amount of a purchase is debited from the account.
</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"> Users of offline debit card transactions must still be cautious of returned payment fees and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdrafts</a>. While the processing time and services differ for offline debit cards in comparison to traditional debit cards, the repercussions for payments with insufficient funds are still the same. Account holders can expect an overdraft fee for each transaction that is made with insufficient funds using an offline debit card. In some cases, vendors who offer preliminary acceptance of an offline debit card payment that is not fully authorized at settlement may also incur a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returned-payment-fee.asp">returned payment fee</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"> Offline debit card transactions do pose a risk for vendors as they are not certain the transaction will be fully completed until the processing is finished and accepted, days later. The vendor is susceptible to certain risks as the customer can charge the amount but perhaps the card is not valid or does not have the funds or the transaction is denied for some reason.
</p></div>
|
## What Is an Offline Debit Card?
An offline debit card is a type of automated payment card, similar to a traditional (online) [debit card](https://www.investopedia.com/terms/d/debitcard.asp), that allows a cardholder to pay for goods and services directly from their bank account. As it is not "online," there is a delay before the incurred cost is debited from the account and it does not require a PIN for use. It is similar to writing a [check](https://www.investopedia.com/terms/c/check.asp). These types of cards are not common in the U.S. but are available in some foreign countries. Offline debit cards may also be known as “check cards.”
### Key Takeaways
* An offline debit card is not connected to an online system when used. Funds are therefore withdrawn from an account 24 to 72 hours later.
* An offline debit card does not require a PIN for use, only a signature, and can be compared to writing a check.
* Offline debit cards are primarily used for payments and cannot be used for withdrawing or depositing funds at an ATM.
* Card network providers, such as Visa and Mastercard, sponsor offline debit cards.
* The same overdraft fees and returned payment fees of a debit card apply to offline debit cards.
## How an Offline Debit Card Works
Offline debit cards work in a similar way as traditional debit cards but can also be compared to the process of writing a check. An offline debit card transaction creates a debit against the cardholder's bank account with delayed processing and only requires a signature rather than a [PIN](https://www.investopedia.com/terms/p/personal-identification-number.asp) number.
Offline debit cards are issued by banks in partnership with a card network processing service provider such as [Visa](https://www.investopedia.com/terms/v/visa-card.asp) or [Mastercard](https://www.investopedia.com/terms/m/mastercard-card.asp). These cards are associated with a customer’s bank account and are used for payments and are not available for making withdrawals or deposits from an ATM.
## Offline Debit Card Transactions
Offline debit cards will often have a maximum daily limit that is lower than a standard debit card. If this is not the case, the maximum amount is based on the funds held in the underlying bank account. Because this debit card is "offline," the bank account is not accessed directly, meaning there's a delay of 24 to 72 hours before the amount of a purchase is debited from the account.
Users of offline debit card transactions must still be cautious of returned payment fees and [overdrafts](https://www.investopedia.com/terms/o/overdraft.asp). While the processing time and services differ for offline debit cards in comparison to traditional debit cards, the repercussions for payments with insufficient funds are still the same. Account holders can expect an overdraft fee for each transaction that is made with insufficient funds using an offline debit card. In some cases, vendors who offer preliminary acceptance of an offline debit card payment that is not fully authorized at settlement may also incur a [returned payment fee](https://www.investopedia.com/terms/r/returned-payment-fee.asp).
Offline debit card transactions do pose a risk for vendors as they are not certain the transaction will be fully completed until the processing is finished and accepted, days later. The vendor is susceptible to certain risks as the customer can charge the amount but perhaps the card is not valid or does not have the funds or the transaction is denied for some reason.
|
What Is an Offline Debit Card?
An offline debit card is a type of automated payment card, similar to a traditional (online) debit card, that allows a cardholder to pay for goods and services directly from their bank account. As it is not "online," there is a delay before the incurred cost is debited from the account and it does not require a PIN for use. It is similar to writing a check. These types of cards are not common in the U.S. but are available in some foreign countries. Offline debit cards may also be known as “check cards.”
Key Takeaways
An offline debit card is not connected to an online system when used. Funds are therefore withdrawn from an account 24 to 72 hours later.An offline debit card does not require a PIN for use, only a signature, and can be compared to writing a check.Offline debit cards are primarily used for payments and cannot be used for withdrawing or depositing funds at an ATM.Card network providers, such as Visa and Mastercard, sponsor offline debit cards.The same overdraft fees and returned payment fees of a debit card apply to offline debit cards.
How an Offline Debit Card Works
Offline debit cards work in a similar way as traditional debit cards but can also be compared to the process of writing a check. An offline debit card transaction creates a debit against the cardholder's bank account with delayed processing and only requires a signature rather than a PIN number.
Offline debit cards are issued by banks in partnership with a card network processing service provider such as Visa or Mastercard. These cards are associated with a customer’s bank account and are used for payments and are not available for making withdrawals or deposits from an ATM.
Offline Debit Card Transactions
Offline debit cards will often have a maximum daily limit that is lower than a standard debit card. If this is not the case, the maximum amount is based on the funds held in the underlying bank account. Because this debit card is "offline," the bank account is not accessed directly, meaning there's a delay of 24 to 72 hours before the amount of a purchase is debited from the account.
Users of offline debit card transactions must still be cautious of returned payment fees and overdrafts. While the processing time and services differ for offline debit cards in comparison to traditional debit cards, the repercussions for payments with insufficient funds are still the same. Account holders can expect an overdraft fee for each transaction that is made with insufficient funds using an offline debit card. In some cases, vendors who offer preliminary acceptance of an offline debit card payment that is not fully authorized at settlement may also incur a returned payment fee.
Offline debit card transactions do pose a risk for vendors as they are not certain the transaction will be fully completed until the processing is finished and accepted, days later. The vendor is susceptible to certain risks as the customer can charge the amount but perhaps the card is not valid or does not have the funds or the transaction is denied for some reason.
|
[
[
"debit card",
"https://www.investopedia.com/terms/d/debitcard.asp"
],
[
"check",
"https://www.investopedia.com/terms/c/check.asp"
],
[
"PIN",
"https://www.investopedia.com/terms/p/personal-identification-number.asp"
],
[
"Visa",
"https://www.investopedia.com/terms/v/visa-card.asp"
],
[
"Mastercard",
"https://www.investopedia.com/terms/m/mastercard-card.asp"
],
[
"overdrafts",
"https://www.investopedia.com/terms/o/overdraft.asp"
],
[
"returned payment fee",
"https://www.investopedia.com/terms/r/returned-payment-fee.asp"
]
] |
https://www.investopedia.com/terms/a/applicablefederalrate.asp
|
Applicable Federal Rate (AFR): What It Is and How To Use It
|
<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-applicable-federal-rate-afr"></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 Applicable Federal Rate (AFR)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The applicable federal rate (AFR) is the minimum interest rate that 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 for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans.<span class="ql-inline-citation" data-cite="3"></span> Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/internal-revenue-code.asp">Internal Revenue Code</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_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>If the interest on a loan is lower than the applicable AFR, it may result in a taxable event for the parties involved.</li><li>AFRs are used to determine the original issue discount, unstated interest, gift tax, and income tax consequences of below-market loans.</li><li>Parties must use the AFR that is published by the IRS at the time when the lender initially makes the loan.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-the-applicable-federal-rate-afr"></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 Applicable Federal Rate (AFR) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The AFR is used by the IRS as a point of comparison versus the interest on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loans</a> between related parties, such as family members.<span class="ql-inline-citation" data-cite="5"></span> If you were giving a loan to a family member, you would need to be sure that the interest rate charged is equal to or higher than the minimum applicable federal rate.
</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 IRS publishes three AFRs: short-term, mid-term, and long-term. Short-term AFR rates are determined from the one-month average of the market yields from marketable obligations, such as U.S. government Treasury securities 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> of three years or less. Mid-term AFR rates are from obligations of maturities of more than three and up to nine years. Long-term AFR rates are from bonds with maturities of more than nine years.<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_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>In addition to the three basic rates, the rulings in which the AFRs are published contain several other rates that vary according to compounding period (annually, semi-annually, quarterly, monthly) and various other criteria and situations.</p></div></div></div>
<span class="heading-toc" id="toc-example-of-how-to-use-the-afr"></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"> Example of How to Use the AFR </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> As of May 2023, the IRS stated that the annual short-term AFR was 4.30%, the mid-term AFR was 3.57%, and the long-term AFR was 3.72%. Please bear in mind that these AFR rates are subject to change by the IRS.<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"> Which AFR rate to use for a family loan would depend on the length of time designated for payback.<span class="ql-inline-citation" data-cite="7"></span> Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-interest-rules.asp">a minimum interest rate</a> of 4.30% for the loan. In other words, you should receive $430 in interest from the loan.
</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 our example above, any rate below 4.30% could trigger a taxable event. For example, let's say you gave the same loan, but you didn't charge any interest. By not charging any interest, you would have "foregone" $430 in interest income, and according to the IRS, it would be considered a taxable gift. Any interest rate charged below the stated AFR for the particular term of the loan would be considered foregone interest and, as a result, be taxable.
</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-special-considerations"></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"> Special Considerations </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> When preparing to make a loan between related parties, taxpayers should consider two factors to select the correct AFR. The length of the loan should correspond to the AFRs: short-term (three years or less), mid-term (up to nine years), and long-term (more than nine years).<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_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 lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/imputedinterest.asp">imputed interest</a> to the income to reflect the AFR rather than the actual amount paid by the borrower. Also, if the loan is more than the annual gift tax exclusion, it may trigger a taxable event, and income taxes may be owed. Depending on the circumstances, the IRS may also assess penalties.<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_24-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_25-0"><span class="heading-toc" id="toc-am-i-required-to-charge-interest-when-loaning-money-to-family"></span> <h2 class="mntl-sc-block-questionandanswer__question">Am I Required to Charge Interest When Loaning Money to Family?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No, you're not required to charge interest. However, by not doing so, the IRS may consider your loan a gift and levy taxes accordingly.</p></div>
</div>
<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-how-often-is-the-afr-determined"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Often Is the AFR Determined?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The AFR is released monthly with updated interest rates based on the market interest rates.</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-does-my-loan-agreement-with-a-family-member-have-to-be-notarized"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does My Loan Agreement With a Family Member Have to Be Notarized?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>No. While notarization may take it the next step, your written and signed agreement is legally binding on its own.<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_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 applicable federal rate exists to set a standard for what differentiates a gift from a loan. Check this rate before loaning money to anyone—if you charge an interest rate less than this benchmark, you may be subject to gift taxes.
</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"> <em>Correction—April 9, 2024:</em> This article has been edited from a previous version that incorrectly referenced T-bills with maturity terms of up to three years. T-bills have maturities of one year or less.<br/>
</p></div>
|
## What Is the Applicable Federal Rate (AFR)?
The applicable federal rate (AFR) is the minimum interest rate that the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) allows for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans. Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the [Internal Revenue Code](https://www.investopedia.com/terms/i/internal-revenue-code.asp).
### Key Takeaways
* If the interest on a loan is lower than the applicable AFR, it may result in a taxable event for the parties involved.
* AFRs are used to determine the original issue discount, unstated interest, gift tax, and income tax consequences of below-market loans.
* Parties must use the AFR that is published by the IRS at the time when the lender initially makes the loan.
## Understanding the Applicable Federal Rate (AFR)
The AFR is used by the IRS as a point of comparison versus the interest on [loans](https://www.investopedia.com/terms/l/loan.asp) between related parties, such as family members. If you were giving a loan to a family member, you would need to be sure that the interest rate charged is equal to or higher than the minimum applicable federal rate.
The IRS publishes three AFRs: short-term, mid-term, and long-term. Short-term AFR rates are determined from the one-month average of the market yields from marketable obligations, such as U.S. government Treasury securities with [maturities](https://www.investopedia.com/terms/m/maturity.asp) of three years or less. Mid-term AFR rates are from obligations of maturities of more than three and up to nine years. Long-term AFR rates are from bonds with maturities of more than nine years.
###
In addition to the three basic rates, the rulings in which the AFRs are published contain several other rates that vary according to compounding period (annually, semi-annually, quarterly, monthly) and various other criteria and situations.
## Example of How to Use the AFR
As of May 2023, the IRS stated that the annual short-term AFR was 4.30%, the mid-term AFR was 3.57%, and the long-term AFR was 3.72%. Please bear in mind that these AFR rates are subject to change by the IRS.
Which AFR rate to use for a family loan would depend on the length of time designated for payback. Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower [a minimum interest rate](https://www.investopedia.com/terms/m/minimum-interest-rules.asp) of 4.30% for the loan. In other words, you should receive $430 in interest from the loan.
In our example above, any rate below 4.30% could trigger a taxable event. For example, let's say you gave the same loan, but you didn't charge any interest. By not charging any interest, you would have "foregone" $430 in interest income, and according to the IRS, it would be considered a taxable gift. Any interest rate charged below the stated AFR for the particular term of the loan would be considered foregone interest and, as a result, be taxable.
## Special Considerations
When preparing to make a loan between related parties, taxpayers should consider two factors to select the correct AFR. The length of the loan should correspond to the AFRs: short-term (three years or less), mid-term (up to nine years), and long-term (more than nine years).
If the lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add [imputed interest](https://www.investopedia.com/terms/i/imputedinterest.asp) to the income to reflect the AFR rather than the actual amount paid by the borrower. Also, if the loan is more than the annual gift tax exclusion, it may trigger a taxable event, and income taxes may be owed. Depending on the circumstances, the IRS may also assess penalties.
## Am I Required to Charge Interest When Loaning Money to Family?
No, you're not required to charge interest. However, by not doing so, the IRS may consider your loan a gift and levy taxes accordingly.
## How Often Is the AFR Determined?
The AFR is released monthly with updated interest rates based on the market interest rates.
## Does My Loan Agreement With a Family Member Have to Be Notarized?
No. While notarization may take it the next step, your written and signed agreement is legally binding on its own.
## The Bottom Line
The applicable federal rate exists to set a standard for what differentiates a gift from a loan. Check this rate before loaning money to anyone—if you charge an interest rate less than this benchmark, you may be subject to gift taxes.
*Correction—April 9, 2024:* This article has been edited from a previous version that incorrectly referenced T-bills with maturity terms of up to three years. T-bills have maturities of one year or less.
|
What Is the Applicable Federal Rate (AFR)?
The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans. Each month the IRS publishes a set of interest rates that the agency considers the minimum market rate for loans. Any interest rate that is less than the AFR would have tax implications. The IRS publishes these rates in accordance with Section 1274(d) of the Internal Revenue Code.
Key Takeaways
If the interest on a loan is lower than the applicable AFR, it may result in a taxable event for the parties involved.AFRs are used to determine the original issue discount, unstated interest, gift tax, and income tax consequences of below-market loans.Parties must use the AFR that is published by the IRS at the time when the lender initially makes the loan.
Understanding the Applicable Federal Rate (AFR)
The AFR is used by the IRS as a point of comparison versus the interest on loans between related parties, such as family members. If you were giving a loan to a family member, you would need to be sure that the interest rate charged is equal to or higher than the minimum applicable federal rate.
The IRS publishes three AFRs: short-term, mid-term, and long-term. Short-term AFR rates are determined from the one-month average of the market yields from marketable obligations, such as U.S. government Treasury securities with maturities of three years or less. Mid-term AFR rates are from obligations of maturities of more than three and up to nine years. Long-term AFR rates are from bonds with maturities of more than nine years.
In addition to the three basic rates, the rulings in which the AFRs are published contain several other rates that vary according to compounding period (annually, semi-annually, quarterly, monthly) and various other criteria and situations.
Example of How to Use the AFR
As of May 2023, the IRS stated that the annual short-term AFR was 4.30%, the mid-term AFR was 3.57%, and the long-term AFR was 3.72%. Please bear in mind that these AFR rates are subject to change by the IRS.
Which AFR rate to use for a family loan would depend on the length of time designated for payback. Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower a minimum interest rate of 4.30% for the loan. In other words, you should receive $430 in interest from the loan.
In our example above, any rate below 4.30% could trigger a taxable event. For example, let's say you gave the same loan, but you didn't charge any interest. By not charging any interest, you would have "foregone" $430 in interest income, and according to the IRS, it would be considered a taxable gift. Any interest rate charged below the stated AFR for the particular term of the loan would be considered foregone interest and, as a result, be taxable.
Special Considerations
When preparing to make a loan between related parties, taxpayers should consider two factors to select the correct AFR. The length of the loan should correspond to the AFRs: short-term (three years or less), mid-term (up to nine years), and long-term (more than nine years).
If the lender charges interest at a lower rate than the proper AFR, the IRS may reassess the lender and add imputed interest to the income to reflect the AFR rather than the actual amount paid by the borrower. Also, if the loan is more than the annual gift tax exclusion, it may trigger a taxable event, and income taxes may be owed. Depending on the circumstances, the IRS may also assess penalties.
Am I Required to Charge Interest When Loaning Money to Family?
No, you're not required to charge interest. However, by not doing so, the IRS may consider your loan a gift and levy taxes accordingly.
How Often Is the AFR Determined?
The AFR is released monthly with updated interest rates based on the market interest rates.
Does My Loan Agreement With a Family Member Have to Be Notarized?
No. While notarization may take it the next step, your written and signed agreement is legally binding on its own.
The Bottom Line
The applicable federal rate exists to set a standard for what differentiates a gift from a loan. Check this rate before loaning money to anyone—if you charge an interest rate less than this benchmark, you may be subject to gift taxes.
Correction—April 9, 2024: This article has been edited from a previous version that incorrectly referenced T-bills with maturity terms of up to three years. T-bills have maturities of one year or less.
|
[
[
"Internal Revenue Service",
"https://www.investopedia.com/terms/i/irs.asp"
],
[
"Internal Revenue Code",
"https://www.investopedia.com/terms/i/internal-revenue-code.asp"
],
[
"loans",
"https://www.investopedia.com/terms/l/loan.asp"
],
[
"maturities",
"https://www.investopedia.com/terms/m/maturity.asp"
],
[
"a minimum interest rate",
"https://www.investopedia.com/terms/m/minimum-interest-rules.asp"
],
[
"imputed interest",
"https://www.investopedia.com/terms/i/imputedinterest.asp"
]
] |
https://www.investopedia.com/wells-fargo-extends-300-dollar-everyday-checking-bonus-to-june-25-2024-8630712
|
Wells Fargo Extends $300 Everyday Checking Bonus to June 25, 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"><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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://accountoffers.wellsfargo.com/checkingoffer/" rel="sponsored nofollow">Wells Fargo’s Everyday Checking</a> account bonus has been extended to June 25, 2024. We reported on this offer when it was <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/earn-300-dollars-with-wells-fargos-everyday-checking-bonus-offer-8620980">originally set to expire on April 1</a>.</li>
<li>The bonus amount and requirements have not changed.</li>
<li>You can get a $300 bonus after receiving $1,000 in qualifying direct deposits within 90 days of opening a new checking account.<br/></li>
</ul></div></div></div>
<span class="heading-toc" id="toc-wells-fargo-everyday-checking-300-how-to-get-it"></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"> Wells Fargo Everyday Checking - $300: How To Get It </span> </h2>
<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0">
<li><strong>Open a new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://accountoffers.wellsfargo.com/checkingoffer/" rel="sponsored nofollow">Wells Fargo Everyday Checking</a> account with an offer code by June 25, 2024:</strong> You can open an account online or at a Wells Fargo branch. If you apply online, your offer code will be automatically included in the application. If you’d like to apply at a branch, you can submit your email address online and an offer code will be mailed to you; bring that code to the branch when you apply.</li>
<li><strong>Make a minimum $25 deposit when you open the account:</strong> The deposit must be made as you open the account.</li>
<li><strong>Receive qualifying direct deposits totaling $1,000 or more within 90 days of account opening:</strong> Eligible direct deposits include employee salaries and government benefit payments. Bank transfers made from personal accounts, Zelle payments, and mobile deposits do not qualify. Your account must remain open and in good standing during this 90-day qualification period.</li>
<li><strong>Wait 90 days and get the $300 bonus:</strong> After the 90-day qualification period, Wells Fargo will review your account to see if you met the requirements. If you did, the $300 bonus will be deposited into your account within 30 days.</li>
</ol>
<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"> This account has a $10 monthly service fee and requires a $25 minimum opening deposit, which does not count toward the bonus requirement. The monthly fee can be waived with a $500 minimum daily balance or $500 in monthly qualifying electronic deposits.<br>
</br></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-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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Wells Fargo may have other bonus offers currently available for other accounts. See all of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wells-fargo-bank-promotions-7106061">Wells Fargo's promotional offers</a> for more information.<br/></p></div></div></div>
<span class="heading-toc" id="toc-are-wells-fargo-bank-bonuses-worth-it"></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"> Are Wells Fargo Bank Bonuses Worth It? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> This bonus from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wells-fargo-bank-review-5024853">Wells Fargo</a> is relatively good—it offers a decent reward for a reasonable deposit, giving you a solid return on your money. You'll get a $30% return on your $1,000 deposit. That's better than the median bonus we track, which has an ROI of around 15%. It’s not the best bonus we’ve seen, but if you’re interested in opening a new Wells Fargo checking account this would be a great way to do it.
</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"> Wells Fargo currently has another bank promotion with a steep deposit requirement and a relatively tiny reward: New <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://accountoffers.wellsfargo.com/premierbonus/" rel="sponsored nofollow">Premier Checking customers</a> can earn a $2,500 bonus, but it requires $250,000 in deposits to qualifying linked accounts, for a meager 1% return on your deposit. That offer also ends on June 25.
</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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>We track <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-bank-sign-up-bonus-7969724">bank bonuses</a> daily. Through our research, we’ve found the average bank bonus to be $300. We only feature bank bonuses that are at least as high as this average, and that are a 10% or better return on your deposit to ensure you are getting a good deal. <br/></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Wells Fargo’s online bank services are available nationwide, with physical branches in 36 states and Washington, D.C.<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_18-0"></div>
<span class="heading-toc" id="toc-how-we-track-bank-account-bonuses"></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"> How We Track Bank Account Bonuses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Every business day, Investopedia tracks 16 banks and credit unions, looking at bonus amounts, bonus requirements, account features, and the current, new, extended, and expired account bonuses they offer customers. Banks were chosen based on consumer interest. We update our picks for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-bank-account-bonuses-5104710">best bank account bonuses</a>, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-checking-account-bonuses-7152530">best checking account bonuses</a>, and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-account-bonuses-7152450">best savings account bonuses</a> as needed. We only feature bank bonus deals when the bonus amount is $300 or more, and a return on deposit of 10% or more, to ensure you know about the best deals before they expire.
</p></div>
|
### Key Takeaways
* [Wells Fargo’s Everyday Checking](https://accountoffers.wellsfargo.com/checkingoffer/) account bonus has been extended to June 25, 2024. We reported on this offer when it was [originally set to expire on April 1](https://www.investopedia.com/earn-300-dollars-with-wells-fargos-everyday-checking-bonus-offer-8620980).
* The bonus amount and requirements have not changed.
* You can get a $300 bonus after receiving $1,000 in qualifying direct deposits within 90 days of opening a new checking account.
## Wells Fargo Everyday Checking - $300: How To Get It
1. **Open a new [Wells Fargo Everyday Checking](https://accountoffers.wellsfargo.com/checkingoffer/) account with an offer code by June 25, 2024:** You can open an account online or at a Wells Fargo branch. If you apply online, your offer code will be automatically included in the application. If you’d like to apply at a branch, you can submit your email address online and an offer code will be mailed to you; bring that code to the branch when you apply.
2. **Make a minimum $25 deposit when you open the account:** The deposit must be made as you open the account.
3. **Receive qualifying direct deposits totaling $1,000 or more within 90 days of account opening:** Eligible direct deposits include employee salaries and government benefit payments. Bank transfers made from personal accounts, Zelle payments, and mobile deposits do not qualify. Your account must remain open and in good standing during this 90-day qualification period.
4. **Wait 90 days and get the $300 bonus:** After the 90-day qualification period, Wells Fargo will review your account to see if you met the requirements. If you did, the $300 bonus will be deposited into your account within 30 days.
This account has a $10 monthly service fee and requires a $25 minimum opening deposit, which does not count toward the bonus requirement. The monthly fee can be waived with a $500 minimum daily balance or $500 in monthly qualifying electronic deposits.
###
Wells Fargo may have other bonus offers currently available for other accounts. See all of [Wells Fargo's promotional offers](https://www.investopedia.com/wells-fargo-bank-promotions-7106061) for more information.
## Are Wells Fargo Bank Bonuses Worth It?
This bonus from [Wells Fargo](https://www.investopedia.com/wells-fargo-bank-review-5024853) is relatively good—it offers a decent reward for a reasonable deposit, giving you a solid return on your money. You'll get a $30% return on your $1,000 deposit. That's better than the median bonus we track, which has an ROI of around 15%. It’s not the best bonus we’ve seen, but if you’re interested in opening a new Wells Fargo checking account this would be a great way to do it.
Wells Fargo currently has another bank promotion with a steep deposit requirement and a relatively tiny reward: New [Premier Checking customers](https://accountoffers.wellsfargo.com/premierbonus/) can earn a $2,500 bonus, but it requires $250,000 in deposits to qualifying linked accounts, for a meager 1% return on your deposit. That offer also ends on June 25.
###
We track [bank bonuses](https://www.investopedia.com/what-is-a-bank-sign-up-bonus-7969724) daily. Through our research, we’ve found the average bank bonus to be $300. We only feature bank bonuses that are at least as high as this average, and that are a 10% or better return on your deposit to ensure you are getting a good deal.
Wells Fargo’s online bank services are available nationwide, with physical branches in 36 states and Washington, D.C.
## How We Track Bank Account Bonuses
Every business day, Investopedia tracks 16 banks and credit unions, looking at bonus amounts, bonus requirements, account features, and the current, new, extended, and expired account bonuses they offer customers. Banks were chosen based on consumer interest. We update our picks for the [best bank account bonuses](https://www.investopedia.com/best-bank-account-bonuses-5104710), the [best checking account bonuses](https://www.investopedia.com/best-checking-account-bonuses-7152530), and the [best savings account bonuses](https://www.investopedia.com/best-savings-account-bonuses-7152450) as needed. We only feature bank bonus deals when the bonus amount is $300 or more, and a return on deposit of 10% or more, to ensure you know about the best deals before they expire.
|
Key Takeaways
Wells Fargo’s Everyday Checking account bonus has been extended to June 25, 2024. We reported on this offer when it was originally set to expire on April 1.
The bonus amount and requirements have not changed.
You can get a $300 bonus after receiving $1,000 in qualifying direct deposits within 90 days of opening a new checking account.
Wells Fargo Everyday Checking - $300: How To Get It
Open a new Wells Fargo Everyday Checking account with an offer code by June 25, 2024: You can open an account online or at a Wells Fargo branch. If you apply online, your offer code will be automatically included in the application. If you’d like to apply at a branch, you can submit your email address online and an offer code will be mailed to you; bring that code to the branch when you apply.
Make a minimum $25 deposit when you open the account: The deposit must be made as you open the account.
Receive qualifying direct deposits totaling $1,000 or more within 90 days of account opening: Eligible direct deposits include employee salaries and government benefit payments. Bank transfers made from personal accounts, Zelle payments, and mobile deposits do not qualify. Your account must remain open and in good standing during this 90-day qualification period.
Wait 90 days and get the $300 bonus: After the 90-day qualification period, Wells Fargo will review your account to see if you met the requirements. If you did, the $300 bonus will be deposited into your account within 30 days.
This account has a $10 monthly service fee and requires a $25 minimum opening deposit, which does not count toward the bonus requirement. The monthly fee can be waived with a $500 minimum daily balance or $500 in monthly qualifying electronic deposits.
Wells Fargo may have other bonus offers currently available for other accounts. See all of Wells Fargo's promotional offers for more information.
Are Wells Fargo Bank Bonuses Worth It?
This bonus from Wells Fargo is relatively good—it offers a decent reward for a reasonable deposit, giving you a solid return on your money. You'll get a $30% return on your $1,000 deposit. That's better than the median bonus we track, which has an ROI of around 15%. It’s not the best bonus we’ve seen, but if you’re interested in opening a new Wells Fargo checking account this would be a great way to do it.
Wells Fargo currently has another bank promotion with a steep deposit requirement and a relatively tiny reward: New Premier Checking customers can earn a $2,500 bonus, but it requires $250,000 in deposits to qualifying linked accounts, for a meager 1% return on your deposit. That offer also ends on June 25.
We track bank bonuses daily. Through our research, we’ve found the average bank bonus to be $300. We only feature bank bonuses that are at least as high as this average, and that are a 10% or better return on your deposit to ensure you are getting a good deal.
Wells Fargo’s online bank services are available nationwide, with physical branches in 36 states and Washington, D.C.
How We Track Bank Account Bonuses
Every business day, Investopedia tracks 16 banks and credit unions, looking at bonus amounts, bonus requirements, account features, and the current, new, extended, and expired account bonuses they offer customers. Banks were chosen based on consumer interest. We update our picks for the best bank account bonuses, the best checking account bonuses, and the best savings account bonuses as needed. We only feature bank bonus deals when the bonus amount is $300 or more, and a return on deposit of 10% or more, to ensure you know about the best deals before they expire.
|
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https://www.investopedia.com/news/industrial-etfs-bouncing-key-support/
|
Industrial ETFs Bouncing Off Key Support
|
<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"> Despite the overshadow of trade <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tariff.asp">tariffs</a>, industrial stocks remain underpinned by a lower corporate <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxrate.asp">tax rate</a> (35% down to 21%), a push for increased <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/infrastructure.asp">infrastructure</a> spending and a strengthening U.S. housing market. Economic data also shows increased industrial activity. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipi.asp">Industrial production</a>, which measures the value of output from manufacturers, mines and utilities, is up 5.1% <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/year-over-year.asp">year over year</a> as of September 2018. The sector should additionally benefit from early investor rotation into <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuestock.asp">value</a> names, robust profit forecasts and increased <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">buyback</a> activity.
</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"> Senior analyst at Wolfe Research Nigel Coe <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.barrons.com/articles/seven-industrial-stocks-to-buy-four-to-sell-1530110183">told Barron's</a> that he believes industrial stocks can maintain strong growth momentum while 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's</a> policy remains loose and supportive of growth. However, he cautioned that companies in the sector need to grow into their <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earningsmultiplier.asp">earnings multiples</a> – <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fowardlookingearnings.asp">forward earnings</a> currently sit at 16.7 times as of October 2018. Price action also suggests that industrial stocks are at key <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/support.asp">support levels</a>. Three leading <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds</a> (ETFs) in the sector have all bounced at critical technical areas on their respective charts. Let's further analyze each fund.
</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-ishares-us-aerospace--defense-etf-ita"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ita" rel="nocaes">iShares US Aerospace & Defense ETF (ITA)</a> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Launched in 2006, the iShares U.S. Aerospace & Defense ETF seeks to track the performance of the Dow Jones U.S. Select / Aerospace & Defense Index. The fund invests in companies that manufacture, assemble and distribute airplane and defense equipment. ITA charges investors an annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fee</a> of 0.43% and has returned 9.3% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/ytd.asp">year to date</a> (YTD) as of October 2018. The recent <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pullback.asp">pullback</a> found support on the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uptrend.asp">uptrend</a> line the connects the early May and late June <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swinglow.asp">swing lows</a>. This $200 support level on the chart also finds support from the 200-day <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sma.asp">simple moving average</a> (SMA), making it a high-probability buying area. A <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop-loss order</a> could be placed just below the <a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/candlestick.asp">candlestick</a> that reversed on the trendline/moving average.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
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<img alt="Chart depicting price chart of the iShares US Aerospace & Defense ETF (ITA)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/KMfXVShDniwTCaNbGMA2fSRsh7M=/975x0/filters:no_upscale():max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/7PDINRT59R9qheo26P6x8zJBBrg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc" data-srcset="https://www.investopedia.com/thmb/90F1A2E_tfU4cY-zdCYmnGuXCX8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc 750w" data-tracking-container="true" height="582" id="mntl-sc-block-image_1-0" width="975"/>
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<img alt="Chart depicting price chart of the iShares US Aerospace & Defense ETF (ITA)" class="img--noscript universal-image__image" height="582" sizes="750px" src="https://www.investopedia.com/thmb/7PDINRT59R9qheo26P6x8zJBBrg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc" srcset="https://www.investopedia.com/thmb/90F1A2E_tfU4cY-zdCYmnGuXCX8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc 750w" width="975"/>
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<span class="heading-toc" id="toc-invesco-dwa-industrials-momentum-etf-prn"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=prn" rel="nocaes">Invesco DWA Industrials Momentum ETF (PRN)</a> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The Invesco DWA Industrials Momentum ETF, also created in 2006, aims to provide similar returns to the DWA Industrials Technical Leaders Index. The ETF'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> holds U.S. industrial firms that are showing strong <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/relativestrength.asp">relative strength</a> and price momentum. As of October 2018, the fund has a -4.69% YTD return and charges a 0.6% management fee. PRN's chart appears to be forming a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/doublebottom.asp">double bottom</a> – the most recent swing low found support near the early May swing low at the $57 level. Short-term momentum looks to be moving back to the upside, with the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rsi.asp">relative strength index</a> (RSI) crossing back above 30. Stops should be placed slightly below double bottom pattern to protect trading capital.
</p>
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<img alt="Chart depicting chart of the Invesco DWA Industrials Momentum ETF (PRN)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/k4XOmLZPAkXtPpwbipTV-U7SLhY=/968x0/filters:no_upscale():max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/wF5WdSYz6EON6VOzEtFk3tUfauw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5" data-srcset="https://www.investopedia.com/thmb/iVF0ktlZjqq_GfAyl5J0Ch1wFYI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5 750w" data-tracking-container="true" height="582" id="mntl-sc-block-image_2-0" width="968"/>
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<img alt="Chart depicting chart of the Invesco DWA Industrials Momentum ETF (PRN)" class="img--noscript universal-image__image" height="582" sizes="750px" src="https://www.investopedia.com/thmb/wF5WdSYz6EON6VOzEtFk3tUfauw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5" srcset="https://www.investopedia.com/thmb/iVF0ktlZjqq_GfAyl5J0Ch1wFYI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5 750w" width="968"/>
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<span class="heading-toc" id="toc-fidelity-msci-industrials-etf-fidu"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fidu" rel="nocaes">Fidelity MSCI Industrials ETF (FIDU)</a> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Formed in 2013, the Fidelity MSCI Industrials ETF attempts to replicate the performance of the MSCI USA IMI Industrials Index. It holds companies that cover the broad U.S. industrials sector. The fund has a low <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> of just 0.08%, well below the 0.5% category average. Performance wise, FIDU has returned -1.33% YTD. Although FIDU's share price is trading below the 200-day SMA, it found strong support from the uptrend line that commenced in early May. The recent bounce at the $37.5 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/support.asp">support level</a> has moved the RSI out of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oversold.asp">oversold</a> territory and occurred on above-average <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volume.asp">volume</a>. Traders who take a long position should protect it with a stop below the most recent swing low.
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<img alt="Chart depicting share price of the Fidelity MSCI Industrials ETF (FIDU)" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/PHjK5o7M__8KAyP_ihWt5QSA390=/977x0/filters:no_upscale():max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/u5O1JSlVWfi-K3zs-VXrUgSbmco=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb" data-srcset="https://www.investopedia.com/thmb/V4k5s1pzvUzPYxTI0rIQK2Cm_Pc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb 750w" data-tracking-container="true" height="584" id="mntl-sc-block-image_3-0" width="977"/>
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<img alt="Chart depicting share price of the Fidelity MSCI Industrials ETF (FIDU)" class="img--noscript universal-image__image" height="584" sizes="750px" src="https://www.investopedia.com/thmb/u5O1JSlVWfi-K3zs-VXrUgSbmco=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb" srcset="https://www.investopedia.com/thmb/V4k5s1pzvUzPYxTI0rIQK2Cm_Pc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb 750w" width="977"/>
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Despite the overshadow of trade [tariffs](https://www.investopedia.com/terms/t/tariff.asp), industrial stocks remain underpinned by a lower corporate [tax rate](https://www.investopedia.com/terms/t/taxrate.asp) (35% down to 21%), a push for increased [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) spending and a strengthening U.S. housing market. Economic data also shows increased industrial activity. [Industrial production](https://www.investopedia.com/terms/i/ipi.asp), which measures the value of output from manufacturers, mines and utilities, is up 5.1% [year over year](https://www.investopedia.com/terms/y/year-over-year.asp) as of September 2018. The sector should additionally benefit from early investor rotation into [value](https://www.investopedia.com/terms/v/valuestock.asp) names, robust profit forecasts and increased [buyback](https://www.investopedia.com/terms/b/buyback.asp) activity.
Senior analyst at Wolfe Research Nigel Coe [told Barron's](https://www.barrons.com/articles/seven-industrial-stocks-to-buy-four-to-sell-1530110183) that he believes industrial stocks can maintain strong growth momentum while the [Federal Reserve's](https://www.investopedia.com/terms/f/federalreservebank.asp) policy remains loose and supportive of growth. However, he cautioned that companies in the sector need to grow into their [earnings multiples](https://www.investopedia.com/terms/e/earningsmultiplier.asp) – [forward earnings](https://www.investopedia.com/terms/f/fowardlookingearnings.asp) currently sit at 16.7 times as of October 2018. Price action also suggests that industrial stocks are at key [support levels](https://www.investopedia.com/terms/s/support.asp). Three leading [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) in the sector have all bounced at critical technical areas on their respective charts. Let's further analyze each fund.
## [iShares US Aerospace & Defense ETF (ITA)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ita)
Launched in 2006, the iShares U.S. Aerospace & Defense ETF seeks to track the performance of the Dow Jones U.S. Select / Aerospace & Defense Index. The fund invests in companies that manufacture, assemble and distribute airplane and defense equipment. ITA charges investors an annual [management fee](https://www.investopedia.com/terms/m/managementfee.asp) of 0.43% and has returned 9.3% [year to date](https://www.investopedia.com/terms/y/ytd.asp) (YTD) as of October 2018. The recent [pullback](https://www.investopedia.com/terms/p/pullback.asp) found support on the [uptrend](https://www.investopedia.com/terms/u/uptrend.asp) line the connects the early May and late June [swing lows](https://www.investopedia.com/terms/s/swinglow.asp). This $200 support level on the chart also finds support from the 200-day [simple moving average](https://www.investopedia.com/terms/s/sma.asp) (SMA), making it a high-probability buying area. A [stop-loss order](https://www.investopedia.com/terms/s/stop-lossorder.asp) could be placed just below the [candlestick](https://www.investopedia.com/terms/c/candlestick.asp) that reversed on the trendline/moving average.
![Chart depicting price chart of the iShares US Aerospace & Defense ETF (ITA)]()
:max_bytes(150000):strip_icc()/ita_chart-5bfd7c26c9e77c0051bcd6dc)
## [Invesco DWA Industrials Momentum ETF (PRN)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=prn)
The Invesco DWA Industrials Momentum ETF, also created in 2006, aims to provide similar returns to the DWA Industrials Technical Leaders Index. The ETF's [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) holds U.S. industrial firms that are showing strong [relative strength](https://www.investopedia.com/terms/r/relativestrength.asp) and price momentum. As of October 2018, the fund has a -4.69% YTD return and charges a 0.6% management fee. PRN's chart appears to be forming a [double bottom](https://www.investopedia.com/terms/d/doublebottom.asp) – the most recent swing low found support near the early May swing low at the $57 level. Short-term momentum looks to be moving back to the upside, with the [relative strength index](https://www.investopedia.com/terms/r/rsi.asp) (RSI) crossing back above 30. Stops should be placed slightly below double bottom pattern to protect trading capital.
![Chart depicting chart of the Invesco DWA Industrials Momentum ETF (PRN)]()
:max_bytes(150000):strip_icc()/prn_chart-5bfd7c2b46e0fb005181aae5)
## [Fidelity MSCI Industrials ETF (FIDU)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fidu)
Formed in 2013, the Fidelity MSCI Industrials ETF attempts to replicate the performance of the MSCI USA IMI Industrials Index. It holds companies that cover the broad U.S. industrials sector. The fund has a low [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of just 0.08%, well below the 0.5% category average. Performance wise, FIDU has returned -1.33% YTD. Although FIDU's share price is trading below the 200-day SMA, it found strong support from the uptrend line that commenced in early May. The recent bounce at the $37.5 [support level](https://www.investopedia.com/terms/s/support.asp) has moved the RSI out of [oversold](https://www.investopedia.com/terms/o/oversold.asp) territory and occurred on above-average [volume](https://www.investopedia.com/terms/v/volume.asp). Traders who take a long position should protect it with a stop below the most recent swing low.
![Chart depicting share price of the Fidelity MSCI Industrials ETF (FIDU)]()
:max_bytes(150000):strip_icc()/fidu_chart-5bfd7c2946e0fb0051563cdb)
|
Despite the overshadow of trade tariffs, industrial stocks remain underpinned by a lower corporate tax rate (35% down to 21%), a push for increased infrastructure spending and a strengthening U.S. housing market. Economic data also shows increased industrial activity. Industrial production, which measures the value of output from manufacturers, mines and utilities, is up 5.1% year over year as of September 2018. The sector should additionally benefit from early investor rotation into value names, robust profit forecasts and increased buyback activity.
Senior analyst at Wolfe Research Nigel Coe told Barron's that he believes industrial stocks can maintain strong growth momentum while the Federal Reserve's policy remains loose and supportive of growth. However, he cautioned that companies in the sector need to grow into their earnings multiples – forward earnings currently sit at 16.7 times as of October 2018. Price action also suggests that industrial stocks are at key support levels. Three leading exchange-traded funds (ETFs) in the sector have all bounced at critical technical areas on their respective charts. Let's further analyze each fund.
iShares US Aerospace & Defense ETF (ITA)
Launched in 2006, the iShares U.S. Aerospace & Defense ETF seeks to track the performance of the Dow Jones U.S. Select / Aerospace & Defense Index. The fund invests in companies that manufacture, assemble and distribute airplane and defense equipment. ITA charges investors an annual management fee of 0.43% and has returned 9.3% year to date (YTD) as of October 2018. The recent pullback found support on the uptrend line the connects the early May and late June swing lows. This $200 support level on the chart also finds support from the 200-day simple moving average (SMA), making it a high-probability buying area. A stop-loss order could be placed just below the candlestick that reversed on the trendline/moving average.
Invesco DWA Industrials Momentum ETF (PRN)
The Invesco DWA Industrials Momentum ETF, also created in 2006, aims to provide similar returns to the DWA Industrials Technical Leaders Index. The ETF's portfolio holds U.S. industrial firms that are showing strong relative strength and price momentum. As of October 2018, the fund has a -4.69% YTD return and charges a 0.6% management fee. PRN's chart appears to be forming a double bottom – the most recent swing low found support near the early May swing low at the $57 level. Short-term momentum looks to be moving back to the upside, with the relative strength index (RSI) crossing back above 30. Stops should be placed slightly below double bottom pattern to protect trading capital.
Fidelity MSCI Industrials ETF (FIDU)
Formed in 2013, the Fidelity MSCI Industrials ETF attempts to replicate the performance of the MSCI USA IMI Industrials Index. It holds companies that cover the broad U.S. industrials sector. The fund has a low expense ratio of just 0.08%, well below the 0.5% category average. Performance wise, FIDU has returned -1.33% YTD. Although FIDU's share price is trading below the 200-day SMA, it found strong support from the uptrend line that commenced in early May. The recent bounce at the $37.5 support level has moved the RSI out of oversold territory and occurred on above-average volume. Traders who take a long position should protect it with a stop below the most recent swing low.
|
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https://www.investopedia.com/terms/m/mobile-commerce.asp
|
Mobile Commerce: Definition, Benefits, Examples, and Trends
|
<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-mobile-commerce"></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 Mobile Commerce? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Mobile commerce, also known as m-commerce, involves using wireless handheld devices like cell phones and tablets to conduct commercial transactions online, including the purchase and sale of products, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/onlinebanking.asp">online banking</a>, and paying bills.
</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>Mobile commerce refers to business or purchases that are conducted over mobile devices like cell phones or tablets.</li><li>M-commerce lets users transact anywhere, provided that there's a wireless Internet provider available in that area.</li><li>Mobile commerce has increased rapidly as security issues have been resolved.</li><li>Companies like Apple and Google have introduced their own mobile commerce services.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-mobile-commerce"></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 Mobile Commerce </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Mobile commerce is a large subset of electronic commerce, a model where firms or individuals conduct business over the Internet. As of 2023, nearly 97% of Americans own a cell phone, and 85% of them owned a smartphone. This is up from 35% in 2011.<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"> Many products and services can be transacted via m-commerce, including banking, investing, and purchases of books, plane tickets, and digital music. The rapid growth of mobile commerce has been driven by several factors, including increased wireless handheld device computing power, a proliferation of m-commerce applications, and the resolution of security issues.<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-m-commerce-vs-e-commerce"></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"> M-Commerce vs. E-Commerce </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecommerce.asp">Electronic commerce (e-commerce)</a> refers to buying and selling goods and services over the Internet. E-commerce can be conducted via a desktop computer, laptop, smartphone, or tablet, but it's typically associated with a computer in which a user has to find a location with an Internet connection.
</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"> Conversely, m-commerce specifically refers to transactions done via a smartphone or mobile device. M-commerce users can transact anywhere provided that there's a wireless Internet provider available in that area.
</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 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>M-commerce transactions tend to be accomplished with a few clicks. E-commerce is done via a tablet, laptop, or desktop and might involve more time and exploring a company's website.</p></div></div></div>
<span class="heading-toc" id="toc-benefits-of-mobile-commerce"></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"> Benefits of Mobile Commerce </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The range of devices capable of mobile commerce has grown. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/digital-wallet.asp">Digital wallets</a> like Apple Pay and Google Pay let customers make in-store purchases without the inconvenience of swiping cards. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/social-media.asp">Social media</a> platforms such as Facebook, X (formerly Twitter), Pinterest, and Instagram, launched "buy buttons" on their mobile platforms during the mid- to late-2010s. This enabled users to conveniently make purchases from other retailers directly from these social media sites.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="5"></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_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> M-commerce apps allow for location tracking via GPS to offer customers help finding items in stores. Personalized shopping experiences can also connect retailers with their clients.<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-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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Digital commerce transactions are likely to continue climbing as content delivery over wireless devices becomes more streamlined, secure, and scalable.</p></div></div></div>
<span class="heading-toc" id="toc-ways-to-improve-mobile-commerce"></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"> Ways to Improve Mobile Commerce </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Quick-loading web pages are likely to win more sales because consumers can be impatient and demand instant gratification. Mobile checkouts must let buyers easily enter payment information, preferably with mobile wallets that eliminate the use of manual entry, thereby reducing human error and facilitating a smoother checkout experience.
</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-mobile-commerce-videos-and-marketing"></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"> Mobile Commerce Videos and Marketing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Mobile applications that use video to demonstrate a product's key features are likely to generate more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a>. An online <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreign-exchange.asp">foreign exchange</a> broker who sends video links illustrating its new mobile trading application will likely win more clients.
</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-mobile-web-and-mobile-applications"></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"> Mobile Web and Mobile Applications </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Consumers typically use Google or social media promotions to initiate online shopping searches. Browsers tend to drive more transactions than mobile applications as a result. Consumers often pair the use of mobile applications with mobile websites for this reason, to enhance their overall shopping experience.<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_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-what-is-m-commerce-most-commonly-used-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is M-Commerce Most Commonly Used for?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>M-commerce has streamlined the processes of shopping, banking, and bill payment. Many consumers can easily manage their financial lives on their phones. Digital wallets are also a common convenience.</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-how-much-in-the-way-of-sales-has-m-commerce-generated"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much in the Way of Sales Has M-Commerce Generated?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Mobile commerce sales in the United States were an estimated $431 billion in 2022, according to the market research company Statista.<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_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-are-there-risks-associated-with-m-commerce"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Risks Associated With M-Commerce?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Anyone who owns a cell phone can tell you that they're easy enough to misplace and lose. You might think your phone is safe in your pocket and break into a jog in the park, only to realize 10 minutes later that it fell out somewhere along the way. The phone's contents, including your personal financial information, passcodes and links, might be easily accessed by anyone who finds it.</p><p>This could have disastrous results if you haven't taken safety precautions. But security can be enhanced by setting up multi-factor authentication, including biometrics such as fingerprints and retina scans.</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"> M-commerce provides numerous benefits to both businesses and consumers. It's a rare individual who doesn't own some type of mobile device and businesses can reach them more easily with the advent of mobile commerce. Consumers can access coupons and discounts directly on their devices and accomplish banking tasks with ease. It's a win/win for both sides and advantages should continue to grow as new technology is discovered and advanced.
</p></div>
|
## What Is Mobile Commerce?
Mobile commerce, also known as m-commerce, involves using wireless handheld devices like cell phones and tablets to conduct commercial transactions online, including the purchase and sale of products, [online banking](https://www.investopedia.com/terms/o/onlinebanking.asp), and paying bills.
### Key Takeaways
* Mobile commerce refers to business or purchases that are conducted over mobile devices like cell phones or tablets.
* M-commerce lets users transact anywhere, provided that there's a wireless Internet provider available in that area.
* Mobile commerce has increased rapidly as security issues have been resolved.
* Companies like Apple and Google have introduced their own mobile commerce services.
## Understanding Mobile Commerce
Mobile commerce is a large subset of electronic commerce, a model where firms or individuals conduct business over the Internet. As of 2023, nearly 97% of Americans own a cell phone, and 85% of them owned a smartphone. This is up from 35% in 2011.
Many products and services can be transacted via m-commerce, including banking, investing, and purchases of books, plane tickets, and digital music. The rapid growth of mobile commerce has been driven by several factors, including increased wireless handheld device computing power, a proliferation of m-commerce applications, and the resolution of security issues.
## M-Commerce vs. E-Commerce
[Electronic commerce (e-commerce)](https://www.investopedia.com/terms/e/ecommerce.asp) refers to buying and selling goods and services over the Internet. E-commerce can be conducted via a desktop computer, laptop, smartphone, or tablet, but it's typically associated with a computer in which a user has to find a location with an Internet connection.
Conversely, m-commerce specifically refers to transactions done via a smartphone or mobile device. M-commerce users can transact anywhere provided that there's a wireless Internet provider available in that area.
###
M-commerce transactions tend to be accomplished with a few clicks. E-commerce is done via a tablet, laptop, or desktop and might involve more time and exploring a company's website.
## Benefits of Mobile Commerce
The range of devices capable of mobile commerce has grown. [Digital wallets](https://www.investopedia.com/terms/d/digital-wallet.asp) like Apple Pay and Google Pay let customers make in-store purchases without the inconvenience of swiping cards. [Social media](https://www.investopedia.com/terms/s/social-media.asp) platforms such as Facebook, X (formerly Twitter), Pinterest, and Instagram, launched "buy buttons" on their mobile platforms during the mid- to late-2010s. This enabled users to conveniently make purchases from other retailers directly from these social media sites.
M-commerce apps allow for location tracking via GPS to offer customers help finding items in stores. Personalized shopping experiences can also connect retailers with their clients.
###
Digital commerce transactions are likely to continue climbing as content delivery over wireless devices becomes more streamlined, secure, and scalable.
## Ways to Improve Mobile Commerce
Quick-loading web pages are likely to win more sales because consumers can be impatient and demand instant gratification. Mobile checkouts must let buyers easily enter payment information, preferably with mobile wallets that eliminate the use of manual entry, thereby reducing human error and facilitating a smoother checkout experience.
## Mobile Commerce Videos and Marketing
Mobile applications that use video to demonstrate a product's key features are likely to generate more [revenue](https://www.investopedia.com/terms/r/revenue.asp). An online [foreign exchange](https://www.investopedia.com/terms/f/foreign-exchange.asp) broker who sends video links illustrating its new mobile trading application will likely win more clients.
## Mobile Web and Mobile Applications
Consumers typically use Google or social media promotions to initiate online shopping searches. Browsers tend to drive more transactions than mobile applications as a result. Consumers often pair the use of mobile applications with mobile websites for this reason, to enhance their overall shopping experience.
## What Is M-Commerce Most Commonly Used for?
M-commerce has streamlined the processes of shopping, banking, and bill payment. Many consumers can easily manage their financial lives on their phones. Digital wallets are also a common convenience.
## How Much in the Way of Sales Has M-Commerce Generated?
Mobile commerce sales in the United States were an estimated $431 billion in 2022, according to the market research company Statista.
## Are There Risks Associated With M-Commerce?
Anyone who owns a cell phone can tell you that they're easy enough to misplace and lose. You might think your phone is safe in your pocket and break into a jog in the park, only to realize 10 minutes later that it fell out somewhere along the way. The phone's contents, including your personal financial information, passcodes and links, might be easily accessed by anyone who finds it.
This could have disastrous results if you haven't taken safety precautions. But security can be enhanced by setting up multi-factor authentication, including biometrics such as fingerprints and retina scans.
## The Bottom Line
M-commerce provides numerous benefits to both businesses and consumers. It's a rare individual who doesn't own some type of mobile device and businesses can reach them more easily with the advent of mobile commerce. Consumers can access coupons and discounts directly on their devices and accomplish banking tasks with ease. It's a win/win for both sides and advantages should continue to grow as new technology is discovered and advanced.
|
What Is Mobile Commerce?
Mobile commerce, also known as m-commerce, involves using wireless handheld devices like cell phones and tablets to conduct commercial transactions online, including the purchase and sale of products, online banking, and paying bills.
Key Takeaways
Mobile commerce refers to business or purchases that are conducted over mobile devices like cell phones or tablets.M-commerce lets users transact anywhere, provided that there's a wireless Internet provider available in that area.Mobile commerce has increased rapidly as security issues have been resolved.Companies like Apple and Google have introduced their own mobile commerce services.
Understanding Mobile Commerce
Mobile commerce is a large subset of electronic commerce, a model where firms or individuals conduct business over the Internet. As of 2023, nearly 97% of Americans own a cell phone, and 85% of them owned a smartphone. This is up from 35% in 2011.
Many products and services can be transacted via m-commerce, including banking, investing, and purchases of books, plane tickets, and digital music. The rapid growth of mobile commerce has been driven by several factors, including increased wireless handheld device computing power, a proliferation of m-commerce applications, and the resolution of security issues.
M-Commerce vs. E-Commerce
Electronic commerce (e-commerce) refers to buying and selling goods and services over the Internet. E-commerce can be conducted via a desktop computer, laptop, smartphone, or tablet, but it's typically associated with a computer in which a user has to find a location with an Internet connection.
Conversely, m-commerce specifically refers to transactions done via a smartphone or mobile device. M-commerce users can transact anywhere provided that there's a wireless Internet provider available in that area.
M-commerce transactions tend to be accomplished with a few clicks. E-commerce is done via a tablet, laptop, or desktop and might involve more time and exploring a company's website.
Benefits of Mobile Commerce
The range of devices capable of mobile commerce has grown. Digital wallets like Apple Pay and Google Pay let customers make in-store purchases without the inconvenience of swiping cards. Social media platforms such as Facebook, X (formerly Twitter), Pinterest, and Instagram, launched "buy buttons" on their mobile platforms during the mid- to late-2010s. This enabled users to conveniently make purchases from other retailers directly from these social media sites.
M-commerce apps allow for location tracking via GPS to offer customers help finding items in stores. Personalized shopping experiences can also connect retailers with their clients.
Digital commerce transactions are likely to continue climbing as content delivery over wireless devices becomes more streamlined, secure, and scalable.
Ways to Improve Mobile Commerce
Quick-loading web pages are likely to win more sales because consumers can be impatient and demand instant gratification. Mobile checkouts must let buyers easily enter payment information, preferably with mobile wallets that eliminate the use of manual entry, thereby reducing human error and facilitating a smoother checkout experience.
Mobile Commerce Videos and Marketing
Mobile applications that use video to demonstrate a product's key features are likely to generate more revenue. An online foreign exchange broker who sends video links illustrating its new mobile trading application will likely win more clients.
Mobile Web and Mobile Applications
Consumers typically use Google or social media promotions to initiate online shopping searches. Browsers tend to drive more transactions than mobile applications as a result. Consumers often pair the use of mobile applications with mobile websites for this reason, to enhance their overall shopping experience.
What Is M-Commerce Most Commonly Used for?
M-commerce has streamlined the processes of shopping, banking, and bill payment. Many consumers can easily manage their financial lives on their phones. Digital wallets are also a common convenience.
How Much in the Way of Sales Has M-Commerce Generated?
Mobile commerce sales in the United States were an estimated $431 billion in 2022, according to the market research company Statista.
Are There Risks Associated With M-Commerce?
Anyone who owns a cell phone can tell you that they're easy enough to misplace and lose. You might think your phone is safe in your pocket and break into a jog in the park, only to realize 10 minutes later that it fell out somewhere along the way. The phone's contents, including your personal financial information, passcodes and links, might be easily accessed by anyone who finds it.This could have disastrous results if you haven't taken safety precautions. But security can be enhanced by setting up multi-factor authentication, including biometrics such as fingerprints and retina scans.
The Bottom Line
M-commerce provides numerous benefits to both businesses and consumers. It's a rare individual who doesn't own some type of mobile device and businesses can reach them more easily with the advent of mobile commerce. Consumers can access coupons and discounts directly on their devices and accomplish banking tasks with ease. It's a win/win for both sides and advantages should continue to grow as new technology is discovered and advanced.
|
[
[
"online banking",
"https://www.investopedia.com/terms/o/onlinebanking.asp"
],
[
"Electronic commerce (e-commerce)",
"https://www.investopedia.com/terms/e/ecommerce.asp"
],
[
"Digital wallets",
"https://www.investopedia.com/terms/d/digital-wallet.asp"
],
[
"Social media",
"https://www.investopedia.com/terms/s/social-media.asp"
],
[
"revenue",
"https://www.investopedia.com/terms/r/revenue.asp"
],
[
"foreign exchange",
"https://www.investopedia.com/terms/f/foreign-exchange.asp"
]
] |
https://www.investopedia.com/terms/e/embeddedoption.asp
|
Embedded Options: Definition and Use Cases
|
<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-embedded-option"></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 Embedded Option? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An embedded option is a feature of a financial instrument that lets <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/issuer.asp">issuers</a> or holders take specified actions against the other party at some future time. Embedded options are provisions included in some <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-incomesecurity.asp">fixed-income securities</a> that allow investors or the issuer to do specific actions, such as call back (redeem) the issue early.
</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>An embedded option is a component of a security that gives either the issuer or the holder the right to take some specified action at present or in the future.</li><li>An embedded option is usually an inseparable part of another security that cannot exist as a stand-alone entity.</li><li>The inclusion of an embedded option can materially impact the value of that financial security.</li><li>Embedded options make investors vulnerable to reinvestment risk and expose them to the possibility of limited price appreciation.</li><li>Examples of embedded options include callable, putable, and convertible securities.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-embedded-options"></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 Embedded Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Typically associated with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>, an embedded option is a function that allows holders or issuers of financial securities to take specified action against one another in the future. Embedded options materially affect the value of a security.
</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"> Embedded options differ from bare options, which trade separately from their underlying securities. In bare options, traders may buy and sell <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/calloption.asp">call</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put</a> options, which are essentially separate securities from the investments themselves. Contrarily, embedded options are inexorably linked to the underlying security. Consequently, they may not be bought or sold independently.
</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-redeeming-securities-embedded-calls--puts"></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"> Redeeming Securities: Embedded Calls & Puts </span> </h2>
<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"> Callable </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Embedded options give investors the power to prematurely redeem a security. For example, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callprovision.asp">call provision</a> is a type of embedded option that affords holders the power to redeem the bond before its scheduled maturity. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/callablebond.asp">Callable bonds</a> are a tool used by issuers, especially at times of high prevailing interest rates, where such an agreement allows the issuer to buy back or redeem bonds at some time in the future. In this case, the bondholder has essentially sold a call option to the company that issued the bond, whether they realize it or not.
</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"> Putable </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putbond.asp">putable provision</a> is an embedded option on a bond that positions holders to demand early redemption from the issuer. In contrast to callable bonds (and also not as common as them), <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/06/bondputoption.asp">putable bonds</a> provide more control of the outcome for the bondholder. Owners of putable bonds have essentially purchased a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put option</a> built into the bond. Just like callable bonds, the bond indenture specifically details the circumstances a bondholder can utilize for the early redemption of the bond or put the bonds back to the issuer.
</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"> Putable bond buyers make some concessions in price or yield (the embedded price of the put) to allow them to close out the bond agreements if rates rise, and then invest or loan their proceeds in higher-yielding agreements. Issuers of putable bonds need to prepare financially for the possible event when investors decide putting the bonds back to the issuer is beneficial. They do this by creating <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/segregatedfund.asp">segregated funds</a> set aside for just such an event or issuing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/bonds/07/callable_bonds.asp">offsetting callable bonds</a> (like put/call strategies) where the corresponding transactions can essentially fund themselves.
</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"> Convertible </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> A convertible security is an investment that can be changed from its initial form into another form. The most common types of convertible securities are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertiblebond.asp">convertible bonds</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertiblepreferredstock.asp">convertible preferred shares</a>, which can be converted into common stock. With convertible bonds, an embedded option gives bondholders the right to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangeabledebt.asp">exchange the bond for shares in the underlying common stock</a>. Convertible securities usually have a lower <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payout.asp">payout</a> than comparable securities without the conversion feature. Investors are willing to accept the lower payout due to the potential profit from sharing in the appreciation of a company's common stock through the conversion feature.
</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 conversion value is similar to the value of the call option on the common stock. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conversionprice.asp">conversion price</a>, which is the preset price at which the security can be converted into common stock, is usually set at a price higher than the stock's current price. If the conversion price is closer to the market price, then it has a higher call value. The underlying security is valued based on its par value and coupon rate. The two values are added together for a more complete picture of the security's valuation.
</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-valuing-securities-with-embedded-options"></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"> Valuing Securities with Embedded Options </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The valuation of bonds with embedded options is determined by using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionpricingtheory.asp">option pricing</a> techniques. Depending on the type of option, the option price is either added to or subtracted from the price of the straight bond that has no options attached. After the value of the bond is determined, various yield values, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yieldtomaturity.asp">yield to maturity</a> (YTM) and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/runningyield.asp">the running yield</a>, may then be calculated.
</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"> Because <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deathput.asp">embedded options may increase or decrease the value of a security</a>, investors should be acutely aware of their presence. For example, a bond that has an embedded option gives the issuer the right to call the issue, potentially rendering the instrument less valuable to an investor than a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/noncallable.asp">non-callable bond</a>. This is mainly due to the fact that the investor may lose out on interest payments they might otherwise enjoy if the callable bond were held to maturity.
</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"> Embedded options on a bond are spelled out in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust_indenture.asp">trust indenture</a>, which delineates the terms and conditions that trustees, bond issuers, and bondholders must all observe.
</p>
<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-callout mntl-block" id="mntl-sc-block_32-0"><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_33-0"><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>Banks that heavily invest their earning assets in products with embedded options at the generational low for yields on fixed-income assets are often vulnerable to rising interest rates.</p></div></div></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"> The Option-Adjusted Spread (OAS) </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionadjustedspread.asp">option-adjusted spread</a> (OAS) is the measurement of the spread of a fixed-income security rate and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freerate.asp">risk-free rate of return</a>, which is then adjusted to take into account an embedded option. Typically, one uses Treasury yields for the risk-free rate. The OAS spread is added to the fixed-income security price to make the risk-free bond price the same as the bond.
</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 option-adjusted spread thus <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052115/what-difference-between-optionadjusted-spread-and-zspread-reference-mortgagebacked-securities-mbs.asp">helps investors compare a fixed-income</a> security’s cash flows to reference rates while also valuing embedded options based on general market volatility. By separately analyzing the security into a bond and the embedded option, analysts can determine whether the investment is worthwhile at a given price. The OAS method is more accurate than simply comparing a bond’s yield to maturity to a benchmark.
</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-non-bond-investments"></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"> Non-Bond Investments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Non-bond investments that feature embedded options include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertiblepreferredstock.asp">convertible preferred shares</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp">mortgage-backed securities</a> (MBSs). Convertible stocks give investors the option to convert their preferred shares into common stock with the issuing company. MBSs can have embedded prepayment options, which give mortgage holders the option to repay early.
</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"> Embedded options expose investors to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reinvestmentrisk.asp">reinvestment risk</a> as well as the propensity for limited price appreciation. Reinvestment risk manifests if an investor or issuer exercises the embedded option, where the recipient of the transactional proceeds is forbidden from reinvesting them.
</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"> Furthermore, embedded options customarily limit a security's potential price appreciation, because when market circumstances change, the price of the affected security may be capped or bound by a specific conversion rate or call price.
</p></div>
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## What Is an Embedded Option?
An embedded option is a feature of a financial instrument that lets [issuers](https://www.investopedia.com/terms/i/issuer.asp) or holders take specified actions against the other party at some future time. Embedded options are provisions included in some [fixed-income securities](https://www.investopedia.com/terms/f/fixed-incomesecurity.asp) that allow investors or the issuer to do specific actions, such as call back (redeem) the issue early.
### Key Takeaways
* An embedded option is a component of a security that gives either the issuer or the holder the right to take some specified action at present or in the future.
* An embedded option is usually an inseparable part of another security that cannot exist as a stand-alone entity.
* The inclusion of an embedded option can materially impact the value of that financial security.
* Embedded options make investors vulnerable to reinvestment risk and expose them to the possibility of limited price appreciation.
* Examples of embedded options include callable, putable, and convertible securities.
## Understanding Embedded Options
Typically associated with [bonds](https://www.investopedia.com/terms/b/bond.asp), an embedded option is a function that allows holders or issuers of financial securities to take specified action against one another in the future. Embedded options materially affect the value of a security.
Embedded options differ from bare options, which trade separately from their underlying securities. In bare options, traders may buy and sell [call](https://www.investopedia.com/terms/c/calloption.asp) and [put](https://www.investopedia.com/terms/p/putoption.asp) options, which are essentially separate securities from the investments themselves. Contrarily, embedded options are inexorably linked to the underlying security. Consequently, they may not be bought or sold independently.
## Redeeming Securities: Embedded Calls & Puts
### Callable
Embedded options give investors the power to prematurely redeem a security. For example, a [call provision](https://www.investopedia.com/terms/c/callprovision.asp) is a type of embedded option that affords holders the power to redeem the bond before its scheduled maturity. [Callable bonds](https://www.investopedia.com/terms/c/callablebond.asp) are a tool used by issuers, especially at times of high prevailing interest rates, where such an agreement allows the issuer to buy back or redeem bonds at some time in the future. In this case, the bondholder has essentially sold a call option to the company that issued the bond, whether they realize it or not.
### Putable
A [putable provision](https://www.investopedia.com/terms/p/putbond.asp) is an embedded option on a bond that positions holders to demand early redemption from the issuer. In contrast to callable bonds (and also not as common as them), [putable bonds](https://www.investopedia.com/ask/answers/06/bondputoption.asp) provide more control of the outcome for the bondholder. Owners of putable bonds have essentially purchased a [put option](https://www.investopedia.com/terms/p/putoption.asp) built into the bond. Just like callable bonds, the bond indenture specifically details the circumstances a bondholder can utilize for the early redemption of the bond or put the bonds back to the issuer.
Putable bond buyers make some concessions in price or yield (the embedded price of the put) to allow them to close out the bond agreements if rates rise, and then invest or loan their proceeds in higher-yielding agreements. Issuers of putable bonds need to prepare financially for the possible event when investors decide putting the bonds back to the issuer is beneficial. They do this by creating [segregated funds](https://www.investopedia.com/terms/s/segregatedfund.asp) set aside for just such an event or issuing [offsetting callable bonds](https://www.investopedia.com/articles/bonds/07/callable_bonds.asp) (like put/call strategies) where the corresponding transactions can essentially fund themselves.
### Convertible
A convertible security is an investment that can be changed from its initial form into another form. The most common types of convertible securities are [convertible bonds](https://www.investopedia.com/terms/c/convertiblebond.asp) and [convertible preferred shares](https://www.investopedia.com/terms/c/convertiblepreferredstock.asp), which can be converted into common stock. With convertible bonds, an embedded option gives bondholders the right to [exchange the bond for shares in the underlying common stock](https://www.investopedia.com/terms/e/exchangeabledebt.asp). Convertible securities usually have a lower [payout](https://www.investopedia.com/terms/p/payout.asp) than comparable securities without the conversion feature. Investors are willing to accept the lower payout due to the potential profit from sharing in the appreciation of a company's common stock through the conversion feature.
The conversion value is similar to the value of the call option on the common stock. The [conversion price](https://www.investopedia.com/terms/c/conversionprice.asp), which is the preset price at which the security can be converted into common stock, is usually set at a price higher than the stock's current price. If the conversion price is closer to the market price, then it has a higher call value. The underlying security is valued based on its par value and coupon rate. The two values are added together for a more complete picture of the security's valuation.
## Valuing Securities with Embedded Options
The valuation of bonds with embedded options is determined by using [option pricing](https://www.investopedia.com/terms/o/optionpricingtheory.asp) techniques. Depending on the type of option, the option price is either added to or subtracted from the price of the straight bond that has no options attached. After the value of the bond is determined, various yield values, such as [yield to maturity](https://www.investopedia.com/terms/y/yieldtomaturity.asp) (YTM) and [the running yield](https://www.investopedia.com/terms/r/runningyield.asp), may then be calculated.
Because [embedded options may increase or decrease the value of a security](https://www.investopedia.com/terms/d/deathput.asp), investors should be acutely aware of their presence. For example, a bond that has an embedded option gives the issuer the right to call the issue, potentially rendering the instrument less valuable to an investor than a [non-callable bond](https://www.investopedia.com/terms/n/noncallable.asp). This is mainly due to the fact that the investor may lose out on interest payments they might otherwise enjoy if the callable bond were held to maturity.
Embedded options on a bond are spelled out in a [trust indenture](https://www.investopedia.com/terms/t/trust_indenture.asp), which delineates the terms and conditions that trustees, bond issuers, and bondholders must all observe.
###
Banks that heavily invest their earning assets in products with embedded options at the generational low for yields on fixed-income assets are often vulnerable to rising interest rates.
### The Option-Adjusted Spread (OAS)
The [option-adjusted spread](https://www.investopedia.com/terms/o/optionadjustedspread.asp) (OAS) is the measurement of the spread of a fixed-income security rate and the [risk-free rate of return](https://www.investopedia.com/terms/r/risk-freerate.asp), which is then adjusted to take into account an embedded option. Typically, one uses Treasury yields for the risk-free rate. The OAS spread is added to the fixed-income security price to make the risk-free bond price the same as the bond.
The option-adjusted spread thus [helps investors compare a fixed-income](https://www.investopedia.com/ask/answers/052115/what-difference-between-optionadjusted-spread-and-zspread-reference-mortgagebacked-securities-mbs.asp) security’s cash flows to reference rates while also valuing embedded options based on general market volatility. By separately analyzing the security into a bond and the embedded option, analysts can determine whether the investment is worthwhile at a given price. The OAS method is more accurate than simply comparing a bond’s yield to maturity to a benchmark.
## Non-Bond Investments
Non-bond investments that feature embedded options include [convertible preferred shares](https://www.investopedia.com/terms/c/convertiblepreferredstock.asp) and [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp) (MBSs). Convertible stocks give investors the option to convert their preferred shares into common stock with the issuing company. MBSs can have embedded prepayment options, which give mortgage holders the option to repay early.
Embedded options expose investors to [reinvestment risk](https://www.investopedia.com/terms/r/reinvestmentrisk.asp) as well as the propensity for limited price appreciation. Reinvestment risk manifests if an investor or issuer exercises the embedded option, where the recipient of the transactional proceeds is forbidden from reinvesting them.
Furthermore, embedded options customarily limit a security's potential price appreciation, because when market circumstances change, the price of the affected security may be capped or bound by a specific conversion rate or call price.
|
What Is an Embedded Option?
An embedded option is a feature of a financial instrument that lets issuers or holders take specified actions against the other party at some future time. Embedded options are provisions included in some fixed-income securities that allow investors or the issuer to do specific actions, such as call back (redeem) the issue early.
Key Takeaways
An embedded option is a component of a security that gives either the issuer or the holder the right to take some specified action at present or in the future.An embedded option is usually an inseparable part of another security that cannot exist as a stand-alone entity.The inclusion of an embedded option can materially impact the value of that financial security.Embedded options make investors vulnerable to reinvestment risk and expose them to the possibility of limited price appreciation.Examples of embedded options include callable, putable, and convertible securities.
Understanding Embedded Options
Typically associated with bonds, an embedded option is a function that allows holders or issuers of financial securities to take specified action against one another in the future. Embedded options materially affect the value of a security.
Embedded options differ from bare options, which trade separately from their underlying securities. In bare options, traders may buy and sell call and put options, which are essentially separate securities from the investments themselves. Contrarily, embedded options are inexorably linked to the underlying security. Consequently, they may not be bought or sold independently.
Redeeming Securities: Embedded Calls & Puts
Callable
Embedded options give investors the power to prematurely redeem a security. For example, a call provision is a type of embedded option that affords holders the power to redeem the bond before its scheduled maturity. Callable bonds are a tool used by issuers, especially at times of high prevailing interest rates, where such an agreement allows the issuer to buy back or redeem bonds at some time in the future. In this case, the bondholder has essentially sold a call option to the company that issued the bond, whether they realize it or not.
Putable
A putable provision is an embedded option on a bond that positions holders to demand early redemption from the issuer. In contrast to callable bonds (and also not as common as them), putable bonds provide more control of the outcome for the bondholder. Owners of putable bonds have essentially purchased a put option built into the bond. Just like callable bonds, the bond indenture specifically details the circumstances a bondholder can utilize for the early redemption of the bond or put the bonds back to the issuer.
Putable bond buyers make some concessions in price or yield (the embedded price of the put) to allow them to close out the bond agreements if rates rise, and then invest or loan their proceeds in higher-yielding agreements. Issuers of putable bonds need to prepare financially for the possible event when investors decide putting the bonds back to the issuer is beneficial. They do this by creating segregated funds set aside for just such an event or issuing offsetting callable bonds (like put/call strategies) where the corresponding transactions can essentially fund themselves.
Convertible
A convertible security is an investment that can be changed from its initial form into another form. The most common types of convertible securities are convertible bonds and convertible preferred shares, which can be converted into common stock. With convertible bonds, an embedded option gives bondholders the right to exchange the bond for shares in the underlying common stock. Convertible securities usually have a lower payout than comparable securities without the conversion feature. Investors are willing to accept the lower payout due to the potential profit from sharing in the appreciation of a company's common stock through the conversion feature.
The conversion value is similar to the value of the call option on the common stock. The conversion price, which is the preset price at which the security can be converted into common stock, is usually set at a price higher than the stock's current price. If the conversion price is closer to the market price, then it has a higher call value. The underlying security is valued based on its par value and coupon rate. The two values are added together for a more complete picture of the security's valuation.
Valuing Securities with Embedded Options
The valuation of bonds with embedded options is determined by using option pricing techniques. Depending on the type of option, the option price is either added to or subtracted from the price of the straight bond that has no options attached. After the value of the bond is determined, various yield values, such as yield to maturity (YTM) and the running yield, may then be calculated.
Because embedded options may increase or decrease the value of a security, investors should be acutely aware of their presence. For example, a bond that has an embedded option gives the issuer the right to call the issue, potentially rendering the instrument less valuable to an investor than a non-callable bond. This is mainly due to the fact that the investor may lose out on interest payments they might otherwise enjoy if the callable bond were held to maturity.
Embedded options on a bond are spelled out in a trust indenture, which delineates the terms and conditions that trustees, bond issuers, and bondholders must all observe.
Banks that heavily invest their earning assets in products with embedded options at the generational low for yields on fixed-income assets are often vulnerable to rising interest rates.
The Option-Adjusted Spread (OAS)
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is then adjusted to take into account an embedded option. Typically, one uses Treasury yields for the risk-free rate. The OAS spread is added to the fixed-income security price to make the risk-free bond price the same as the bond.
The option-adjusted spread thus helps investors compare a fixed-income security’s cash flows to reference rates while also valuing embedded options based on general market volatility. By separately analyzing the security into a bond and the embedded option, analysts can determine whether the investment is worthwhile at a given price. The OAS method is more accurate than simply comparing a bond’s yield to maturity to a benchmark.
Non-Bond Investments
Non-bond investments that feature embedded options include convertible preferred shares and mortgage-backed securities (MBSs). Convertible stocks give investors the option to convert their preferred shares into common stock with the issuing company. MBSs can have embedded prepayment options, which give mortgage holders the option to repay early.
Embedded options expose investors to reinvestment risk as well as the propensity for limited price appreciation. Reinvestment risk manifests if an investor or issuer exercises the embedded option, where the recipient of the transactional proceeds is forbidden from reinvesting them.
Furthermore, embedded options customarily limit a security's potential price appreciation, because when market circumstances change, the price of the affected security may be capped or bound by a specific conversion rate or call price.
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https://www.investopedia.com/how-to-invest-in-ai-7504987
|
How to Invest In AI
|
<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"> Artificial Intelligence (AI), or the use of machines to replicate and replace human intelligence processes across a variety of situations and industries, is attracting an incredible amount of attention through its increasing relevance to our everyday lives and economy. As AI’s capabilities continue to expand, investors are trying to determine the best ways to capitalize on this very important growth industry.
</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"> Similar to past emerging technologies, such as the railroads in the late 1800s or the personal computer in the 1980s, there are many ways to invest in this new trend. But while some companies will have wild success, other early adopters will fail.
</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 computer revolution is a great analogy for AI investing because while computers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/generative-ai-7497939">set the stage for automation</a> of mundane and repeatable tasks, AI now seeks to bring this concept to the next level through the automation of tasks that previously required human thought and intelligence. This article will further outline ways investors can take advantage of AI’s anticipated growth as the technology starts to move from conceptual ideas to actual use in our economy.
</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-how-to-invest-in-ai"></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 to Invest In AI </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> There are many ways to invest in an industry or market sector, and AI appears to be fast becoming an important disruptor technology. Great profits can be obtained by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trendanalysis.asp">identifying these disruptor trends</a> and investing in new companies, but there is tremendous competition building and it is not always easy to identify which companies will end up the winner.
</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"> Sometimes, the innovator takes and holds a market-leading position, but other times an imitator is able to use an innovator’s technology in better ways that make it more successful over time.
</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 people will want to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/smaller-companies-to-benefit-from-ai-7151761">invest directly in companies</a> that develop AI, while others may choose to invest in those companies that stand to benefit the most from its wider adoption. Using the introduction and growth of the personal computer industry as an example, investors could have had success investing in computer manufacturers or hardware companies that made routers and switches. Others invested in software companies that produced the programs used by computers, while still others attempted to identify companies that would benefit most from the automation that computers offered.
</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"> Some of these investments were direct bets in computers and the actual technology, while others were more conservative, such as investing in an already strong company that stood to benefit further from the growth of computer usage; but the point is that there are often winners and losers when new technologies emerge.
</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"> Finally, with many believing that AI may <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/economic-impact-of-generative-ai-7976252">have a strong economic impact</a> and displace many workers in many industries, there may be opportunities to identify companies, such as those focused on worker retraining, that may benefit from these large shifts in the workforce. We will now discuss some individual stocks that may match some of these criteria for investment in AI.
</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-invest-in-ai-stocks-and-etfs"></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"> Invest in AI Stocks and ETFs </span> </h2>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Leading Companies in AI </span> </h3>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0">
<li><strong>Tesla (TSLA)</strong>: Tesla is one of the most visible AI companies, and is easy to understand. The company uses AI to automate driving, which necessitates constant processing of data to identify other cars, road conditions, traffic signals, and pedestrians. As anyone who has driven knows, this requires constant scanning and processing to account for instantaneously changing conditions.</li>
<li><strong>NVIDIA (NVDA): </strong>NVIDIA is a leader in AI and has a very strong position in the marketplace through its generative artificial intelligence, which describes algorithms used to create new content in multiple output forms that include audio, computer code, images, text, simulations, and videos. NVIDIA has created the computer chips, hardware, software, and development tools to create start-to-finish AI systems. NVIDIA utilizes thousands of graphic processing units (GPUs) to drive a large AI system, and the company currently has a GPU market share of 88%.<span class="ql-inline-citation" data-cite="4"></span> </li>
<li><strong>Microsoft (MSFT)</strong>: Microsoft has invested $13 billion in AI initiatives, including an early $1 billion investment in OpenAI (whose ChatGPT is now one of the most recognizable names in AI). Microsoft has embedded AI into many of its systems, including its Bing search engine, Microsoft 360, its sales and marketing tools, X-Box, and GitHub coding tools. It has also outlined a framework for building AI apps and copilots and expanding its AI plug-in ecosystem. </li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Taiwan Semiconductor Manufacturing (TSM): </strong>Taiwan Semiconductor Manufacturing is the world’s largest chip maker, and it is another leading competitor in chip manufacturing for artificial intelligence. As AI grows, the need for robust computing chips will grow with it. TSM is a mature company that continues to make chips for non-AI computer applications, so it may represent less risk than other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/04/042904.asp">pure plays</a> on AI.</li>
<li><strong>Meta Platforms (META)</strong>: Meta has made significant investments in AI. It utilizes large language module (LLM) AI to help drive search results and predict the content its users will want to see. Meta has also developed its own silicon chip for AI processing applications and created a next-generation data center.</li>
<li><strong>Amazon.com (AMZN)</strong>:<strong> </strong>Amazon uses AI in its Alexa system and also offers machine learning (ML) and AI tools to its customers. Amazon’s cloud computing business, Amazon Web Services (AWS), provides an AI infrastructure that allows its customers to analyze data and incorporate AI into their existing systems. AWS has more than 100,000 customers that can benefit from AI and ML services to personalize recommendations, improve safety and security, analyze their business, and increase customer engagement.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Apple (APPL): </strong>In addition to Siri, which utilizes AI to interact with customers, Apple will continue to make a percentage of AI services delivered on its platform. A significant example of this is OpenAI, which just launched its iPhone app for ChatGPT; it will pay Apple 30% of the revenue generated from the app. In addition to AI companies delivering services through Apple’s platform, the company can also use its massive cash reserves to make major investments in AI that it builds itself or acquires using its massive cash reserves.</li>
</ul>
<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-compare-some-top-brokers-for-investing-in-ai-stocks"></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"> Compare Some Top Brokers for Investing in AI Stocks </span> </h2>
<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>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Platform</b> </th>
<th><b>Account</b> <b>Minimum</b></th>
<th> <b>Fees</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.merrilledge.com" rel="sponsored nofollow">Merrill Edge</a></td>
<td>$0</td>
<td>$0.00 per stock trade. Options trades $0 per leg plus $0.65 per contract</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://ad.doubleclick.net/ddm/trackclk/N84001.3034362DOTDASH/B29033839.359635625;dc_trk_aid=550738970;dc_trk_cid=186914042;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=" rel="sponsored nofollow">E*TRADE</a></td>
<td>$0</td>
<td>No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.</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>
<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"> Best AI ETFs </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Utilizing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/top-etfs-capitalizing-artificial-intelligence/">professionally managed ETFs</a> or mutual funds that invest in AI companies lets professionals perform the research and make the determinations about which companies to invest in. This also provides the investor with a portfolio of multiple AI stocks within a single investment. Investing in funds involves looking for funds that have solid track records and also paying attention to the fees charged by the funds to ensure total returns.
</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><strong>iShares Exponential Technologies ETF (XT): </strong>XT is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large capitalization</a> fund that selects global stocks trying to disrupt their industries. The disruption also includes AI technology stocks, which make up nearly half of the fund. The other half of the fund invests in healthcare and industrial stocks, which are also actively looking at how AI might make an outsized difference in their more mature industries. This fund has an expense ratio of 0.46% and an annual dividend yield of 0.70%.<span class="ql-inline-citation" data-cite="1"></span></li>
<li><strong>Defiance Machine Learning & Quantum Computing ETF (QTUM):</strong> QTUM has only $112 million under management. The fund invests in companies looking to commercialize their research and development in quantum computing systems. Its benchmark is the BlueStar Quantum Computing and Machine Learning Index. This fund has an expense ratio of 0.40% and an annual dividend yield of 0.45%.<span class="ql-inline-citation" data-cite="2"></span></li>
<li><strong>ROBO Global Robotics & Automation Index ETF (ROBO):</strong> ROBO invests in companies focused on robotics, automation, and artificial intelligence and invests in both growth and value stocks. The fund’s expense ratio is 0.95%, and it has an annual dividend yield of 0.17%.<span class="ql-inline-citation" data-cite="3"></span></li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<span class="heading-toc" id="toc-compare-some-top-brokers-for-investing-in-ai-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> Compare Some Top Brokers for Investing in AI ETFs </span> </h2>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_31-0"> <div class="mntl-sc-block-table__table-wrapper">
<table class="mntl-sc-block-table__table">
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Company</b></th>
<th><b>Account Minimums</b></th>
<th><b>Fees</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td><a class="null" data-affiliate-link-rewriter="u1=${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&offerid=1500096.1134&type=3&subid=0" rel="sponsored nofollow">Fidelity</a></td>
<td>$0</td>
<td>$0 for stock/ETF trades, $0 plus $0.65/contract for options trade</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow">Interactive Brokers</a></td>
<td>$0 </td>
<td>$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.</td>
</tr>
<tr>
<td><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://ad.doubleclick.net/ddm/trackclk/N6036.Investopedia.com/B29101415.354473582;dc_trk_aid=546438013;dc_trk_cid=184464738;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=" rel="sponsored nofollow">Charles Schwab</a></td>
<td>$0 </td>
<td>$0 for stock/ETF trades, $0.65 per contract for options</td>
</tr>
</tbody>
</table>
</div></figure>
<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-how-to-search-for-ai-investments"></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"> How to Search for AI Investments </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Buying individual AI stocks represents more work for the investor. The first step is to read about the industry to understand the various aspects of AI, as there are multiple ways to invest in this sector. As outlined earlier, there are pure plays and more conservative plays within the AI universe, and investors will have to decide the type of exposure they want to this market sector. Once the investor has an idea of the overall parts of the AI market they want to invest in, they should utilize traditional investment analysis—both fundamental and technical.
</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>Earnings forecasts:</strong> Earnings are a great way to judge the performance of a company, and AI companies with consistent and growing earnings will be looked upon favorably. Many AI companies will be viewed as growth stocks, so earnings growth will be an important criterion for many investors. Earnings releases have a tendency to move AI stocks up or down very sharply.</li>
<li><strong>Annual reports:</strong> Annual reports provide important narrative information about the activities of the company, and the financial statements allow investors to look at various financial metrics, such as debt to equity and other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accounting-ratio.asp">accounting ratios</a> used to make financial decisions about stocks. </li>
<li><strong>Relative performance vs. the market:</strong> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/relativereturn.asp">Relative performance</a> is looking at how an individual stock performs relative to an index or another stock. With newer AI companies, it may be best to look at the relative performance between similar companies. </li>
<li><strong>Growth analysis:</strong> This analysis <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/062915/what-are-common-growth-rates-should-be-analyzed-when-considering-future-prospects-company.asp">deals with the growth of a company</a> over time, with the investor looking at earnings, market share, and other metrics that can help to determine the strength of the company and its prospects. </li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Analyst projections:</strong> Analysis projections and research reports may be particularly helpful for investors new to AI. This is a volatile market with new developments in technology and company prospects changing much more quickly than with stocks in more mature industries. Therefore, it is helpful to gain the perspective of professional researchers who have a good understanding of the overall AI space, as well as the prospects of individual stocks relative to competitors in the sector.</li>
</ul>
<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-faqs"></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"> FAQs </span> </h2>
<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-investors-make-money-in-ai"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Investors Make Money in AI?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Artificial intelligence use has been growing, and the technology appears poised to break out further and deliver on expectations for more widespread adoption across a wide range of businesses and real-world applications. Like any disruptive technology that requires capital investment, AI offers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/smaller-companies-to-benefit-from-ai-7151761">plenty of opportunities for investors</a> to make money, but new technologies also involve risk, so investors should determine the best way to gain exposure to this market. Options include more speculative direct AI investments in individual companies or investing in ETFs and mutual funds that offer a portfolio of multiple companies in the AI space. Investors may also look to add well-established companies that are positioned to increase their revenues as AI becomes more widely adopted across the economy to their portfolios.</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-how-can-you-invest-in-ai-art"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Invest in AI Art?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Art can now be created using artificial intelligence. A user can type or speak of an image they want to create, and an AI program can produce an image that meets the description provided by the user. These AI programs use the user’s description in conjunction with images available throughout the world to generate the image for the user requesting the artwork. AI-generated artwork has been utilized by people of all ages and backgrounds. </p><p>Copyright is an issue related to AI-generated art. Since these AI programs generate art from existing examples, many artists feel their copyrights are being violated by these programs, putting their livelihoods at risk. There are publicly traded companies that have vast collections of artwork utilized by AI art generators, such as Pinterest, Getty Images, Snap Inc., and Shutterstock.<br/></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-how-can-you-invest-in-ai-startups"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Invest in AI Startups?</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/s/startup.asp">Startup companies</a> are often created in new and promising fields, such as artificial intelligence and machine learning. Often, these are companies that have been initially capitalized by venture capital investors, then taken public to capitalize on their initial investment and to raise more capital as the business increases its operations and begins offering its products to a wider customer base. While investing in startup companies is risky, the rewards for investing in a successful startup company can be huge. Examples of successful startup companies include Apple, Amazon, and Microsoft, and its early investors have, obviously, been very well rewarded.<br/></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-can-you-invest-directly-in-ai"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Invest Directly in AI?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, investors can make direct investments in artificial intelligence and machine learning. This can be done by investing in individual stocks, or by investing in ETFs or mutual funds that focus their investments in AI stocks. There are widely held, well-known AI stocks, as well as much less known AI stocks, that may represent good investments.</p></div>
</div></div>
|
Artificial Intelligence (AI), or the use of machines to replicate and replace human intelligence processes across a variety of situations and industries, is attracting an incredible amount of attention through its increasing relevance to our everyday lives and economy. As AI’s capabilities continue to expand, investors are trying to determine the best ways to capitalize on this very important growth industry.
Similar to past emerging technologies, such as the railroads in the late 1800s or the personal computer in the 1980s, there are many ways to invest in this new trend. But while some companies will have wild success, other early adopters will fail.
The computer revolution is a great analogy for AI investing because while computers [set the stage for automation](https://www.investopedia.com/generative-ai-7497939) of mundane and repeatable tasks, AI now seeks to bring this concept to the next level through the automation of tasks that previously required human thought and intelligence. This article will further outline ways investors can take advantage of AI’s anticipated growth as the technology starts to move from conceptual ideas to actual use in our economy.
## How to Invest In AI
There are many ways to invest in an industry or market sector, and AI appears to be fast becoming an important disruptor technology. Great profits can be obtained by [identifying these disruptor trends](https://www.investopedia.com/terms/t/trendanalysis.asp) and investing in new companies, but there is tremendous competition building and it is not always easy to identify which companies will end up the winner.
Sometimes, the innovator takes and holds a market-leading position, but other times an imitator is able to use an innovator’s technology in better ways that make it more successful over time.
Some people will want to [invest directly in companies](https://www.investopedia.com/smaller-companies-to-benefit-from-ai-7151761) that develop AI, while others may choose to invest in those companies that stand to benefit the most from its wider adoption. Using the introduction and growth of the personal computer industry as an example, investors could have had success investing in computer manufacturers or hardware companies that made routers and switches. Others invested in software companies that produced the programs used by computers, while still others attempted to identify companies that would benefit most from the automation that computers offered.
Some of these investments were direct bets in computers and the actual technology, while others were more conservative, such as investing in an already strong company that stood to benefit further from the growth of computer usage; but the point is that there are often winners and losers when new technologies emerge.
Finally, with many believing that AI may [have a strong economic impact](https://www.investopedia.com/economic-impact-of-generative-ai-7976252) and displace many workers in many industries, there may be opportunities to identify companies, such as those focused on worker retraining, that may benefit from these large shifts in the workforce. We will now discuss some individual stocks that may match some of these criteria for investment in AI.
## Invest in AI Stocks and ETFs
### Leading Companies in AI
* **Tesla (TSLA)**: Tesla is one of the most visible AI companies, and is easy to understand. The company uses AI to automate driving, which necessitates constant processing of data to identify other cars, road conditions, traffic signals, and pedestrians. As anyone who has driven knows, this requires constant scanning and processing to account for instantaneously changing conditions.
* **NVIDIA (NVDA):** NVIDIA is a leader in AI and has a very strong position in the marketplace through its generative artificial intelligence, which describes algorithms used to create new content in multiple output forms that include audio, computer code, images, text, simulations, and videos. NVIDIA has created the computer chips, hardware, software, and development tools to create start-to-finish AI systems. NVIDIA utilizes thousands of graphic processing units (GPUs) to drive a large AI system, and the company currently has a GPU market share of 88%.
* **Microsoft (MSFT)**: Microsoft has invested $13 billion in AI initiatives, including an early $1 billion investment in OpenAI (whose ChatGPT is now one of the most recognizable names in AI). Microsoft has embedded AI into many of its systems, including its Bing search engine, Microsoft 360, its sales and marketing tools, X-Box, and GitHub coding tools. It has also outlined a framework for building AI apps and copilots and expanding its AI plug-in ecosystem.
* **Taiwan Semiconductor Manufacturing (TSM):** Taiwan Semiconductor Manufacturing is the world’s largest chip maker, and it is another leading competitor in chip manufacturing for artificial intelligence. As AI grows, the need for robust computing chips will grow with it. TSM is a mature company that continues to make chips for non-AI computer applications, so it may represent less risk than other [pure plays](https://www.investopedia.com/ask/answers/04/042904.asp) on AI.
* **Meta Platforms (META)**: Meta has made significant investments in AI. It utilizes large language module (LLM) AI to help drive search results and predict the content its users will want to see. Meta has also developed its own silicon chip for AI processing applications and created a next-generation data center.
* **Amazon.com (AMZN)**:Amazon uses AI in its Alexa system and also offers machine learning (ML) and AI tools to its customers. Amazon’s cloud computing business, Amazon Web Services (AWS), provides an AI infrastructure that allows its customers to analyze data and incorporate AI into their existing systems. AWS has more than 100,000 customers that can benefit from AI and ML services to personalize recommendations, improve safety and security, analyze their business, and increase customer engagement.
* **Apple (APPL):** In addition to Siri, which utilizes AI to interact with customers, Apple will continue to make a percentage of AI services delivered on its platform. A significant example of this is OpenAI, which just launched its iPhone app for ChatGPT; it will pay Apple 30% of the revenue generated from the app. In addition to AI companies delivering services through Apple’s platform, the company can also use its massive cash reserves to make major investments in AI that it builds itself or acquires using its massive cash reserves.
## Compare Some Top Brokers for Investing in AI Stocks
| **Platform** | **Account** **Minimum** | **Fees** |
| --- | --- | --- |
| [Merrill Edge](https://www.merrilledge.com) | $0 | $0.00 per stock trade. Options trades $0 per leg plus $0.65 per contract |
| [E\*TRADE](https://ad.doubleclick.net/ddm/trackclk/N84001.3034362DOTDASH/B29033839.359635625;dc_trk_aid=550738970;dc_trk_cid=186914042;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=) | $0 | No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume. |
### Best AI ETFs
Utilizing [professionally managed ETFs](https://www.investopedia.com/investing/top-etfs-capitalizing-artificial-intelligence/) or mutual funds that invest in AI companies lets professionals perform the research and make the determinations about which companies to invest in. This also provides the investor with a portfolio of multiple AI stocks within a single investment. Investing in funds involves looking for funds that have solid track records and also paying attention to the fees charged by the funds to ensure total returns.
* **iShares Exponential Technologies ETF (XT):** XT is a [large capitalization](https://www.investopedia.com/terms/l/large-cap.asp) fund that selects global stocks trying to disrupt their industries. The disruption also includes AI technology stocks, which make up nearly half of the fund. The other half of the fund invests in healthcare and industrial stocks, which are also actively looking at how AI might make an outsized difference in their more mature industries. This fund has an expense ratio of 0.46% and an annual dividend yield of 0.70%.
* **Defiance Machine Learning & Quantum Computing ETF (QTUM):** QTUM has only $112 million under management. The fund invests in companies looking to commercialize their research and development in quantum computing systems. Its benchmark is the BlueStar Quantum Computing and Machine Learning Index. This fund has an expense ratio of 0.40% and an annual dividend yield of 0.45%.
* **ROBO Global Robotics & Automation Index ETF (ROBO):** ROBO invests in companies focused on robotics, automation, and artificial intelligence and invests in both growth and value stocks. The fund’s expense ratio is 0.95%, and it has an annual dividend yield of 0.17%.
## Compare Some Top Brokers for Investing in AI ETFs
| **Company** | **Account Minimums** | **Fees** |
| --- | --- | --- |
| [Fidelity](https://click.linksynergy.com/fs-bin/click?id=RL7M2q*4kuk&offerid=1500096.1134&type=3&subid=0) | $0 | $0 for stock/ETF trades, $0 plus $0.65/contract for options trade |
| [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) | $0 | $0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures. |
| [Charles Schwab](https://ad.doubleclick.net/ddm/trackclk/N6036.Investopedia.com/B29101415.354473582;dc_trk_aid=546438013;dc_trk_cid=184464738;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=) | $0 | $0 for stock/ETF trades, $0.65 per contract for options |
## How to Search for AI Investments
Buying individual AI stocks represents more work for the investor. The first step is to read about the industry to understand the various aspects of AI, as there are multiple ways to invest in this sector. As outlined earlier, there are pure plays and more conservative plays within the AI universe, and investors will have to decide the type of exposure they want to this market sector. Once the investor has an idea of the overall parts of the AI market they want to invest in, they should utilize traditional investment analysis—both fundamental and technical.
* **Earnings forecasts:** Earnings are a great way to judge the performance of a company, and AI companies with consistent and growing earnings will be looked upon favorably. Many AI companies will be viewed as growth stocks, so earnings growth will be an important criterion for many investors. Earnings releases have a tendency to move AI stocks up or down very sharply.
* **Annual reports:** Annual reports provide important narrative information about the activities of the company, and the financial statements allow investors to look at various financial metrics, such as debt to equity and other [accounting ratios](https://www.investopedia.com/terms/a/accounting-ratio.asp) used to make financial decisions about stocks.
* **Relative performance vs. the market:** [Relative performance](https://www.investopedia.com/terms/r/relativereturn.asp) is looking at how an individual stock performs relative to an index or another stock. With newer AI companies, it may be best to look at the relative performance between similar companies.
* **Growth analysis:** This analysis [deals with the growth of a company](https://www.investopedia.com/ask/answers/062915/what-are-common-growth-rates-should-be-analyzed-when-considering-future-prospects-company.asp) over time, with the investor looking at earnings, market share, and other metrics that can help to determine the strength of the company and its prospects.
* **Analyst projections:** Analysis projections and research reports may be particularly helpful for investors new to AI. This is a volatile market with new developments in technology and company prospects changing much more quickly than with stocks in more mature industries. Therefore, it is helpful to gain the perspective of professional researchers who have a good understanding of the overall AI space, as well as the prospects of individual stocks relative to competitors in the sector.
## FAQs
## Can Investors Make Money in AI?
Artificial intelligence use has been growing, and the technology appears poised to break out further and deliver on expectations for more widespread adoption across a wide range of businesses and real-world applications. Like any disruptive technology that requires capital investment, AI offers [plenty of opportunities for investors](https://www.investopedia.com/smaller-companies-to-benefit-from-ai-7151761) to make money, but new technologies also involve risk, so investors should determine the best way to gain exposure to this market. Options include more speculative direct AI investments in individual companies or investing in ETFs and mutual funds that offer a portfolio of multiple companies in the AI space. Investors may also look to add well-established companies that are positioned to increase their revenues as AI becomes more widely adopted across the economy to their portfolios.
## How Can You Invest in AI Art?
Art can now be created using artificial intelligence. A user can type or speak of an image they want to create, and an AI program can produce an image that meets the description provided by the user. These AI programs use the user’s description in conjunction with images available throughout the world to generate the image for the user requesting the artwork. AI-generated artwork has been utilized by people of all ages and backgrounds.
Copyright is an issue related to AI-generated art. Since these AI programs generate art from existing examples, many artists feel their copyrights are being violated by these programs, putting their livelihoods at risk. There are publicly traded companies that have vast collections of artwork utilized by AI art generators, such as Pinterest, Getty Images, Snap Inc., and Shutterstock.
## How Can You Invest in AI Startups?
[Startup companies](https://www.investopedia.com/terms/s/startup.asp) are often created in new and promising fields, such as artificial intelligence and machine learning. Often, these are companies that have been initially capitalized by venture capital investors, then taken public to capitalize on their initial investment and to raise more capital as the business increases its operations and begins offering its products to a wider customer base. While investing in startup companies is risky, the rewards for investing in a successful startup company can be huge. Examples of successful startup companies include Apple, Amazon, and Microsoft, and its early investors have, obviously, been very well rewarded.
## Can You Invest Directly in AI?
Yes, investors can make direct investments in artificial intelligence and machine learning. This can be done by investing in individual stocks, or by investing in ETFs or mutual funds that focus their investments in AI stocks. There are widely held, well-known AI stocks, as well as much less known AI stocks, that may represent good investments.
|
Artificial Intelligence (AI), or the use of machines to replicate and replace human intelligence processes across a variety of situations and industries, is attracting an incredible amount of attention through its increasing relevance to our everyday lives and economy. As AI’s capabilities continue to expand, investors are trying to determine the best ways to capitalize on this very important growth industry.
Similar to past emerging technologies, such as the railroads in the late 1800s or the personal computer in the 1980s, there are many ways to invest in this new trend. But while some companies will have wild success, other early adopters will fail.
The computer revolution is a great analogy for AI investing because while computers set the stage for automation of mundane and repeatable tasks, AI now seeks to bring this concept to the next level through the automation of tasks that previously required human thought and intelligence. This article will further outline ways investors can take advantage of AI’s anticipated growth as the technology starts to move from conceptual ideas to actual use in our economy.
How to Invest In AI
There are many ways to invest in an industry or market sector, and AI appears to be fast becoming an important disruptor technology. Great profits can be obtained by identifying these disruptor trends and investing in new companies, but there is tremendous competition building and it is not always easy to identify which companies will end up the winner.
Sometimes, the innovator takes and holds a market-leading position, but other times an imitator is able to use an innovator’s technology in better ways that make it more successful over time.
Some people will want to invest directly in companies that develop AI, while others may choose to invest in those companies that stand to benefit the most from its wider adoption. Using the introduction and growth of the personal computer industry as an example, investors could have had success investing in computer manufacturers or hardware companies that made routers and switches. Others invested in software companies that produced the programs used by computers, while still others attempted to identify companies that would benefit most from the automation that computers offered.
Some of these investments were direct bets in computers and the actual technology, while others were more conservative, such as investing in an already strong company that stood to benefit further from the growth of computer usage; but the point is that there are often winners and losers when new technologies emerge.
Finally, with many believing that AI may have a strong economic impact and displace many workers in many industries, there may be opportunities to identify companies, such as those focused on worker retraining, that may benefit from these large shifts in the workforce. We will now discuss some individual stocks that may match some of these criteria for investment in AI.
Invest in AI Stocks and ETFs
Leading Companies in AI
Tesla (TSLA): Tesla is one of the most visible AI companies, and is easy to understand. The company uses AI to automate driving, which necessitates constant processing of data to identify other cars, road conditions, traffic signals, and pedestrians. As anyone who has driven knows, this requires constant scanning and processing to account for instantaneously changing conditions.
NVIDIA (NVDA): NVIDIA is a leader in AI and has a very strong position in the marketplace through its generative artificial intelligence, which describes algorithms used to create new content in multiple output forms that include audio, computer code, images, text, simulations, and videos. NVIDIA has created the computer chips, hardware, software, and development tools to create start-to-finish AI systems. NVIDIA utilizes thousands of graphic processing units (GPUs) to drive a large AI system, and the company currently has a GPU market share of 88%.
Microsoft (MSFT): Microsoft has invested $13 billion in AI initiatives, including an early $1 billion investment in OpenAI (whose ChatGPT is now one of the most recognizable names in AI). Microsoft has embedded AI into many of its systems, including its Bing search engine, Microsoft 360, its sales and marketing tools, X-Box, and GitHub coding tools. It has also outlined a framework for building AI apps and copilots and expanding its AI plug-in ecosystem.
Taiwan Semiconductor Manufacturing (TSM): Taiwan Semiconductor Manufacturing is the world’s largest chip maker, and it is another leading competitor in chip manufacturing for artificial intelligence. As AI grows, the need for robust computing chips will grow with it. TSM is a mature company that continues to make chips for non-AI computer applications, so it may represent less risk than other pure plays on AI.
Meta Platforms (META): Meta has made significant investments in AI. It utilizes large language module (LLM) AI to help drive search results and predict the content its users will want to see. Meta has also developed its own silicon chip for AI processing applications and created a next-generation data center.
Amazon.com (AMZN): Amazon uses AI in its Alexa system and also offers machine learning (ML) and AI tools to its customers. Amazon’s cloud computing business, Amazon Web Services (AWS), provides an AI infrastructure that allows its customers to analyze data and incorporate AI into their existing systems. AWS has more than 100,000 customers that can benefit from AI and ML services to personalize recommendations, improve safety and security, analyze their business, and increase customer engagement.
Apple (APPL): In addition to Siri, which utilizes AI to interact with customers, Apple will continue to make a percentage of AI services delivered on its platform. A significant example of this is OpenAI, which just launched its iPhone app for ChatGPT; it will pay Apple 30% of the revenue generated from the app. In addition to AI companies delivering services through Apple’s platform, the company can also use its massive cash reserves to make major investments in AI that it builds itself or acquires using its massive cash reserves.
Compare Some Top Brokers for Investing in AI Stocks
Platform
Account Minimum
Fees
Merrill Edge
$0
$0.00 per stock trade. Options trades $0 per leg plus $0.65 per contract
E*TRADE
$0
No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.
Best AI ETFs
Utilizing professionally managed ETFs or mutual funds that invest in AI companies lets professionals perform the research and make the determinations about which companies to invest in. This also provides the investor with a portfolio of multiple AI stocks within a single investment. Investing in funds involves looking for funds that have solid track records and also paying attention to the fees charged by the funds to ensure total returns.
iShares Exponential Technologies ETF (XT): XT is a large capitalization fund that selects global stocks trying to disrupt their industries. The disruption also includes AI technology stocks, which make up nearly half of the fund. The other half of the fund invests in healthcare and industrial stocks, which are also actively looking at how AI might make an outsized difference in their more mature industries. This fund has an expense ratio of 0.46% and an annual dividend yield of 0.70%.
Defiance Machine Learning & Quantum Computing ETF (QTUM): QTUM has only $112 million under management. The fund invests in companies looking to commercialize their research and development in quantum computing systems. Its benchmark is the BlueStar Quantum Computing and Machine Learning Index. This fund has an expense ratio of 0.40% and an annual dividend yield of 0.45%.
ROBO Global Robotics & Automation Index ETF (ROBO): ROBO invests in companies focused on robotics, automation, and artificial intelligence and invests in both growth and value stocks. The fund’s expense ratio is 0.95%, and it has an annual dividend yield of 0.17%.
Compare Some Top Brokers for Investing in AI ETFs
Company
Account Minimums
Fees
Fidelity
$0
$0 for stock/ETF trades, $0 plus $0.65/contract for options trade
Interactive Brokers
$0
$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.
Charles Schwab
$0
$0 for stock/ETF trades, $0.65 per contract for options
How to Search for AI Investments
Buying individual AI stocks represents more work for the investor. The first step is to read about the industry to understand the various aspects of AI, as there are multiple ways to invest in this sector. As outlined earlier, there are pure plays and more conservative plays within the AI universe, and investors will have to decide the type of exposure they want to this market sector. Once the investor has an idea of the overall parts of the AI market they want to invest in, they should utilize traditional investment analysis—both fundamental and technical.
Earnings forecasts: Earnings are a great way to judge the performance of a company, and AI companies with consistent and growing earnings will be looked upon favorably. Many AI companies will be viewed as growth stocks, so earnings growth will be an important criterion for many investors. Earnings releases have a tendency to move AI stocks up or down very sharply.
Annual reports: Annual reports provide important narrative information about the activities of the company, and the financial statements allow investors to look at various financial metrics, such as debt to equity and other accounting ratios used to make financial decisions about stocks.
Relative performance vs. the market: Relative performance is looking at how an individual stock performs relative to an index or another stock. With newer AI companies, it may be best to look at the relative performance between similar companies.
Growth analysis: This analysis deals with the growth of a company over time, with the investor looking at earnings, market share, and other metrics that can help to determine the strength of the company and its prospects.
Analyst projections: Analysis projections and research reports may be particularly helpful for investors new to AI. This is a volatile market with new developments in technology and company prospects changing much more quickly than with stocks in more mature industries. Therefore, it is helpful to gain the perspective of professional researchers who have a good understanding of the overall AI space, as well as the prospects of individual stocks relative to competitors in the sector.
FAQs
Can Investors Make Money in AI?
Artificial intelligence use has been growing, and the technology appears poised to break out further and deliver on expectations for more widespread adoption across a wide range of businesses and real-world applications. Like any disruptive technology that requires capital investment, AI offers plenty of opportunities for investors to make money, but new technologies also involve risk, so investors should determine the best way to gain exposure to this market. Options include more speculative direct AI investments in individual companies or investing in ETFs and mutual funds that offer a portfolio of multiple companies in the AI space. Investors may also look to add well-established companies that are positioned to increase their revenues as AI becomes more widely adopted across the economy to their portfolios.
How Can You Invest in AI Art?
Art can now be created using artificial intelligence. A user can type or speak of an image they want to create, and an AI program can produce an image that meets the description provided by the user. These AI programs use the user’s description in conjunction with images available throughout the world to generate the image for the user requesting the artwork. AI-generated artwork has been utilized by people of all ages and backgrounds. Copyright is an issue related to AI-generated art. Since these AI programs generate art from existing examples, many artists feel their copyrights are being violated by these programs, putting their livelihoods at risk. There are publicly traded companies that have vast collections of artwork utilized by AI art generators, such as Pinterest, Getty Images, Snap Inc., and Shutterstock.
How Can You Invest in AI Startups?
Startup companies are often created in new and promising fields, such as artificial intelligence and machine learning. Often, these are companies that have been initially capitalized by venture capital investors, then taken public to capitalize on their initial investment and to raise more capital as the business increases its operations and begins offering its products to a wider customer base. While investing in startup companies is risky, the rewards for investing in a successful startup company can be huge. Examples of successful startup companies include Apple, Amazon, and Microsoft, and its early investors have, obviously, been very well rewarded.
Can You Invest Directly in AI?
Yes, investors can make direct investments in artificial intelligence and machine learning. This can be done by investing in individual stocks, or by investing in ETFs or mutual funds that focus their investments in AI stocks. There are widely held, well-known AI stocks, as well as much less known AI stocks, that may represent good investments.
|
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https://www.investopedia.com/terms/c/conventionalmortgage.asp
|
Conventional Mortgage or Loan
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<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-conventional-mortgage-or-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 a Conventional Mortgage or Loan? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A conventional mortgage is a homebuyer’s loan made through a private lender. Compared to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fhaloan.asp">Federal Housing Administration (FHA) loan</a>, a conventional loan often requires a higher credit score to qualify.<span class="ql-inline-citation" data-cite="17"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Conventional loans are not offered or secured by a government entity. Instead, these <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgages are available</a> through private <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lenders</a>, such as banks, credit unions, and mortgage companies.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> However, some conventional mortgages can be guaranteed by the two government-sponsored enterprises (GSEs): the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/fannie-mae-loans/">Federal National Mortgage Association (Fannie Mae)</a> and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freddiemac.asp">Federal Home Loan Mortgage Corp. (Freddie Mac)</a>.<span class="ql-inline-citation" data-cite="1"></span>
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A conventional mortgage or conventional loan is a homebuyer’s loan not offered or secured by a government entity.</li><li>It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.</li><li>Potential borrowers need to complete an official mortgage application and supply the required documents, their credit history, and current credit score.</li><li>Conventional loan interest rates may be higher than government-backed mortgages, such as Federal Housing Administration (FHA) loans.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-conventional-mortgages-and-loans"></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"> Understanding Conventional Mortgages and Loans </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Conventional mortgages can have a fixed or variable interest rate. Conventional mortgages or loans are not guaranteed by the federal government and, as a result, typically have stricter lending requirements by banks and creditors.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> There are a few government agencies that secure mortgages for banks, such as 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>, which offers low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/down_payment.asp">down payments</a> and no <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/closingcosts.asp">closing costs</a>.<span class="ql-inline-citation" data-cite="9"></span> Two other agencies are the U.S. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/veterans-administration.asp">Department of Veterans Affairs (VA)</a> and the U.S. Department of Agriculture’s (USDA’s) <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rhs.asp">Rural Housing Service</a>, neither of which requires a down payment.<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="10"></span> However, there are requirements that borrowers must meet to qualify for these programs.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.<span class="ql-inline-citation" data-cite="18"></span></p></div></div></div>
<span class="heading-toc" id="toc-example-of-conventional-mortgage"></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"> Example of Conventional Mortgage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> If you meet the relatively strict requirements to qualify for a conventional mortgage, this can be an inexpensive way to borrow money to buy property.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If, for example, you took out a conventional mortgage to buy a home worth $500,000, had a $100,000 down payment (that’s 20%), and a good <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> of 650, you might be able to get a conventional mortgage with a locked-in rate of 5.50%. This would equate to a monthly payment of around $2,271 on a 30-year loan just for the principal and interest payments.
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<span class="heading-toc" id="toc-conventional-mortgage-vs-fha-mortgage"></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"> Conventional Mortgage vs. FHA Mortgage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The primary difference between conventional and FHA mortgages is that FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>, or because they have limited savings.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Those who qualify for an FHA loan require a lower down payment. And the credit requirements aren’t nearly as strict as other mortgage loans—even those with credit scores below 580 may get financing. These loans are not granted by the FHA itself. Instead, they are advanced by FHA-approved lenders.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> In contrast, to qualify for a conventional loan, consumers typically must have stellar <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit reports</a> with no significant blemishes and credit scores of at least 620. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product, and current market conditions.
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<span class="heading-toc" id="toc-conventional-vs-conforming"></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"> Conventional vs. Conforming </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Conventional loans are often erroneously referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conformingloan.asp">conforming mortgages or loans</a>. While there is overlap, the two are distinct categories.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit set annually by 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 (FHFA)</a>. In most of the continental United States, a loan must not exceed $766,550 in 2024 (up from $726,200 in 2023).<span class="ql-inline-citation" data-cite="4"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/jumboloan.asp">jumbo mortgage</a> of $800,000 is a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/061815/jumbo-vs-conventional-mortgages-how-they-differ.asp">conventional mortgage but not a conforming mortgage</a>—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> At the end of fiscal year 2023, there were 7.5 million homeowners with FHA-insured mortgages.<span class="ql-inline-citation" data-cite="6"></span> The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp">mortgage-backed securities (MBS),</a> which trade in a well-established forward market known as the mortgage <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tba.asp">to be announced (TBA)</a> market. Many of these conventional <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passthroughsecurity.asp">pass-through securities</a> are further securitized into <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cmo.asp">collateralized mortgage obligations (CMOs)</a>.
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<span class="heading-toc" id="toc-types-of-conventional-mortgages"></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"> Types of Conventional Mortgages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> There are several types of conventional mortgages, and the terms used to refer to them can be confusing. Here are the most common types.
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<li><strong>Conforming conventional loans</strong>: As mentioned above, conforming conventional loans are loans that adhere to the standards set by Fannie Mae and Freddie Mac.</li>
<li><strong>Jumbo loans</strong>: Jumbo loans allow you to borrow more than the maximum lending limit for conforming loans. However, they typically require a higher credit score, lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dti.asp">debt-to-income (DTI) ratio</a>, and larger down payment.</li>
<li><strong>Portfolio loans</strong>: A portfolio loan is a conventional loan that a lender chooses to keep in its own portfolio rather than selling it on the secondary market.</li>
<li><strong>Subprime loans</strong>: Conforming loans require that you have a DTI below 50% and a credit score of 620 or higher. But if your credit isn’t quite there, you may qualify for a subprime mortgage loan.</li>
<li><strong>Amortized conventional loans</strong>: These loans are fully amortized, giving homebuyers a set monthly payment from the beginning to the end of the loan repayment period.</li>
<li><strong>Adjustable-rate loans</strong>: With an adjustable-rate mortgage, you’ll get a fixed interest rate for a set period, typically three to 10 years. After that, your interest rate can vary each year.</li>
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<span class="heading-toc" id="toc-required-documentation-for-a-conventional-mortgage"></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"> Required Documentation for a Conventional Mortgage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> In the years since the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime-meltdown.asp">subprime mortgage meltdown</a> in 2007, lenders have tightened the qualifications for loans, but overall, most of the basic requirements haven’t changed.<span class="ql-inline-citation" data-cite="12"></span> Potential borrowers need to complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> No property is ever 100% financed. In checking your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liability.asp">liabilities</a>, a lender is not only looking to see if you can afford your monthly mortgage payments, which usually shouldn’t exceed 35% of your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossincome.asp">gross income</a>.<span class="ql-inline-citation" data-cite="7"></span> The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/origination.asp">origination</a> or <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100214/what-real-estate-underwriting.asp">underwriting</a> fees, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage-fee.asp">broker fees</a>, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:
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<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"> 1. Proof of Income </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> These documents will include but may not be limited to:
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<li>Thirty days of pay stubs that show income as well as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/ytd.asp" rel="noopener noreferrer">year-to-date</a> income</li>
<li>Two years of federal <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp" rel="noopener noreferrer">tax returns</a></li>
<li>Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts</li>
<li>Two years of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/w2form.asp" rel="noopener noreferrer">W-2</a> statements</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.
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<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"> 2. Assets </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> You will need to present <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-statement.asp">bank statements</a> and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/giftletter.asp">gift letters</a>, which certify that these are not loans and have no required or obligatory repayment.
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<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"> 3. Employment Verification </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Lenders today want to make sure they are loaning only to borrowers with a stable income. Your lender will want to see your pay stubs. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
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<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"> 4. Other Documentation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Your lender will need to copy your driver’s license or state ID card and will need your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security number</a> and your signature, allowing the lender to pull your credit report.
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<span class="heading-toc" id="toc-interest-rates-for-conventional-mortgages"></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"> Interest Rates for Conventional Mortgages </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Conventional loan interest rates may be higher than those of government-backed mortgages, such as FHA loans (although these loans, which usually mandate that borrowers pay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071614/whats-difference-between-private-mortgage-insurance-pmi-and-mortgage-insurance-premium-mip.asp">mortgage insurance premiums</a>, may work out to be just as costly in the long run).<span class="ql-inline-citation" data-cite="13"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> The interest rate carried by a conventional mortgage <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-rates/factors-affect-mortgage-rates/">depends on several factors</a>, including the terms of the loan—its length, its size, and whether the interest rate is fixed or adjustable—as well as current economic or financial market conditions. Mortgage lenders set interest rates based on their expectations for future inflation; the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/law-of-supply-demand.asp">supply of and demand for</a> mortgage-backed securities also influences the rates. A <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">mortgage calculator</a> can show you the impact of different rates on your monthly payment.
</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 mntl-sc-block-tool mntl-block mntl-sc-block--mortgage-loan-calculator" id="mntl-sc-block_69-0"><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_70-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> When <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050715/how-federal-reserve-affects-mortgage-rates.asp">the Federal Reserve makes it more expensive</a> for banks to borrow by targeting a higher <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>, the banks, in turn, pass on the higher costs to their customers, and consumer loan rates, including those for mortgages, tend to go up.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Typically linked to the interest rate are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-rates/points/">points</a>, or fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%.<span class="ql-inline-citation" data-cite="8"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The final factor in determining the interest rate is the individual borrower’s financial profile: personal assets, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthiness</a>, and the size of the down payment that they can make on the residence to be financed.
</p>
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_77-0"><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_78-0"><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 buyer who plans on living in a home for 10 or more years should consider paying for points to keep interest rates lower for the life of the mortgage.</p></div></div></div>
<span class="heading-toc" id="toc-special-considerations-for-a-conventional-mortgage-or-loan"></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"> Special Considerations for a Conventional Mortgage or Loan </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.
</p>
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<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"> Who May Qualify </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0">
<li>A fair or better <strong>credit score</strong>. A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 620 and possibly higher can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms reserved for those with an excellent score.<span class="ql-inline-citation" data-cite="15"></span></li>
<li>An <strong>acceptable debt-to-income (DTI) ratio</strong>. This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the DTI ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.<span class="ql-inline-citation" data-cite="16"></span></li>
<li>A <strong>down payment</strong> of at least 20% of the home’s purchase price is readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-guide/mortgage-insurance/">private mortgage insurance</a> and pay its premiums monthly until they achieve at least 20% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/home_equity.asp">equity in the house</a>.</li>
</ul>
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<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"> Who May Not Qualify </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> Generally speaking, those just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages may be tough for those who have:
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0">
<li>Suffered <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a> within the past four years or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosure</a> within the past seven years</li>
<li>Credit scores below 620</li>
<li>DTI ratios above 43%</li>
<li>Less than 20% or even 10% of the home’s purchase price for a down payment</li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> However, if you’re turned down for the mortgage, be sure to ask for the reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> For example, if you have no credit history and are a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/first-time-home-buyer/">first-time homebuyer</a>, you may qualify for an FHA loan. FHA loans are tailored specifically for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.
</p>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_96-0"><span class="heading-toc" id="toc-whats-the-difference-between-a-federal-housing-administration-fha-loan-and-a-conventional-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What’s the Difference Between a Federal Housing Administration (FHA) Loan and a Conventional Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers with poor credit history or limited savings. Conventional loan interest rates may be higher than government-backed mortgages, such as FHA loans, and you will need a higher credit score and down payment to qualify.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_98-0"><span class="heading-toc" id="toc-is-it-better-to-go-fha-or-conventional"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is It Better to Go FHA or Conventional?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option. However, it’s worth checking both options because the best way to borrow can depend on many factors.</p></div>
</div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_100-0"><span class="heading-toc" id="toc-what-credit-score-do-i-need-for-a-conventional-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Credit Score Do I Need for a Conventional Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Fannie Mae says conventional loans typically require a minimum credit score of 620, but it can vary by lender. Banks may be more willing to lend to people with a significant down payment.</p></div>
</div>
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<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_102-0"> <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_103-0"> A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity. They are often compared to FHA loans, which are designed to allow low-income families, or those with low credit scores or little savings, to access mortgage loans.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Conventional mortgages are available via private lenders or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. Potential borrowers need to complete an official mortgage application, and supply the required documents, credit history, and current credit score. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans, unless you have an excellent credit rating.
</p>
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## What Is a Conventional Mortgage or Loan?
A conventional mortgage is a homebuyer’s loan made through a private lender. Compared to a [Federal Housing Administration (FHA) loan](https://www.investopedia.com/terms/f/fhaloan.asp), a conventional loan often requires a higher credit score to qualify.
Conventional loans are not offered or secured by a government entity. Instead, these [mortgages are available](https://www.investopedia.com/best-mortgage-lenders-5076852) through private [lenders](https://www.investopedia.com/terms/l/lender.asp), such as banks, credit unions, and mortgage companies.
However, some conventional mortgages can be guaranteed by the two government-sponsored enterprises (GSEs): the [Federal National Mortgage Association (Fannie Mae)](https://www.investopedia.com/mortgage/fannie-mae-loans/) and the [Federal Home Loan Mortgage Corp. (Freddie Mac)](https://www.investopedia.com/terms/f/freddiemac.asp).
### Key Takeaways
* A conventional mortgage or conventional loan is a homebuyer’s loan not offered or secured by a government entity.
* It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.
* Potential borrowers need to complete an official mortgage application and supply the required documents, their credit history, and current credit score.
* Conventional loan interest rates may be higher than government-backed mortgages, such as Federal Housing Administration (FHA) loans.
## Understanding Conventional Mortgages and Loans
Conventional mortgages can have a fixed or variable interest rate. Conventional mortgages or loans are not guaranteed by the federal government and, as a result, typically have stricter lending requirements by banks and creditors.
There are a few government agencies that secure mortgages for banks, such as the [Federal Housing Administration (FHA)](https://www.investopedia.com/terms/f/federal-housing-administration.asp), which offers low [down payments](https://www.investopedia.com/terms/d/down_payment.asp) and no [closing costs](https://www.investopedia.com/terms/c/closingcosts.asp). Two other agencies are the U.S. [Department of Veterans Affairs (VA)](https://www.investopedia.com/terms/v/veterans-administration.asp) and the U.S. Department of Agriculture’s (USDA’s) [Rural Housing Service](https://www.investopedia.com/terms/r/rhs.asp), neither of which requires a down payment. However, there are requirements that borrowers must meet to qualify for these programs.
###
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
## Example of Conventional Mortgage
If you meet the relatively strict requirements to qualify for a conventional mortgage, this can be an inexpensive way to borrow money to buy property.
If, for example, you took out a conventional mortgage to buy a home worth $500,000, had a $100,000 down payment (that’s 20%), and a good [credit score](https://www.investopedia.com/terms/c/credit_score.asp) of 650, you might be able to get a conventional mortgage with a locked-in rate of 5.50%. This would equate to a monthly payment of around $2,271 on a 30-year loan just for the principal and interest payments.
## Conventional Mortgage vs. FHA Mortgage
The primary difference between conventional and FHA mortgages is that FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor [credit history](https://www.investopedia.com/terms/c/credit-history.asp), or because they have limited savings.
Those who qualify for an FHA loan require a lower down payment. And the credit requirements aren’t nearly as strict as other mortgage loans—even those with credit scores below 580 may get financing. These loans are not granted by the FHA itself. Instead, they are advanced by FHA-approved lenders.
In contrast, to qualify for a conventional loan, consumers typically must have stellar [credit reports](https://www.investopedia.com/terms/c/creditreport.asp) with no significant blemishes and credit scores of at least 620. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product, and current market conditions.
## Conventional vs. Conforming
Conventional loans are often erroneously referred to as [conforming mortgages or loans](https://www.investopedia.com/terms/c/conformingloan.asp). While there is overlap, the two are distinct categories.
A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit set annually by the [Federal Housing Finance Agency (FHFA)](https://www.investopedia.com/terms/f/fhfa.asp). In most of the continental United States, a loan must not exceed $766,550 in 2024 (up from $726,200 in 2023).
So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a [jumbo mortgage](https://www.investopedia.com/terms/j/jumboloan.asp) of $800,000 is a [conventional mortgage but not a conforming mortgage](https://www.investopedia.com/articles/personal-finance/061815/jumbo-vs-conventional-mortgages-how-they-differ.asp)—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
At the end of fiscal year 2023, there were 7.5 million homeowners with FHA-insured mortgages. The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through [mortgage-backed securities (MBS),](https://www.investopedia.com/terms/m/mbs.asp) which trade in a well-established forward market known as the mortgage [to be announced (TBA)](https://www.investopedia.com/terms/t/tba.asp) market. Many of these conventional [pass-through securities](https://www.investopedia.com/terms/p/passthroughsecurity.asp) are further securitized into [collateralized mortgage obligations (CMOs)](https://www.investopedia.com/terms/c/cmo.asp).
## Types of Conventional Mortgages
There are several types of conventional mortgages, and the terms used to refer to them can be confusing. Here are the most common types.
* **Conforming conventional loans**: As mentioned above, conforming conventional loans are loans that adhere to the standards set by Fannie Mae and Freddie Mac.
* **Jumbo loans**: Jumbo loans allow you to borrow more than the maximum lending limit for conforming loans. However, they typically require a higher credit score, lower [debt-to-income (DTI) ratio](https://www.investopedia.com/terms/d/dti.asp), and larger down payment.
* **Portfolio loans**: A portfolio loan is a conventional loan that a lender chooses to keep in its own portfolio rather than selling it on the secondary market.
* **Subprime loans**: Conforming loans require that you have a DTI below 50% and a credit score of 620 or higher. But if your credit isn’t quite there, you may qualify for a subprime mortgage loan.
* **Amortized conventional loans**: These loans are fully amortized, giving homebuyers a set monthly payment from the beginning to the end of the loan repayment period.
* **Adjustable-rate loans**: With an adjustable-rate mortgage, you’ll get a fixed interest rate for a set period, typically three to 10 years. After that, your interest rate can vary each year.
## Required Documentation for a Conventional Mortgage
In the years since the [subprime mortgage meltdown](https://www.investopedia.com/terms/s/subprime-meltdown.asp) in 2007, lenders have tightened the qualifications for loans, but overall, most of the basic requirements haven’t changed. Potential borrowers need to complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.
No property is ever 100% financed. In checking your [assets](https://www.investopedia.com/terms/a/asset.asp) and [liabilities](https://www.investopedia.com/terms/l/liability.asp), a lender is not only looking to see if you can afford your monthly mortgage payments, which usually shouldn’t exceed 35% of your [gross income](https://www.investopedia.com/terms/g/grossincome.asp). The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan [origination](https://www.investopedia.com/terms/o/origination.asp) or [underwriting](https://www.investopedia.com/ask/answers/100214/what-real-estate-underwriting.asp) fees, [broker fees](https://www.investopedia.com/terms/b/brokerage-fee.asp), and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:
### 1. Proof of Income
These documents will include but may not be limited to:
* Thirty days of pay stubs that show income as well as [year-to-date](https://www.investopedia.com/terms/y/ytd.asp) income
* Two years of federal [tax returns](https://www.investopedia.com/terms/t/taxreturn.asp)
* Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts
* Two years of [W-2](https://www.investopedia.com/terms/w/w2form.asp) statements
Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.
### 2. Assets
You will need to present [bank statements](https://www.investopedia.com/terms/b/bank-statement.asp) and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need [gift letters](https://www.investopedia.com/terms/g/giftletter.asp), which certify that these are not loans and have no required or obligatory repayment.
### 3. Employment Verification
Lenders today want to make sure they are loaning only to borrowers with a stable income. Your lender will want to see your pay stubs. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
### 4. Other Documentation
Your lender will need to copy your driver’s license or state ID card and will need your [Social Security number](https://www.investopedia.com/terms/s/ssn.asp) and your signature, allowing the lender to pull your credit report.
## Interest Rates for Conventional Mortgages
Conventional loan interest rates may be higher than those of government-backed mortgages, such as FHA loans (although these loans, which usually mandate that borrowers pay [mortgage insurance premiums](https://www.investopedia.com/ask/answers/071614/whats-difference-between-private-mortgage-insurance-pmi-and-mortgage-insurance-premium-mip.asp), may work out to be just as costly in the long run).
The interest rate carried by a conventional mortgage [depends on several factors](https://www.investopedia.com/mortgage/mortgage-rates/factors-affect-mortgage-rates/), including the terms of the loan—its length, its size, and whether the interest rate is fixed or adjustable—as well as current economic or financial market conditions. Mortgage lenders set interest rates based on their expectations for future inflation; the [supply of and demand for](https://www.investopedia.com/terms/l/law-of-supply-demand.asp) mortgage-backed securities also influences the rates. A [mortgage calculator](https://www.investopedia.com/mortgage-calculator-5084794) can show you the impact of different rates on your monthly payment.
When [the Federal Reserve makes it more expensive](https://www.investopedia.com/articles/personal-finance/050715/how-federal-reserve-affects-mortgage-rates.asp) for banks to borrow by targeting a higher [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp), the banks, in turn, pass on the higher costs to their customers, and consumer loan rates, including those for mortgages, tend to go up.
Typically linked to the interest rate are [points](https://www.investopedia.com/mortgage/mortgage-rates/points/), or fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%.
The final factor in determining the interest rate is the individual borrower’s financial profile: personal assets, [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp), and the size of the down payment that they can make on the residence to be financed.
###
A buyer who plans on living in a home for 10 or more years should consider paying for points to keep interest rates lower for the life of the mortgage.
## Special Considerations for a Conventional Mortgage or Loan
These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.
### Who May Qualify
People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:
* A fair or better **credit score**. A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 620 and possibly higher can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms reserved for those with an excellent score.
* An **acceptable debt-to-income (DTI) ratio**. This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the DTI ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.
* A **down payment** of at least 20% of the home’s purchase price is readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out [private mortgage insurance](https://www.investopedia.com/mortgage/mortgage-guide/mortgage-insurance/) and pay its premiums monthly until they achieve at least 20% [equity in the house](https://www.investopedia.com/terms/h/home_equity.asp).
### Who May Not Qualify
Generally speaking, those just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages may be tough for those who have:
* Suffered [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp) within the past four years or [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp) within the past seven years
* Credit scores below 620
* DTI ratios above 43%
* Less than 20% or even 10% of the home’s purchase price for a down payment
However, if you’re turned down for the mortgage, be sure to ask for the reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.
For example, if you have no credit history and are a [first-time homebuyer](https://www.investopedia.com/updates/first-time-home-buyer/), you may qualify for an FHA loan. FHA loans are tailored specifically for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.
## What’s the Difference Between a Federal Housing Administration (FHA) Loan and a Conventional Loan?
FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers with poor credit history or limited savings. Conventional loan interest rates may be higher than government-backed mortgages, such as FHA loans, and you will need a higher credit score and down payment to qualify.
## Is It Better to Go FHA or Conventional?
A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option. However, it’s worth checking both options because the best way to borrow can depend on many factors.
## What Credit Score Do I Need for a Conventional Loan?
Fannie Mae says conventional loans typically require a minimum credit score of 620, but it can vary by lender. Banks may be more willing to lend to people with a significant down payment.
## The Bottom Line
A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity. They are often compared to FHA loans, which are designed to allow low-income families, or those with low credit scores or little savings, to access mortgage loans.
Conventional mortgages are available via private lenders or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. Potential borrowers need to complete an official mortgage application, and supply the required documents, credit history, and current credit score. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans, unless you have an excellent credit rating.
|
What Is a Conventional Mortgage or Loan?
A conventional mortgage is a homebuyer’s loan made through a private lender. Compared to a Federal Housing Administration (FHA) loan, a conventional loan often requires a higher credit score to qualify.
Conventional loans are not offered or secured by a government entity. Instead, these mortgages are available through private lenders, such as banks, credit unions, and mortgage companies.
However, some conventional mortgages can be guaranteed by the two government-sponsored enterprises (GSEs): the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
Key Takeaways
A conventional mortgage or conventional loan is a homebuyer’s loan not offered or secured by a government entity.It is available through or guaranteed by a private lender or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac.Potential borrowers need to complete an official mortgage application and supply the required documents, their credit history, and current credit score.Conventional loan interest rates may be higher than government-backed mortgages, such as Federal Housing Administration (FHA) loans.
Understanding Conventional Mortgages and Loans
Conventional mortgages can have a fixed or variable interest rate. Conventional mortgages or loans are not guaranteed by the federal government and, as a result, typically have stricter lending requirements by banks and creditors.
There are a few government agencies that secure mortgages for banks, such as the Federal Housing Administration (FHA), which offers low down payments and no closing costs. Two other agencies are the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture’s (USDA’s) Rural Housing Service, neither of which requires a down payment. However, there are requirements that borrowers must meet to qualify for these programs.
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
Example of Conventional Mortgage
If you meet the relatively strict requirements to qualify for a conventional mortgage, this can be an inexpensive way to borrow money to buy property.
If, for example, you took out a conventional mortgage to buy a home worth $500,000, had a $100,000 down payment (that’s 20%), and a good credit score of 650, you might be able to get a conventional mortgage with a locked-in rate of 5.50%. This would equate to a monthly payment of around $2,271 on a 30-year loan just for the principal and interest payments.
Conventional Mortgage vs. FHA Mortgage
The primary difference between conventional and FHA mortgages is that FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers who may not otherwise be able to get financing because of a lack of or a poor credit history, or because they have limited savings.
Those who qualify for an FHA loan require a lower down payment. And the credit requirements aren’t nearly as strict as other mortgage loans—even those with credit scores below 580 may get financing. These loans are not granted by the FHA itself. Instead, they are advanced by FHA-approved lenders.
In contrast, to qualify for a conventional loan, consumers typically must have stellar credit reports with no significant blemishes and credit scores of at least 620. Conventional loan interest rates vary depending on the amount of the down payment, the consumer’s choice of mortgage product, and current market conditions.
Conventional vs. Conforming
Conventional loans are often erroneously referred to as conforming mortgages or loans. While there is overlap, the two are distinct categories.
A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit set annually by the Federal Housing Finance Agency (FHFA). In most of the continental United States, a loan must not exceed $766,550 in 2024 (up from $726,200 in 2023).
So, while all conforming loans are conventional, not all conventional loans qualify as conforming. For example, a jumbo mortgage of $800,000 is a conventional mortgage but not a conforming mortgage—because it surpasses the amount that would allow it to be backed by Fannie Mae or Freddie Mac.
At the end of fiscal year 2023, there were 7.5 million homeowners with FHA-insured mortgages. The secondary market for conventional mortgages is extremely large and liquid. Most conventional mortgages are packaged into pass-through mortgage-backed securities (MBS), which trade in a well-established forward market known as the mortgage to be announced (TBA) market. Many of these conventional pass-through securities are further securitized into collateralized mortgage obligations (CMOs).
Types of Conventional Mortgages
There are several types of conventional mortgages, and the terms used to refer to them can be confusing. Here are the most common types.
Conforming conventional loans: As mentioned above, conforming conventional loans are loans that adhere to the standards set by Fannie Mae and Freddie Mac.
Jumbo loans: Jumbo loans allow you to borrow more than the maximum lending limit for conforming loans. However, they typically require a higher credit score, lower debt-to-income (DTI) ratio, and larger down payment.
Portfolio loans: A portfolio loan is a conventional loan that a lender chooses to keep in its own portfolio rather than selling it on the secondary market.
Subprime loans: Conforming loans require that you have a DTI below 50% and a credit score of 620 or higher. But if your credit isn’t quite there, you may qualify for a subprime mortgage loan.
Amortized conventional loans: These loans are fully amortized, giving homebuyers a set monthly payment from the beginning to the end of the loan repayment period.
Adjustable-rate loans: With an adjustable-rate mortgage, you’ll get a fixed interest rate for a set period, typically three to 10 years. After that, your interest rate can vary each year.
Required Documentation for a Conventional Mortgage
In the years since the subprime mortgage meltdown in 2007, lenders have tightened the qualifications for loans, but overall, most of the basic requirements haven’t changed. Potential borrowers need to complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.
No property is ever 100% financed. In checking your assets and liabilities, a lender is not only looking to see if you can afford your monthly mortgage payments, which usually shouldn’t exceed 35% of your gross income. The lender is also looking to see if you can handle a down payment on the property (and if so, how much), along with other up-front costs, such as loan origination or underwriting fees, broker fees, and settlement or closing costs, all of which can significantly drive up the cost of a mortgage. Among the items required are:
1. Proof of Income
These documents will include but may not be limited to:
Thirty days of pay stubs that show income as well as year-to-date income
Two years of federal tax returns
Sixty days or a quarterly statement of all asset accounts, including your checking, savings, and any investment accounts
Two years of W-2 statements
Borrowers also need to be prepared with proof of any additional income, such as alimony or bonuses.
2. Assets
You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs on the residence, as well as cash reserves. If you receive money from a friend or relative to assist with the down payment, you will need gift letters, which certify that these are not loans and have no required or obligatory repayment.
3. Employment Verification
Lenders today want to make sure they are loaning only to borrowers with a stable income. Your lender will want to see your pay stubs. Self-employed borrowers will need to provide significant additional paperwork concerning their business and income.
4. Other Documentation
Your lender will need to copy your driver’s license or state ID card and will need your Social Security number and your signature, allowing the lender to pull your credit report.
Interest Rates for Conventional Mortgages
Conventional loan interest rates may be higher than those of government-backed mortgages, such as FHA loans (although these loans, which usually mandate that borrowers pay mortgage insurance premiums, may work out to be just as costly in the long run).
The interest rate carried by a conventional mortgage depends on several factors, including the terms of the loan—its length, its size, and whether the interest rate is fixed or adjustable—as well as current economic or financial market conditions. Mortgage lenders set interest rates based on their expectations for future inflation; the supply of and demand for mortgage-backed securities also influences the rates. A mortgage calculator can show you the impact of different rates on your monthly payment.
When the Federal Reserve makes it more expensive for banks to borrow by targeting a higher federal funds rate, the banks, in turn, pass on the higher costs to their customers, and consumer loan rates, including those for mortgages, tend to go up.
Typically linked to the interest rate are points, or fees paid to the lender (or broker). The more points you pay, the lower your interest rate. One point costs 1% of the loan amount and reduces your interest rate by about 0.25%.
The final factor in determining the interest rate is the individual borrower’s financial profile: personal assets, creditworthiness, and the size of the down payment that they can make on the residence to be financed.
A buyer who plans on living in a home for 10 or more years should consider paying for points to keep interest rates lower for the life of the mortgage.
Special Considerations for a Conventional Mortgage or Loan
These types of loans are not for everyone. Here’s a look at who is likely to qualify for a conventional mortgage and who is not.
Who May Qualify
People with established credit and stellar credit reports who are on a solid financial footing usually qualify for conventional mortgages. More specifically, the ideal candidate should have:
A fair or better credit score. A credit score is a numerical representation of a borrower’s ability to pay back a loan. Credit scores include a borrower’s credit history and the number of late payments. A credit score of at least 620 and possibly higher can be required for approval. Also, the higher the score, the lower the interest rate on the loan, with the best terms reserved for those with an excellent score.
An acceptable debt-to-income (DTI) ratio. This is the sum of your monthly debt payments, such as credit cards and loan payments, compared to your monthly income. Ideally, the DTI ratio should be around 36% and no more than 43%. In other words, you should spend less than 36% of your monthly income on debt payments.
A down payment of at least 20% of the home’s purchase price is readily available. Lenders can and do accept less, but if they do, they often require that borrowers take out private mortgage insurance and pay its premiums monthly until they achieve at least 20% equity in the house.
Who May Not Qualify
Generally speaking, those just starting out in life, those with a little more debt than normal, and those with a modest credit rating often have trouble qualifying for conventional loans. More specifically, these mortgages may be tough for those who have:
Suffered bankruptcy within the past four years or foreclosure within the past seven years
Credit scores below 620
DTI ratios above 43%
Less than 20% or even 10% of the home’s purchase price for a down payment
However, if you’re turned down for the mortgage, be sure to ask for the reasons in writing. You may qualify for other programs that could help you get approved for a mortgage.
For example, if you have no credit history and are a first-time homebuyer, you may qualify for an FHA loan. FHA loans are tailored specifically for first-time homebuyers. As a result, FHA loans have different qualifications and credit requirements, including a lower down payment.
What’s the Difference Between a Federal Housing Administration (FHA) Loan and a Conventional Loan?
FHA loans are designed to make homeownership possible and easier for low- to moderate-income borrowers with poor credit history or limited savings. Conventional loan interest rates may be higher than government-backed mortgages, such as FHA loans, and you will need a higher credit score and down payment to qualify.
Is It Better to Go FHA or Conventional?
A conventional loan is often better if you have good or excellent credit because your mortgage rate and private mortgage insurance (PMI) costs will decrease. But an FHA loan can be perfect if your credit score is in the high 500s or low 600s. For lower-credit borrowers, FHA is often the cheaper option. However, it’s worth checking both options because the best way to borrow can depend on many factors.
What Credit Score Do I Need for a Conventional Loan?
Fannie Mae says conventional loans typically require a minimum credit score of 620, but it can vary by lender. Banks may be more willing to lend to people with a significant down payment.
The Bottom Line
A conventional mortgage or conventional loan is a homebuyer’s loan that is not offered or secured by a government entity. They are often compared to FHA loans, which are designed to allow low-income families, or those with low credit scores or little savings, to access mortgage loans.
Conventional mortgages are available via private lenders or the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. Potential borrowers need to complete an official mortgage application, and supply the required documents, credit history, and current credit score. Conventional loan interest rates tend to be higher than those of government-backed mortgages, such as FHA loans, unless you have an excellent credit rating.
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https://www.investopedia.com/articles/bonds/09/inflation-linked-bonds.asp
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Hedge Your Bets With Inflation-Indexed Bonds
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<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"> Inflation can have a dampening effect on fixed-income investments by reducing their purchasing power and cutting their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realrateofreturn.asp">real returns</a> over time. This happens even if the inflation rate is relatively low. If you have a portfolio that returns 9% and the inflation rate is 3%, then your real returns are about 6%.
</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"> Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods. The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds. Because they reduce uncertainty, inflation-indexed bonds are a popular long-range planning investment vehicle for individuals and institutions alike.
</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>Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods.</li><li>The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds.</li><li>TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation.</li><li>An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-inflation-linked-bonds-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 Inflation-Linked Bonds Work </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Inflation-linked bonds are tied to the costs of consumer goods as measured by an inflation index, such as 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>. Each country has its own method of calculating those costs on a regular basis. In addition, each nation has its own agency responsible for issuing inflation-linked bonds. For instance:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0">
<li>In the United States, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tips.asp">Treasury Inflation-Protected Securities (TIPS)</a> and inflation-indexed savings bonds (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seriesibond.asp">I bonds</a>) are tied to the value of the U.S. CPI and sold by the U.S. Treasury<span class="ql-inline-citation" data-cite="17"></span></li>
<li>In the United Kingdom, inflation-linked gilts are issued by the U.K. Debt Management Office and linked to that country's <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rpi.asp">retail price index (RPI)</a><span class="ql-inline-citation" data-cite="2"></span></li>
<li>The Bank of Canada issues that nation's real return bonds<span class="ql-inline-citation" data-cite="3"></span></li>
<li>Indian inflation-indexed bonds are issued through the Reserve Bank of India (RBI)<span class="ql-inline-citation" data-cite="4"></span></li>
</ul>
<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 outstanding principal of the bond generally rises with inflation for inflation-linked bonds. So, the face or par value of the bond increases when inflation occurs. This is in contrast to other types of securities, which often decrease in value when inflation rises.
</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 interest paid out by inflation-linked bonds is also adjusted for inflation. By providing these features, inflation-linked bonds can soften the real impact of inflation on the holders of the bonds.
</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-history-of-inflation-linked-bonds"></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"> History of Inflation-Linked Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Inflation-linked bonds were developed during the American Revolution to combat the corrosive effects of inflation on the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/real-value.asp">real value</a> of consumer goods. Massachusetts issued inflation-indexed bonds beginning in 1780, but inflation indexing seemed unnecessary for established countries on the gold standard.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Most of the world abandoned the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldstandard.asp">gold standard</a> by the 1970s, and rising inflation created a demand for inflation-linked bonds. In 1981, the U.K. began to issue the first modern inflation-linked bonds, or linkers as they are often called.<span class="ql-inline-citation" data-cite="8"></span><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_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Other countries followed suit, including Sweden, Canada, and Australia. The U.S. Treasury did not issue inflation-indexed bonds until 1997, and India issued capital-indexed bonds that same year; however, India did not issue fully inflation-indexed bonds, which protect both coupons and principal from inflation, until 2013.<span class="ql-inline-citation" data-cite="13"></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_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>Fitch Ratings downgraded the rating for the U.S. from AAA to AA+ in Aug. 2023. The credit rating agency stated that concerns about the country's "fiscal deterioration" over the next three years and its high national debt caused by tax cuts and increased government spending were among the reasons for the drop.<span class="ql-inline-citation" data-cite="15"></span></p></div></div></div>
<span class="heading-toc" id="toc-risks-of-inflation-linked-bonds"></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"> Risks of Inflation-Linked Bonds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> While inflation-linked bonds have considerable upside potential, there are also certain risks associated with these assets.
</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"> Values </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Their value also tends to fluctuate with the rise and fall of interest rates. TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation, which is when prices decline. The U.S. Treasury sets an initial floor for TIPS at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parvalue.asp">par value</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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> However, the risk is still considerable because there are older TIPS issues that carry years of inflation-adjusted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accruals.asp">accruals</a>, which can be lost to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deflation.asp">deflation</a>. This deflation risk caused TIPS to underperform other Treasury bonds during 2008.<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_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"> Trading and Taxation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> This asset type also presents complications in trading and taxation that don't affect other fixed-income asset classes. This is mostly because inflation-linked bonds have two values: the original face value of the bond and the current value adjusted for inflation.
</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 adjustments of the principal amount are considered annual income for tax purposes. However, investors do not actually receive the adjustments in that year. Instead, they get the larger coupon payments and only receive inflation-augmented principal when the bond matures. Thus, investors may be subject to tax on what's known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/phantom-income.asp">phantom income</a>.<br/>
</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-are-inflation-linked-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Inflation-Linked Bonds?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Inflation-linked bonds are fixed-income assets that are designed to protect investors from inflation. Generally offered by federal governments, these assets are indexed to inflation. This means they are tied to inflation so the principal investment and interest portion both rise and fall with the inflation rate. In many cases, they are tied to the price index of consumer goods and services. For instance, those issued by the U.S. government are tied to the Consumer Price Index.</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-how-risky-are-inflation-linked-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Risky Are Inflation-Linked Bonds?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Bonds that are linked to inflation are usually offered by federal governments. These fixed-income investments offer investors protection against inflation because they are indexed to inflation. As such, the principal and interest rises and falls with the inflation rate. Although they provide some safety, there are certain risks associated with inflation-linked bonds. For instance, investors are subject to interest rate risk. They must also consider deflation risk since these bonds are tied to the CPI in the U.S.<br/></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-current-rate-for-inflation-bonds"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Current Rate for Inflation Bonds?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The current rate for I bonds issued between May 1, 2023, and Oct. 31, 2023, is 4.30%. This rate includes a fixed rate of 0.90%.<span class="ql-inline-citation" data-cite="16"></span></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"> Despite their complicated nature and potential downside in deflationary periods, inflation-linked bonds are still enormously popular. They are the most trusted investment vehicle to hedge against short-term inflation. The corrosive effect that inflation can have on returns is a strong motivating factor behind the popularity of these bonds.
</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"> An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets. Inflation-linked bonds are a hedge against inflation, and they also help to provide diversification in a balanced portfolio.
</p></div>
|
Inflation can have a dampening effect on fixed-income investments by reducing their purchasing power and cutting their [real returns](https://www.investopedia.com/terms/r/realrateofreturn.asp) over time. This happens even if the inflation rate is relatively low. If you have a portfolio that returns 9% and the inflation rate is 3%, then your real returns are about 6%.
Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods. The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds. Because they reduce uncertainty, inflation-indexed bonds are a popular long-range planning investment vehicle for individuals and institutions alike.
### Key Takeaways
* Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods.
* The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds.
* TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation.
* An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets.
## How Inflation-Linked Bonds Work
Inflation-linked bonds are tied to the costs of consumer goods as measured by an inflation index, such as the [consumer price index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp). Each country has its own method of calculating those costs on a regular basis. In addition, each nation has its own agency responsible for issuing inflation-linked bonds. For instance:
* In the United States, [Treasury Inflation-Protected Securities (TIPS)](https://www.investopedia.com/terms/t/tips.asp) and inflation-indexed savings bonds ([I bonds](https://www.investopedia.com/terms/s/seriesibond.asp)) are tied to the value of the U.S. CPI and sold by the U.S. Treasury
* In the United Kingdom, inflation-linked gilts are issued by the U.K. Debt Management Office and linked to that country's [retail price index (RPI)](https://www.investopedia.com/terms/r/rpi.asp)
* The Bank of Canada issues that nation's real return bonds
* Indian inflation-indexed bonds are issued through the Reserve Bank of India (RBI)
The outstanding principal of the bond generally rises with inflation for inflation-linked bonds. So, the face or par value of the bond increases when inflation occurs. This is in contrast to other types of securities, which often decrease in value when inflation rises.
The interest paid out by inflation-linked bonds is also adjusted for inflation. By providing these features, inflation-linked bonds can soften the real impact of inflation on the holders of the bonds.
## History of Inflation-Linked Bonds
Inflation-linked bonds were developed during the American Revolution to combat the corrosive effects of inflation on the [real value](https://www.investopedia.com/terms/r/real-value.asp) of consumer goods. Massachusetts issued inflation-indexed bonds beginning in 1780, but inflation indexing seemed unnecessary for established countries on the gold standard.
Most of the world abandoned the [gold standard](https://www.investopedia.com/terms/g/goldstandard.asp) by the 1970s, and rising inflation created a demand for inflation-linked bonds. In 1981, the U.K. began to issue the first modern inflation-linked bonds, or linkers as they are often called.
Other countries followed suit, including Sweden, Canada, and Australia. The U.S. Treasury did not issue inflation-indexed bonds until 1997, and India issued capital-indexed bonds that same year; however, India did not issue fully inflation-indexed bonds, which protect both coupons and principal from inflation, until 2013.
###
Fitch Ratings downgraded the rating for the U.S. from AAA to AA+ in Aug. 2023. The credit rating agency stated that concerns about the country's "fiscal deterioration" over the next three years and its high national debt caused by tax cuts and increased government spending were among the reasons for the drop.
## Risks of Inflation-Linked Bonds
While inflation-linked bonds have considerable upside potential, there are also certain risks associated with these assets.
### Values
Their value also tends to fluctuate with the rise and fall of interest rates. TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation, which is when prices decline. The U.S. Treasury sets an initial floor for TIPS at [par value](https://www.investopedia.com/terms/p/parvalue.asp).
However, the risk is still considerable because there are older TIPS issues that carry years of inflation-adjusted [accruals](https://www.investopedia.com/terms/a/accruals.asp), which can be lost to [deflation](https://www.investopedia.com/terms/d/deflation.asp). This deflation risk caused TIPS to underperform other Treasury bonds during 2008.
### Trading and Taxation
This asset type also presents complications in trading and taxation that don't affect other fixed-income asset classes. This is mostly because inflation-linked bonds have two values: the original face value of the bond and the current value adjusted for inflation.
The adjustments of the principal amount are considered annual income for tax purposes. However, investors do not actually receive the adjustments in that year. Instead, they get the larger coupon payments and only receive inflation-augmented principal when the bond matures. Thus, investors may be subject to tax on what's known as [phantom income](https://www.investopedia.com/terms/p/phantom-income.asp).
## What Are Inflation-Linked Bonds?
Inflation-linked bonds are fixed-income assets that are designed to protect investors from inflation. Generally offered by federal governments, these assets are indexed to inflation. This means they are tied to inflation so the principal investment and interest portion both rise and fall with the inflation rate. In many cases, they are tied to the price index of consumer goods and services. For instance, those issued by the U.S. government are tied to the Consumer Price Index.
## How Risky Are Inflation-Linked Bonds?
Bonds that are linked to inflation are usually offered by federal governments. These fixed-income investments offer investors protection against inflation because they are indexed to inflation. As such, the principal and interest rises and falls with the inflation rate. Although they provide some safety, there are certain risks associated with inflation-linked bonds. For instance, investors are subject to interest rate risk. They must also consider deflation risk since these bonds are tied to the CPI in the U.S.
## What Is the Current Rate for Inflation Bonds?
The current rate for I bonds issued between May 1, 2023, and Oct. 31, 2023, is 4.30%. This rate includes a fixed rate of 0.90%.
## The Bottom Line
Despite their complicated nature and potential downside in deflationary periods, inflation-linked bonds are still enormously popular. They are the most trusted investment vehicle to hedge against short-term inflation. The corrosive effect that inflation can have on returns is a strong motivating factor behind the popularity of these bonds.
An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets. Inflation-linked bonds are a hedge against inflation, and they also help to provide diversification in a balanced portfolio.
|
Inflation can have a dampening effect on fixed-income investments by reducing their purchasing power and cutting their real returns over time. This happens even if the inflation rate is relatively low. If you have a portfolio that returns 9% and the inflation rate is 3%, then your real returns are about 6%.
Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods. The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds. Because they reduce uncertainty, inflation-indexed bonds are a popular long-range planning investment vehicle for individuals and institutions alike.
Key Takeaways
Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods.The United States, India, Canada, and a wide range of other countries issue inflation-linked bonds.TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation.An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets.
How Inflation-Linked Bonds Work
Inflation-linked bonds are tied to the costs of consumer goods as measured by an inflation index, such as the consumer price index (CPI). Each country has its own method of calculating those costs on a regular basis. In addition, each nation has its own agency responsible for issuing inflation-linked bonds. For instance:
In the United States, Treasury Inflation-Protected Securities (TIPS) and inflation-indexed savings bonds (I bonds) are tied to the value of the U.S. CPI and sold by the U.S. Treasury
In the United Kingdom, inflation-linked gilts are issued by the U.K. Debt Management Office and linked to that country's retail price index (RPI)
The Bank of Canada issues that nation's real return bonds
Indian inflation-indexed bonds are issued through the Reserve Bank of India (RBI)
The outstanding principal of the bond generally rises with inflation for inflation-linked bonds. So, the face or par value of the bond increases when inflation occurs. This is in contrast to other types of securities, which often decrease in value when inflation rises.
The interest paid out by inflation-linked bonds is also adjusted for inflation. By providing these features, inflation-linked bonds can soften the real impact of inflation on the holders of the bonds.
History of Inflation-Linked Bonds
Inflation-linked bonds were developed during the American Revolution to combat the corrosive effects of inflation on the real value of consumer goods. Massachusetts issued inflation-indexed bonds beginning in 1780, but inflation indexing seemed unnecessary for established countries on the gold standard.
Most of the world abandoned the gold standard by the 1970s, and rising inflation created a demand for inflation-linked bonds. In 1981, the U.K. began to issue the first modern inflation-linked bonds, or linkers as they are often called.
Other countries followed suit, including Sweden, Canada, and Australia. The U.S. Treasury did not issue inflation-indexed bonds until 1997, and India issued capital-indexed bonds that same year; however, India did not issue fully inflation-indexed bonds, which protect both coupons and principal from inflation, until 2013.
Fitch Ratings downgraded the rating for the U.S. from AAA to AA+ in Aug. 2023. The credit rating agency stated that concerns about the country's "fiscal deterioration" over the next three years and its high national debt caused by tax cuts and increased government spending were among the reasons for the drop.
Risks of Inflation-Linked Bonds
While inflation-linked bonds have considerable upside potential, there are also certain risks associated with these assets.
Values
Their value also tends to fluctuate with the rise and fall of interest rates. TIPS and many of their global inflation-linked counterparts do not offer very good protection during times of deflation, which is when prices decline. The U.S. Treasury sets an initial floor for TIPS at par value.
However, the risk is still considerable because there are older TIPS issues that carry years of inflation-adjusted accruals, which can be lost to deflation. This deflation risk caused TIPS to underperform other Treasury bonds during 2008.
Trading and Taxation
This asset type also presents complications in trading and taxation that don't affect other fixed-income asset classes. This is mostly because inflation-linked bonds have two values: the original face value of the bond and the current value adjusted for inflation.
The adjustments of the principal amount are considered annual income for tax purposes. However, investors do not actually receive the adjustments in that year. Instead, they get the larger coupon payments and only receive inflation-augmented principal when the bond matures. Thus, investors may be subject to tax on what's known as phantom income.
What Are Inflation-Linked Bonds?
Inflation-linked bonds are fixed-income assets that are designed to protect investors from inflation. Generally offered by federal governments, these assets are indexed to inflation. This means they are tied to inflation so the principal investment and interest portion both rise and fall with the inflation rate. In many cases, they are tied to the price index of consumer goods and services. For instance, those issued by the U.S. government are tied to the Consumer Price Index.
How Risky Are Inflation-Linked Bonds?
Bonds that are linked to inflation are usually offered by federal governments. These fixed-income investments offer investors protection against inflation because they are indexed to inflation. As such, the principal and interest rises and falls with the inflation rate. Although they provide some safety, there are certain risks associated with inflation-linked bonds. For instance, investors are subject to interest rate risk. They must also consider deflation risk since these bonds are tied to the CPI in the U.S.
What Is the Current Rate for Inflation Bonds?
The current rate for I bonds issued between May 1, 2023, and Oct. 31, 2023, is 4.30%. This rate includes a fixed rate of 0.90%.
The Bottom Line
Despite their complicated nature and potential downside in deflationary periods, inflation-linked bonds are still enormously popular. They are the most trusted investment vehicle to hedge against short-term inflation. The corrosive effect that inflation can have on returns is a strong motivating factor behind the popularity of these bonds.
An additional upside of inflation-linked bonds is that their returns do not correlate with those of stocks or with other fixed-income assets. Inflation-linked bonds are a hedge against inflation, and they also help to provide diversification in a balanced portfolio.
|
[
[
"real returns",
"https://www.investopedia.com/terms/r/realrateofreturn.asp"
],
[
"consumer price index (CPI)",
"https://www.investopedia.com/terms/c/consumerpriceindex.asp"
],
[
"Treasury Inflation-Protected Securities (TIPS)",
"https://www.investopedia.com/terms/t/tips.asp"
],
[
"I bonds",
"https://www.investopedia.com/terms/s/seriesibond.asp"
],
[
"retail price index (RPI)",
"https://www.investopedia.com/terms/r/rpi.asp"
],
[
"real value",
"https://www.investopedia.com/terms/r/real-value.asp"
],
[
"gold standard",
"https://www.investopedia.com/terms/g/goldstandard.asp"
],
[
"par value",
"https://www.investopedia.com/terms/p/parvalue.asp"
],
[
"accruals",
"https://www.investopedia.com/terms/a/accruals.asp"
],
[
"deflation",
"https://www.investopedia.com/terms/d/deflation.asp"
],
[
"phantom income",
"https://www.investopedia.com/terms/p/phantom-income.asp"
]
] |
https://www.investopedia.com/terms/b/burstbasket.asp
|
Burst Basket Definition and Uses
|
<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-burst-basket"></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 Burst Basket? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A burst basket refers to a transaction that executes the sale or purchase of a group of stocks, known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basket.asp">basket</a>. A basket is essentially an entire portfolio of stocks from different sectors. This portfolio of stocks is aggregated into a single trading unit, the basket. Baskets typically contain at least five stocks, but often 15 or more. They are commonly used in index tracking and currency portfolio management. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/baskettrade.asp">baskets are traded</a> on both the NYSE and the Cboe for institutions and index <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrageur.asp">arbitrageurs</a>.<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_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>Burst baskets are used in trading programs to buy or sell multiple securities at the same time.</li><li>Baskets typically contain at least 15 stocks.</li><li>Baskets can be used to create custom indexes or portfolios, and then rebalance them instantly. Baskets can also be used to deploy strategies across multiple stocks at once.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-burst-baskets"></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 Burst Baskets </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The term "burst basket" is used in reference to the actual execution of a trade of a basket of stocks, particularly in conjunction with execution used in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/programtrading.asp" rel="noopener noreferrer">program trading</a>. Program trading refers to trading done through the use of mathematical algorithms to buy or sell securities.
</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-burst-baskets-vs-tracking-funds"></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"> Burst Baskets vs. Tracking Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Index mutual funds and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/051815/what-are-differences-between-mlp-exchange-traded-fund-etf-and-mlp-exchange-traded-note-etn.asp">exchange-traded funds (ETFs)</a> are examples of tracking funds, which are managed to closely track the performance of a stated index. For example, the SPDR S&P 500 ETF (SPY) is built to track the performance of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> index.<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"> One downside of an index mutual fund or ETF is a lack of flexibility or customization. When you purchase these instruments, you are not able to make any changes to the holdings within them. You get the stocks and sometimes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> that the instrument holds, and cannot pick and choose what you personally would change about the holdings.
</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"> With a basket trade, you have some room to tweak the basket of stocks to favor one company or industry over another. When it comes to the question of flexibility to customize a portfolio's holdings, baskets have the advantage. However, mutual funds and ETFs may have advantages in terms of expense and tax efficiency for retail investors.
</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-example-of-how-baskets-compare-to-funds"></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"> Example of How Baskets Compare to Funds </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> For retail investors, purchasing a pre-made basket—like an ETF or mutual fund—is a more economical choice. Buying 500 (actually 505, subject to change) stocks to get a portfolio representative of the S&P 500 would incur significant costs, and even buying one share of each company may cost more than the investor has to invest. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-amazon-makes-money-4587523">Amazon.com Inc.</a> (AMZN) is included in the S&P 500, and as of March 31, 2023, is priced at $103, and Alphabet Inc. Class C (GOOG) is priced at $104.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="5"></span> Not all investors could afford one share of each of these companies, let alone attempting to buy the other 503.
</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"> Compare this to an ETF, where an investor can buy a single share of the SPDR S&P 500 ETF, for example, and own a piece of all the companies in the S&P 500 index. As of March 30, 2023, SPY was trading around $403. So for $400 per share, an investor owns a tracked basket of stocks.<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_20-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> An institution with low <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transactioncosts.asp">trading costs</a>, large amounts of capital to deploy, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp">algorithmic</a> or automated trading capabilities may create its own basket orders, buying or selling dozens or even hundreds of different stocks all at the same time. This allows the firm to fine-tune what it wants to buy and sell, instead of relying on prepackaged baskets.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_23-0"><span class="heading-toc" id="toc-what-are-the-advantages-of-basket-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Advantages of Basket Trading?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Basket trading allows market participants to create a trade that is personalized and specific to their needs, to dole out investments across multiple securities, and to have more control over where their investment money is going.</p></div>
</div>
<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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_25-0"><span class="heading-toc" id="toc-who-uses-basket-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Uses Basket Trading?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Basket trading is mostly used by investment firms and large institutional traders, as opposed to retail investors. However, individual investors can also use basket trading, enabling them to buy or sell a group of financial instruments all at the same time.</p></div>
</div>
<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-is-the-difference-between-a-basket-and-an-etf"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between a Basket and an ETF?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An exchange-traded fund (ETF) is a kind of basket. A basket trade involves buying or selling a group of financial securities, usually 15 or more, simultaneously. An ETF is a basket of securities pegged to an underlying index, sector, commodity, or other financial asset.</p></div>
</div></div>
|
## What Is a Burst Basket?
A burst basket refers to a transaction that executes the sale or purchase of a group of stocks, known as a [basket](https://www.investopedia.com/terms/b/basket.asp). A basket is essentially an entire portfolio of stocks from different sectors. This portfolio of stocks is aggregated into a single trading unit, the basket. Baskets typically contain at least five stocks, but often 15 or more. They are commonly used in index tracking and currency portfolio management. The [baskets are traded](https://www.investopedia.com/terms/b/baskettrade.asp) on both the NYSE and the Cboe for institutions and index [arbitrageurs](https://www.investopedia.com/terms/a/arbitrageur.asp).
### Key Takeaways
* Burst baskets are used in trading programs to buy or sell multiple securities at the same time.
* Baskets typically contain at least 15 stocks.
* Baskets can be used to create custom indexes or portfolios, and then rebalance them instantly. Baskets can also be used to deploy strategies across multiple stocks at once.
## Understanding Burst Baskets
The term "burst basket" is used in reference to the actual execution of a trade of a basket of stocks, particularly in conjunction with execution used in [program trading](https://www.investopedia.com/terms/p/programtrading.asp). Program trading refers to trading done through the use of mathematical algorithms to buy or sell securities.
## Burst Baskets vs. Tracking Funds
Index mutual funds and [exchange-traded funds (ETFs)](https://www.investopedia.com/ask/answers/051815/what-are-differences-between-mlp-exchange-traded-fund-etf-and-mlp-exchange-traded-note-etn.asp) are examples of tracking funds, which are managed to closely track the performance of a stated index. For example, the SPDR S&P 500 ETF (SPY) is built to track the performance of the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) index.
One downside of an index mutual fund or ETF is a lack of flexibility or customization. When you purchase these instruments, you are not able to make any changes to the holdings within them. You get the stocks and sometimes [derivatives](https://www.investopedia.com/terms/d/derivative.asp) that the instrument holds, and cannot pick and choose what you personally would change about the holdings.
With a basket trade, you have some room to tweak the basket of stocks to favor one company or industry over another. When it comes to the question of flexibility to customize a portfolio's holdings, baskets have the advantage. However, mutual funds and ETFs may have advantages in terms of expense and tax efficiency for retail investors.
## Example of How Baskets Compare to Funds
For retail investors, purchasing a pre-made basket—like an ETF or mutual fund—is a more economical choice. Buying 500 (actually 505, subject to change) stocks to get a portfolio representative of the S&P 500 would incur significant costs, and even buying one share of each company may cost more than the investor has to invest. [Amazon.com Inc.](https://www.investopedia.com/how-amazon-makes-money-4587523) (AMZN) is included in the S&P 500, and as of March 31, 2023, is priced at $103, and Alphabet Inc. Class C (GOOG) is priced at $104. Not all investors could afford one share of each of these companies, let alone attempting to buy the other 503.
Compare this to an ETF, where an investor can buy a single share of the SPDR S&P 500 ETF, for example, and own a piece of all the companies in the S&P 500 index. As of March 30, 2023, SPY was trading around $403. So for $400 per share, an investor owns a tracked basket of stocks.
An institution with low [trading costs](https://www.investopedia.com/terms/t/transactioncosts.asp), large amounts of capital to deploy, and [algorithmic](https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp) or automated trading capabilities may create its own basket orders, buying or selling dozens or even hundreds of different stocks all at the same time. This allows the firm to fine-tune what it wants to buy and sell, instead of relying on prepackaged baskets.
## What Are the Advantages of Basket Trading?
Basket trading allows market participants to create a trade that is personalized and specific to their needs, to dole out investments across multiple securities, and to have more control over where their investment money is going.
## Who Uses Basket Trading?
Basket trading is mostly used by investment firms and large institutional traders, as opposed to retail investors. However, individual investors can also use basket trading, enabling them to buy or sell a group of financial instruments all at the same time.
## What Is the Difference Between a Basket and an ETF?
An exchange-traded fund (ETF) is a kind of basket. A basket trade involves buying or selling a group of financial securities, usually 15 or more, simultaneously. An ETF is a basket of securities pegged to an underlying index, sector, commodity, or other financial asset.
|
What Is a Burst Basket?
A burst basket refers to a transaction that executes the sale or purchase of a group of stocks, known as a basket. A basket is essentially an entire portfolio of stocks from different sectors. This portfolio of stocks is aggregated into a single trading unit, the basket. Baskets typically contain at least five stocks, but often 15 or more. They are commonly used in index tracking and currency portfolio management. The baskets are traded on both the NYSE and the Cboe for institutions and index arbitrageurs.
Key Takeaways
Burst baskets are used in trading programs to buy or sell multiple securities at the same time.Baskets typically contain at least 15 stocks.Baskets can be used to create custom indexes or portfolios, and then rebalance them instantly. Baskets can also be used to deploy strategies across multiple stocks at once.
Understanding Burst Baskets
The term "burst basket" is used in reference to the actual execution of a trade of a basket of stocks, particularly in conjunction with execution used in program trading. Program trading refers to trading done through the use of mathematical algorithms to buy or sell securities.
Burst Baskets vs. Tracking Funds
Index mutual funds and exchange-traded funds (ETFs) are examples of tracking funds, which are managed to closely track the performance of a stated index. For example, the SPDR S&P 500 ETF (SPY) is built to track the performance of the S&P 500 index.
One downside of an index mutual fund or ETF is a lack of flexibility or customization. When you purchase these instruments, you are not able to make any changes to the holdings within them. You get the stocks and sometimes derivatives that the instrument holds, and cannot pick and choose what you personally would change about the holdings.
With a basket trade, you have some room to tweak the basket of stocks to favor one company or industry over another. When it comes to the question of flexibility to customize a portfolio's holdings, baskets have the advantage. However, mutual funds and ETFs may have advantages in terms of expense and tax efficiency for retail investors.
Example of How Baskets Compare to Funds
For retail investors, purchasing a pre-made basket—like an ETF or mutual fund—is a more economical choice. Buying 500 (actually 505, subject to change) stocks to get a portfolio representative of the S&P 500 would incur significant costs, and even buying one share of each company may cost more than the investor has to invest. Amazon.com Inc. (AMZN) is included in the S&P 500, and as of March 31, 2023, is priced at $103, and Alphabet Inc. Class C (GOOG) is priced at $104. Not all investors could afford one share of each of these companies, let alone attempting to buy the other 503.
Compare this to an ETF, where an investor can buy a single share of the SPDR S&P 500 ETF, for example, and own a piece of all the companies in the S&P 500 index. As of March 30, 2023, SPY was trading around $403. So for $400 per share, an investor owns a tracked basket of stocks.
An institution with low trading costs, large amounts of capital to deploy, and algorithmic or automated trading capabilities may create its own basket orders, buying or selling dozens or even hundreds of different stocks all at the same time. This allows the firm to fine-tune what it wants to buy and sell, instead of relying on prepackaged baskets.
What Are the Advantages of Basket Trading?
Basket trading allows market participants to create a trade that is personalized and specific to their needs, to dole out investments across multiple securities, and to have more control over where their investment money is going.
Who Uses Basket Trading?
Basket trading is mostly used by investment firms and large institutional traders, as opposed to retail investors. However, individual investors can also use basket trading, enabling them to buy or sell a group of financial instruments all at the same time.
What Is the Difference Between a Basket and an ETF?
An exchange-traded fund (ETF) is a kind of basket. A basket trade involves buying or selling a group of financial securities, usually 15 or more, simultaneously. An ETF is a basket of securities pegged to an underlying index, sector, commodity, or other financial asset.
|
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[
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],
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],
[
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],
[
"program trading",
"https://www.investopedia.com/terms/p/programtrading.asp"
],
[
"exchange-traded funds (ETFs)",
"https://www.investopedia.com/ask/answers/051815/what-are-differences-between-mlp-exchange-traded-fund-etf-and-mlp-exchange-traded-note-etn.asp"
],
[
"S&P 500",
"https://www.investopedia.com/terms/s/sp500.asp"
],
[
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],
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],
[
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],
[
"algorithmic",
"https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp"
]
] |
https://www.investopedia.com/datadog-stock-sinks-despite-earnings-beat-as-guidance-fails-to-impress-8644532
|
Datadog Stock Sinks Despite Earnings Beat as Guidance Fails to Impress
|
<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>Shares of Datadog sank in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated.</li><li>The company also said president Amit Agarwal was resigning.</li><li>Datadog's first-quarter profit and revenue exceeded forecasts.</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"> <br/>Datadog (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DDOG">DDOG</a>) shares plunged in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated,<span class="ql-inline-citation" data-cite="2"></span> and its president resigned.
</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"> Datadog said it sees current-quarter adjusted <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>) in a range of $0.34 to $0.36, with revenue of $620 million to $624 million. It predicts full-year adjusted EPS to be $1.51 to $1.57, and revenue of $2.59 billion to $2.61 billion.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Analysts were expecting second-quarter adjusted EPS of $0.35 on revenue of $620.6 million, according to estimates compiled by Visible Alpha, and full-year adjusted EPS of $1.47 on revenue of $2.59 billion.
</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-q1-results-top-estimates"></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"> Q1 Results Top Estimates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In the first quarter, the company reported adjusted EPS of $0.44, with revenue jumping 27% to $611.3 million. Both exceeded forecasts.
</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"> Datadog noted as of the end of March it had 3,340 customers with annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recurringrevenue.asp">recurring revenue</a> (ARR) of $100,000 or more. That was a 15% increase from a year earlier.
</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-datadog-president-to-step-down"></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"> Datadog President to Step Down </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The company also announced that president Amit Agarwal will be stepping down at the end of 2024 and is expected to join the board.
</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"> Shares of Datadog were down 9.5% at 11:22 a.m. ET to $114.87, their lowest level since early January.<br>
</br></p></div>
|
### Key Takeaways
* Shares of Datadog sank in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated.
* The company also said president Amit Agarwal was resigning.
* Datadog's first-quarter profit and revenue exceeded forecasts.
Datadog ([DDOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DDOG)) shares plunged in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated, and its president resigned.
Datadog said it sees current-quarter adjusted [earnings per share (EPS](https://www.investopedia.com/terms/e/eps.asp)) in a range of $0.34 to $0.36, with revenue of $620 million to $624 million. It predicts full-year adjusted EPS to be $1.51 to $1.57, and revenue of $2.59 billion to $2.61 billion.
Analysts were expecting second-quarter adjusted EPS of $0.35 on revenue of $620.6 million, according to estimates compiled by Visible Alpha, and full-year adjusted EPS of $1.47 on revenue of $2.59 billion.
## Q1 Results Top Estimates
In the first quarter, the company reported adjusted EPS of $0.44, with revenue jumping 27% to $611.3 million. Both exceeded forecasts.
Datadog noted as of the end of March it had 3,340 customers with annual [recurring revenue](https://www.investopedia.com/terms/r/recurringrevenue.asp) (ARR) of $100,000 or more. That was a 15% increase from a year earlier.
## Datadog President to Step Down
The company also announced that president Amit Agarwal will be stepping down at the end of 2024 and is expected to join the board.
Shares of Datadog were down 9.5% at 11:22 a.m. ET to $114.87, their lowest level since early January.
|
Key Takeaways
Shares of Datadog sank in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated.The company also said president Amit Agarwal was resigning.Datadog's first-quarter profit and revenue exceeded forecasts.
Datadog (DDOG) shares plunged in intraday trading Tuesday as the cloud monitoring and security company’s guidance appeared to be less than some had anticipated, and its president resigned.
Datadog said it sees current-quarter adjusted earnings per share (EPS) in a range of $0.34 to $0.36, with revenue of $620 million to $624 million. It predicts full-year adjusted EPS to be $1.51 to $1.57, and revenue of $2.59 billion to $2.61 billion.
Analysts were expecting second-quarter adjusted EPS of $0.35 on revenue of $620.6 million, according to estimates compiled by Visible Alpha, and full-year adjusted EPS of $1.47 on revenue of $2.59 billion.
Q1 Results Top Estimates
In the first quarter, the company reported adjusted EPS of $0.44, with revenue jumping 27% to $611.3 million. Both exceeded forecasts.
Datadog noted as of the end of March it had 3,340 customers with annual recurring revenue (ARR) of $100,000 or more. That was a 15% increase from a year earlier.
Datadog President to Step Down
The company also announced that president Amit Agarwal will be stepping down at the end of 2024 and is expected to join the board.
Shares of Datadog were down 9.5% at 11:22 a.m. ET to $114.87, their lowest level since early January.
|
[
[
"DDOG",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=DDOG"
],
[
"earnings per share (EPS",
"https://www.investopedia.com/terms/e/eps.asp"
],
[
"recurring revenue",
"https://www.investopedia.com/terms/r/recurringrevenue.asp"
]
] |
https://www.investopedia.com/terms/n/noncommercialtrader.asp
|
Non-Commercial Trader: 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-a-non-commercial-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"> What Is a Non-Commercial Trader? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A non-commercial trader is defined 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</a> (CFTC) as someone who has no business activities related to a particular commodity in which they might have a position in the futures or options markets.<span class="ql-inline-citation" data-cite="2"></span> In other words, non-commercial traders are not looking to take delivery of a commodity or to hedge costs related to a commodity-related business. Instead, they are taking positions in the market purely to seek a profit from market moves as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculator.asp" rel="noopener noreferrer">speculator</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 non-commercial trader is someone who has no direct business interests in the commodity that they are trading.</li><li>Instead, a non-commercial trader takes a speculative market position only to profit from price moves in the market.</li><li>The CFTC makes this designation in order to keep track of market activity in its Commitment of Traders (COT) report.<span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-non-commercial-traders"></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 Non-Commercial Traders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Non-commercial traders tend to be individual investors, <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>, and large financial institutions. The classification of non-commercial traders is based on information gathered from CFTC Form 40: Statement of Reporting Trader, but the CFTC ultimately decides how a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trader.asp" rel="noopener noreferrer">trader</a> is classified and may do so regardless of claims made by the trader on the CFTC Form 40.<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_8-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> It is possible for an organization that has more than one trading entity to be classified as a non-commercial trader in one <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp" rel="noopener noreferrer">commodity</a> and a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialtraders.asp" rel="noopener noreferrer">commercial trader</a> in a separate one. However, it is not possible for a single trading entity to be a non-commercial and commercial trader in the same commodity.<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"> Futures prices tend to positively correlate with the positions of non-commercial traders, which can be seen in the CFTC's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cot.asp" rel="noopener noreferrer">COT report</a>: a weekly publication that shows the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/openinterest.asp" rel="noopener noreferrer">open interest</a> and positions of different types of traders.<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"> When most non-commercial traders are betting a commodity's price will rise, it is usually a strong bullish signal. By contrast, if non-commercial traders have a substantial number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp" rel="noopener noreferrer">short positions</a> in a commodity, betting that the price will fall, it can be taken as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bear.asp" rel="noopener noreferrer">bearish</a> signal. Over time, non-commercial traders have been right as well as incredibly responsive to market signals when they are wrong.
</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-non-commercial-vs-commercial-traders"></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"> Non-Commercial vs. Commercial Traders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Commercial traders are largely seen as defensive players in the market, rather than trendsetters. While non-commercial traders share a clear <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profit-motive.asp" rel="noopener noreferrer">profit motive</a>, the trading motives of commercial traders are much more diverse.
</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>When the positions of both non-commercial and commercial traders turn bullish or bearish, it usually results in sharp price movements that break through previous <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/support.asp" rel="noopener noreferrer">support</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/resistance.asp" rel="noopener noreferrer">resistance</a> levels.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> For example, producers, merchants, processors, and users of a commodity are all considered commercial traders in that commodity even though their pricing and <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> goals are different and can be in direct opposition. This is another reason why the positions of non-commercial traders are seen as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pricediscovery.asp" rel="noopener noreferrer">purer pricing signals</a> than those of commercial traders.
</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"> Moreover, because non-commercial traders tend to take the opposite positions of commercial traders, they also play an important role in providing the <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> required to keep the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futuresmarket.asp" rel="noopener noreferrer">futures market</a> running.
</p></div>
|
## What Is a Non-Commercial Trader?
A non-commercial trader is defined by the [Commodity Futures Trading Commission](https://www.investopedia.com/terms/c/cftc.asp) (CFTC) as someone who has no business activities related to a particular commodity in which they might have a position in the futures or options markets. In other words, non-commercial traders are not looking to take delivery of a commodity or to hedge costs related to a commodity-related business. Instead, they are taking positions in the market purely to seek a profit from market moves as a [speculator](https://www.investopedia.com/terms/s/speculator.asp).
### Key Takeaways
* A non-commercial trader is someone who has no direct business interests in the commodity that they are trading.
* Instead, a non-commercial trader takes a speculative market position only to profit from price moves in the market.
* The CFTC makes this designation in order to keep track of market activity in its Commitment of Traders (COT) report.
## Understanding Non-Commercial Traders
Non-commercial traders tend to be individual investors, [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp), and large financial institutions. The classification of non-commercial traders is based on information gathered from CFTC Form 40: Statement of Reporting Trader, but the CFTC ultimately decides how a [trader](https://www.investopedia.com/terms/t/trader.asp) is classified and may do so regardless of claims made by the trader on the CFTC Form 40.
It is possible for an organization that has more than one trading entity to be classified as a non-commercial trader in one [commodity](https://www.investopedia.com/terms/c/commodity.asp) and a [commercial trader](https://www.investopedia.com/terms/c/commercialtraders.asp) in a separate one. However, it is not possible for a single trading entity to be a non-commercial and commercial trader in the same commodity.
Futures prices tend to positively correlate with the positions of non-commercial traders, which can be seen in the CFTC's [COT report](https://www.investopedia.com/terms/c/cot.asp): a weekly publication that shows the [open interest](https://www.investopedia.com/terms/o/openinterest.asp) and positions of different types of traders.
When most non-commercial traders are betting a commodity's price will rise, it is usually a strong bullish signal. By contrast, if non-commercial traders have a substantial number of [short positions](https://www.investopedia.com/terms/s/short.asp) in a commodity, betting that the price will fall, it can be taken as a [bearish](https://www.investopedia.com/terms/b/bear.asp) signal. Over time, non-commercial traders have been right as well as incredibly responsive to market signals when they are wrong.
## Non-Commercial vs. Commercial Traders
Commercial traders are largely seen as defensive players in the market, rather than trendsetters. While non-commercial traders share a clear [profit motive](https://www.investopedia.com/terms/p/profit-motive.asp), the trading motives of commercial traders are much more diverse.
###
When the positions of both non-commercial and commercial traders turn bullish or bearish, it usually results in sharp price movements that break through previous [support](https://www.investopedia.com/terms/s/support.asp) or [resistance](https://www.investopedia.com/terms/r/resistance.asp) levels.
For example, producers, merchants, processors, and users of a commodity are all considered commercial traders in that commodity even though their pricing and [hedging](https://www.investopedia.com/terms/h/hedge.asp) goals are different and can be in direct opposition. This is another reason why the positions of non-commercial traders are seen as [purer pricing signals](https://www.investopedia.com/terms/p/pricediscovery.asp) than those of commercial traders.
Moreover, because non-commercial traders tend to take the opposite positions of commercial traders, they also play an important role in providing the [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) required to keep the [futures market](https://www.investopedia.com/terms/f/futuresmarket.asp) running.
|
What Is a Non-Commercial Trader?
A non-commercial trader is defined by the Commodity Futures Trading Commission (CFTC) as someone who has no business activities related to a particular commodity in which they might have a position in the futures or options markets. In other words, non-commercial traders are not looking to take delivery of a commodity or to hedge costs related to a commodity-related business. Instead, they are taking positions in the market purely to seek a profit from market moves as a speculator.
Key Takeaways
A non-commercial trader is someone who has no direct business interests in the commodity that they are trading.Instead, a non-commercial trader takes a speculative market position only to profit from price moves in the market.The CFTC makes this designation in order to keep track of market activity in its Commitment of Traders (COT) report.
Understanding Non-Commercial Traders
Non-commercial traders tend to be individual investors, hedge funds, and large financial institutions. The classification of non-commercial traders is based on information gathered from CFTC Form 40: Statement of Reporting Trader, but the CFTC ultimately decides how a trader is classified and may do so regardless of claims made by the trader on the CFTC Form 40.
It is possible for an organization that has more than one trading entity to be classified as a non-commercial trader in one commodity and a commercial trader in a separate one. However, it is not possible for a single trading entity to be a non-commercial and commercial trader in the same commodity.
Futures prices tend to positively correlate with the positions of non-commercial traders, which can be seen in the CFTC's COT report: a weekly publication that shows the open interest and positions of different types of traders.
When most non-commercial traders are betting a commodity's price will rise, it is usually a strong bullish signal. By contrast, if non-commercial traders have a substantial number of short positions in a commodity, betting that the price will fall, it can be taken as a bearish signal. Over time, non-commercial traders have been right as well as incredibly responsive to market signals when they are wrong.
Non-Commercial vs. Commercial Traders
Commercial traders are largely seen as defensive players in the market, rather than trendsetters. While non-commercial traders share a clear profit motive, the trading motives of commercial traders are much more diverse.
When the positions of both non-commercial and commercial traders turn bullish or bearish, it usually results in sharp price movements that break through previous support or resistance levels.
For example, producers, merchants, processors, and users of a commodity are all considered commercial traders in that commodity even though their pricing and hedging goals are different and can be in direct opposition. This is another reason why the positions of non-commercial traders are seen as purer pricing signals than those of commercial traders.
Moreover, because non-commercial traders tend to take the opposite positions of commercial traders, they also play an important role in providing the liquidity required to keep the futures market running.
|
[
[
"Commodity Futures Trading Commission",
"https://www.investopedia.com/terms/c/cftc.asp"
],
[
"speculator",
"https://www.investopedia.com/terms/s/speculator.asp"
],
[
"hedge funds",
"https://www.investopedia.com/terms/h/hedgefund.asp"
],
[
"trader",
"https://www.investopedia.com/terms/t/trader.asp"
],
[
"commodity",
"https://www.investopedia.com/terms/c/commodity.asp"
],
[
"commercial trader",
"https://www.investopedia.com/terms/c/commercialtraders.asp"
],
[
"COT report",
"https://www.investopedia.com/terms/c/cot.asp"
],
[
"open interest",
"https://www.investopedia.com/terms/o/openinterest.asp"
],
[
"short positions",
"https://www.investopedia.com/terms/s/short.asp"
],
[
"bearish",
"https://www.investopedia.com/terms/b/bear.asp"
],
[
"profit motive",
"https://www.investopedia.com/terms/p/profit-motive.asp"
],
[
"support",
"https://www.investopedia.com/terms/s/support.asp"
],
[
"resistance",
"https://www.investopedia.com/terms/r/resistance.asp"
],
[
"hedging",
"https://www.investopedia.com/terms/h/hedge.asp"
],
[
"purer pricing signals",
"https://www.investopedia.com/terms/p/pricediscovery.asp"
],
[
"liquidity",
"https://www.investopedia.com/terms/l/liquidity.asp"
],
[
"futures market",
"https://www.investopedia.com/terms/f/futuresmarket.asp"
]
] |
https://www.investopedia.com/articles/investing/102014/feeonly-financial-advisers-what-you-need-know.asp
|
What You Need to Know About Fee-Only Financial Advisors
|
<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 financial world, advisors and planners are compensated in one of two basic ways: by earning flat fees or by earning commissions. A fee-only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisor</a> is paid a set rate for the services they provide rather than getting paid by commission on the products they sell or trade.
</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"> Should you be working with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/feebasedinvestment.asp">fee-only</a> financial advisor? There are many benefits to someone who is compensated solely by what they charge directly to clients and not from the <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commission.asp">commissions</a> earned from the sale of financial products or financial <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transactions</a>. However, there are drawbacks as well. Let's review.
</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>Many financial advisors are shifting to a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions.</li><li>The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering.</li><li>The downsides of fee-only advisors can include being more expensive or a limited scope of products and services offered.</li><li>Fee-only advisors aren't always completely free of conflicts. If they're compensated by a portion of AUM, they may be biased against you withdrawing funds.<strong> </strong>However, they may bound by fiduciary standards to always put their client’s interest first and to fully disclose any potential conflict of interest to the client.<span class="ql-inline-citation" data-cite="9"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-fee-only-or-commission-based"></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"> Fee-Only or Commission-Based? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The basic compensation models for financial advisors are as follows:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0">
<li><strong>Charging an hourly or a flat fee</strong> for the planning services they provide. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.</li>
<li><strong>Charging a percentage</strong> <strong>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</a> </strong>(AUM)—say, 1% of the investment account value. The engagement may or may not include planning and/or other advice, which is usually secondary to money management.</li>
<li><strong>Earning commissions</strong> based on the sale of a product or a financial transaction, such as a stock trade. Advice or planning might be ancillary to the product sale (as with a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockbroker.asp">stockbroker</a>), or they might be a key part of services (as with a <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialplanner.asp">financial planner</a>).</li>
<li><strong>Getting compensated through a combination</strong> of flat fees, percentage of AUM, or commissions. The exact mix varies by the advisor. Also known as "fee-based," this model allows advisors to offer clients a wider range of services as well as work with them to implement recommendations and monitor progress.</li>
</ul>
<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"> There has been some debate as to how "fee-only" compensation should be defined—mainly, whether or not it should include the second group, those who charge based on AUM. Generally, though, most agree, fee-only refers to payment from fixed, flat, hourly, or percentage-based fees.
</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-advantages-of-using-a-fee-only-advisor"></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"> Advantages of Using a Fee-Only Advisor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> One of the major benefits of selecting a fee-only advisor is the freedom from the inherent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conflict-of-interest.asp">conflict of interest</a> that can arise when a significant portion of the advisor’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> comes from selling financial products to you. The concern you should have as a potential client is whether or not the advisor is recommending a certain investment because it enhances their <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bottomline.asp">bottom line</a> and if the products recommended are truly in your best interest.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In fact, there are some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/registeredrepresentative.asp">registered reps</a> and others who earn all or part of their compensation via commission that may be <em>required </em>to favor products offered by their employer—which may or may not be the best investments for your portfolio strategy.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In addition, an advisor is usually a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiduciary.asp">fiduciary</a> when they charge a fee for planning services and/or they are investing money for an advisory account; as a result, they are legally required to always act in the best interest of their clients, and to disclose anything that might smack of impropriety.<span class="ql-inline-citation" data-cite="10"></span> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/ria.asp">Registered Investment Advisors</a> (RIAs) and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp">certified financial planners</a> (CFP®s) both swear to act as fiduciaries, for example.<span class="ql-inline-citation" data-cite="12"></span><span class="ql-inline-citation" data-cite="11"></span>
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<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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>An advisor who only earns commissions—like a stockbroker—is held to a lower standard and does not have to make a "best-interest" recommendation, but rather one that is "suitable" for your needs.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Another <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/071415/how-cut-financial-advisor-expenses.asp">benefit of using fee-only financial advisors</a> is the opportunity for them to offer an objective second opinion of your situation. This is especially true if the advisor works with clients on an hourly, as-needed basis or perhaps will do a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_plan.asp">financial plan</a> or financial review for a fixed project fee. Services here can range from addressing a specific financial question to a review of your investment <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a> or a full-blown financial plan.
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<span class="heading-toc" id="toc-disadvantages-of-using-a-fee-only-advisor"></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"> Disadvantages of Using a Fee-Only Advisor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> All of the above are great reasons to use fee-only advisors, but there are still some potential downsides to the fee-only model.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> First, fee-only advisors might be more expensive. For example, let's say through the planning process, a fee-only advisor discovers a need and recommends that a client buys a commission-based product such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diinsurance.asp">disability income insurance</a>. If the fee-only advisor doesn’t sell the product, then the client would need to find and work with an insurance broker, adding additional steps to an already complex process.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Also, the insurance broker receives a commission from the sale of the product, so the client ends up paying both a fee and a commission (albeit to different people).
</p>
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<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-note" 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 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 states limit an advisor's ability to charge a fee for the analysis of just insurance products or needs.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Consequently, the fee-only advisor has to either limit the services they offer or charge clients a higher fee. For wealthy individuals who are willing and able to pay a substantial retainer, a fee-only advisor could be the right choice. But, for many individuals with limited resources or whose <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a> are tied up in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qrp.asp">qualified plans</a>, the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/outofpocket.asp">out-of-pocket costs</a> for a fee-only advisor could get prohibitive.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Fee-only advisors can be expensive in another sense. Investors with smaller portfolio balances or lower transaction activity may get favorable pricing with commission-based advisors. While fee-only advisors are relatively less expensive for clients with large portfolios, different fee structures impact investors differently.
</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"> Fee-only advisors are also in the unique position of holding fiduciary responsibility over your assets, yet they do not get incrementally rewarded for your success. Whether your portfolio doubles in size or gets cut in half, a fixed-fee advisor will likely receive the same fees to manage your portfolio. As there is minimal incentive to the advisor to ensure your investment success, you may find fixed-fee advisors may not always have your best interest at heart as well.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Another issue to consider is that being fee-only does not ensure that the advisor is competent or appropriate for you. While it conjures up the image of an erudite professional, like a lawyer or an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountant.asp">accountant</a>, this compensation model doesn't guarantee the advisor has expertise—or that their expertise dovetails with your needs and profile.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> For example, a fee-only advisor who specializes in working with teachers and government employees nearing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement.asp">retirement</a> probably would not be the best advisor for a high-earning thirtysomething professional in the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/private-sector.asp">private sector</a>.
</p>
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<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_46-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_47-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Fee-Only Financial Advisors</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>Less chance for conflicts of interest</p></li>
<li><p>More transparent pricing structure</p></li>
<li><p>More objective advice</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>Often more expensive/skewed to higher-income clients</p></li>
<li><p>More limited in product and service offerings</p></li>
<li><p>May not be totally disinterested (if you want to withdraw funds)</p></li>
</ul>
</div>
</div></div>
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<span class="heading-toc" id="toc-how-to-find-a-fee-only-advisor"></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 Find a Fee-Only Advisor </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/national-association-personal-financial-advisors-napfa.asp">National Association of Personal Financial Advisors</a> (NAPFA) is one of the largest professional organizations of fee-only financial advisors in the country. It has a find an advisor link on its website. You can search by zip code and then further by area of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/specialization.asp">specialization</a>. Note that NAPFA members run the gamut from solo practitioners to large multi-advisor firms. Additionally, NAPFA members offer a wide range of service options, including hourly as-needed services, ongoing investment and portfolio advice, and almost everything in between.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> The Garrett Planning Network is another organization of fee-only <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialplanner.asp">financial planners</a> who mostly focus on providing hourly advice. There is a degree of overlap in the membership of the Garrett Planning Network and NAPFA. It also has a "find an advisor" function.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> The accounting profession also has a financial planning designation for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cpa.asp">Certified Public Accountants</a> (CPAs) called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/personal-financial-specialist-pfs.asp">Personal Financial Specialists</a> (PFS). Please note that while many holders of the PFS designation are fee-only, they are not required to be. As you contact advisors, you will need to ask these folks how they are compensated.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The Certified Financial Planner Board also has a directory of financial advisors who hold the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp">CFP</a>®<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cfp.asp"> designation</a>. Again, being a CFP® does not mean the advisor is fee-only. The CFP® Board recently has revised its compensation classifications to include fee-only, fee-and-commission, and commission. There has been some controversy surrounding its definition of fee-only, so investors using this database need to ask and be diligent in investigating advisors found here to ensure they are fee-only. The CFP® Board hosts a '<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.letsmakeaplan.org/">Find a Financial Planner</a>' tool on their website.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_58-0"><span class="heading-toc" id="toc-what-does-a-fee-only-financial-advisor-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Fee-Only Financial Advisor Cost?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A fee-only financial advisor's costs can range greatly, depending on their expertise and years of experience, their region, and the services they offer. A flat fee of $1,500 to $3,000 is typical for the original creation of a comprehensive financial plan, according to financial advisors. Timed or retainer rates can run between $150 to $400 an hour and between $1,000 to $7,500 annually.</p></div>
</div>
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<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-does-a-commission-based-financial-advisor-cost"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Commission-Based Financial Advisor Cost?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A commission-based financial advisor doesn't cost you anything—directly, that is. They get compensated by commissions from the products they sell to you or sell for you.</p><p>Typical commissions for investment products and packages range from 3-6% of the sale.<span class="ql-inline-citation" data-cite="7"></span> That sum comes out of the amount that actually gets invested, so in a sense, that commission "costs" you in terms of future returns.</p><p><br/></p><p>Insurance product commissions, which are taken out of your first-year premium payments, range from 1% to 8% on annuities. On life insurance policies, an advisor may get 40% to 90% of the first year premium as a commission and between 2% to 5% commission from the second to the fourth year.<span class="ql-inline-citation" data-cite="8"></span></p></div>
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<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-whats-the-difference-between-a-financial-planner-and-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's the Difference Between a Financial Planner and a Financial Advisor?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>There's definitely <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/040215/financial-advisor-vs-financial-planner.asp">overlap between the two</a>. A financial planner is a professional who helps individuals identify and create a system/schedule to meet long-term financial and life goals. Some just advise, and others actually find investment products.</p><p>A financial advisor can apply to those who help you plan <em>and</em> also to those who manage the money in your portfolio and investment accounts. Financial advisors can include brokers and investment managers. "Financial advisor" is a broader, more generic term. All financial planners can be considered financial advisors, but not all financial advisors are financial planners.</p></div>
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<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-how-do-i-find-a-fee-only-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Find a Fee-Only Financial Advisor?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Aside from asking around, you can zero in on a fee-only financial advisor by going to organizations that specialize in the same field. The National Association of Personal Financial Advisors (NAPFA) and The Garrett Planning Network both have searchable directories on their websites.</p><p>Other, more general advisor organizations offer a good place to start. For example, the Financial Planning Association (FPA) has a database of financial planners that you can search according to location. On their website, you can easily filter the list to highlight fee-only planners—compensation is indicated in their profiles.</p></div>
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<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_66-0"> <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_67-0"> It is important to understand that the quality of the advice you receive is not solely tied to an advisor’s compensation model. However, the kind of advice you receive may be affected by the advisor’s compensation model. Compensation arising from sales commissions on financial products could cause advisors to recommend products mandated by their employer and/or products generating the highest commissions for the advisor. These products might not always be the best fit for your situation even if they meet the standard of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/suitable.asp">suitability</a>.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Critics of fee-only argue that this sort of arrangement tends to be more expensive. Of course, fees are an up-front <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expense.asp">expense</a>—but make no mistake, the commissions paid to a financial advisor also come out of your pocket in the form of lower <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">returns on your investment</a>. Fee-only is not a perfect arrangement, but it is generally a bit more transparent and fees charged for advice are more visible. Commissions may be harder to ascertain.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Also, no advisor (or advisor group) can excel at everything. There are times when you may be better off working with an advisor who specializes in certain commission-based products such as a disability or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/healthinsurance.asp">health insurance</a>. You may also want an advisor who is most current on all investment options. However, if you want advice on retirement planning and do not necessarily need to buy a specific product, an advisor who charges fees may be the right choice.
</p></div>
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In the financial world, advisors and planners are compensated in one of two basic ways: by earning flat fees or by earning commissions. A fee-only [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) is paid a set rate for the services they provide rather than getting paid by commission on the products they sell or trade.
Should you be working with a [fee-only](https://www.investopedia.com/terms/f/feebasedinvestment.asp) financial advisor? There are many benefits to someone who is compensated solely by what they charge directly to clients and not from the [commissions](https://www.investopedia.com/terms/c/commission.asp) earned from the sale of financial products or financial [transactions](https://www.investopedia.com/terms/t/transaction.asp). However, there are drawbacks as well. Let's review.
### Key Takeaways
* Many financial advisors are shifting to a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions.
* The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering.
* The downsides of fee-only advisors can include being more expensive or a limited scope of products and services offered.
* Fee-only advisors aren't always completely free of conflicts. If they're compensated by a portion of AUM, they may be biased against you withdrawing funds.However, they may bound by fiduciary standards to always put their client’s interest first and to fully disclose any potential conflict of interest to the client.
## Fee-Only or Commission-Based?
The basic compensation models for financial advisors are as follows:
* **Charging an hourly or a flat fee** for the planning services they provide. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.
* **Charging a percentage** **based on [assets under management](https://www.investopedia.com/terms/a/aum.asp)** (AUM)—say, 1% of the investment account value. The engagement may or may not include planning and/or other advice, which is usually secondary to money management.
* **Earning commissions** based on the sale of a product or a financial transaction, such as a stock trade. Advice or planning might be ancillary to the product sale (as with a [stockbroker](https://www.investopedia.com/terms/s/stockbroker.asp)), or they might be a key part of services (as with a [financial planner](https://www.investopedia.com/terms/f/financialplanner.asp)).
* **Getting compensated through a combination** of flat fees, percentage of AUM, or commissions. The exact mix varies by the advisor. Also known as "fee-based," this model allows advisors to offer clients a wider range of services as well as work with them to implement recommendations and monitor progress.
There has been some debate as to how "fee-only" compensation should be defined—mainly, whether or not it should include the second group, those who charge based on AUM. Generally, though, most agree, fee-only refers to payment from fixed, flat, hourly, or percentage-based fees.
## Advantages of Using a Fee-Only Advisor
One of the major benefits of selecting a fee-only advisor is the freedom from the inherent [conflict of interest](https://www.investopedia.com/terms/c/conflict-of-interest.asp) that can arise when a significant portion of the advisor’s [income](https://www.investopedia.com/terms/i/income.asp) comes from selling financial products to you. The concern you should have as a potential client is whether or not the advisor is recommending a certain investment because it enhances their [bottom line](https://www.investopedia.com/terms/b/bottomline.asp) and if the products recommended are truly in your best interest.
In fact, there are some [registered reps](https://www.investopedia.com/terms/r/registeredrepresentative.asp) and others who earn all or part of their compensation via commission that may be *required* to favor products offered by their employer—which may or may not be the best investments for your portfolio strategy.
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
In addition, an advisor is usually a [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) when they charge a fee for planning services and/or they are investing money for an advisory account; as a result, they are legally required to always act in the best interest of their clients, and to disclose anything that might smack of impropriety. [Registered Investment Advisors](https://www.investopedia.com/terms/r/ria.asp) (RIAs) and [certified financial planners](https://www.investopedia.com/terms/c/cfp.asp) (CFP®s) both swear to act as fiduciaries, for example.
###
An advisor who only earns commissions—like a stockbroker—is held to a lower standard and does not have to make a "best-interest" recommendation, but rather one that is "suitable" for your needs.
Another [benefit of using fee-only financial advisors](https://www.investopedia.com/articles/personal-finance/071415/how-cut-financial-advisor-expenses.asp) is the opportunity for them to offer an objective second opinion of your situation. This is especially true if the advisor works with clients on an hourly, as-needed basis or perhaps will do a [financial plan](https://www.investopedia.com/terms/f/financial_plan.asp) or financial review for a fixed project fee. Services here can range from addressing a specific financial question to a review of your investment [portfolio](https://www.investopedia.com/terms/p/portfolio.asp) or a full-blown financial plan.
## Disadvantages of Using a Fee-Only Advisor
All of the above are great reasons to use fee-only advisors, but there are still some potential downsides to the fee-only model.
First, fee-only advisors might be more expensive. For example, let's say through the planning process, a fee-only advisor discovers a need and recommends that a client buys a commission-based product such as [disability income insurance](https://www.investopedia.com/terms/d/diinsurance.asp). If the fee-only advisor doesn’t sell the product, then the client would need to find and work with an insurance broker, adding additional steps to an already complex process.
Also, the insurance broker receives a commission from the sale of the product, so the client ends up paying both a fee and a commission (albeit to different people).
###
Some states limit an advisor's ability to charge a fee for the analysis of just insurance products or needs.
Consequently, the fee-only advisor has to either limit the services they offer or charge clients a higher fee. For wealthy individuals who are willing and able to pay a substantial retainer, a fee-only advisor could be the right choice. But, for many individuals with limited resources or whose [assets](https://www.investopedia.com/terms/a/asset.asp) are tied up in [qualified plans](https://www.investopedia.com/terms/q/qrp.asp), the [out-of-pocket costs](https://www.investopedia.com/terms/o/outofpocket.asp) for a fee-only advisor could get prohibitive.
Fee-only advisors can be expensive in another sense. Investors with smaller portfolio balances or lower transaction activity may get favorable pricing with commission-based advisors. While fee-only advisors are relatively less expensive for clients with large portfolios, different fee structures impact investors differently.
Fee-only advisors are also in the unique position of holding fiduciary responsibility over your assets, yet they do not get incrementally rewarded for your success. Whether your portfolio doubles in size or gets cut in half, a fixed-fee advisor will likely receive the same fees to manage your portfolio. As there is minimal incentive to the advisor to ensure your investment success, you may find fixed-fee advisors may not always have your best interest at heart as well.
Another issue to consider is that being fee-only does not ensure that the advisor is competent or appropriate for you. While it conjures up the image of an erudite professional, like a lawyer or an [accountant](https://www.investopedia.com/terms/a/accountant.asp), this compensation model doesn't guarantee the advisor has expertise—or that their expertise dovetails with your needs and profile.
For example, a fee-only advisor who specializes in working with teachers and government employees nearing [retirement](https://www.investopedia.com/terms/r/retirement.asp) probably would not be the best advisor for a high-earning thirtysomething professional in the [private sector](https://www.investopedia.com/terms/p/private-sector.asp).
### Fee-Only Financial Advisors
Pros
* Less chance for conflicts of interest
* More transparent pricing structure
* More objective advice
Cons
* Often more expensive/skewed to higher-income clients
* More limited in product and service offerings
* May not be totally disinterested (if you want to withdraw funds)
## How to Find a Fee-Only Advisor
The [National Association of Personal Financial Advisors](https://www.investopedia.com/terms/n/national-association-personal-financial-advisors-napfa.asp) (NAPFA) is one of the largest professional organizations of fee-only financial advisors in the country. It has a find an advisor link on its website. You can search by zip code and then further by area of [specialization](https://www.investopedia.com/terms/s/specialization.asp). Note that NAPFA members run the gamut from solo practitioners to large multi-advisor firms. Additionally, NAPFA members offer a wide range of service options, including hourly as-needed services, ongoing investment and portfolio advice, and almost everything in between.
The Garrett Planning Network is another organization of fee-only [financial planners](https://www.investopedia.com/terms/f/financialplanner.asp) who mostly focus on providing hourly advice. There is a degree of overlap in the membership of the Garrett Planning Network and NAPFA. It also has a "find an advisor" function.
The accounting profession also has a financial planning designation for [Certified Public Accountants](https://www.investopedia.com/terms/c/cpa.asp) (CPAs) called [Personal Financial Specialists](https://www.investopedia.com/terms/p/personal-financial-specialist-pfs.asp) (PFS). Please note that while many holders of the PFS designation are fee-only, they are not required to be. As you contact advisors, you will need to ask these folks how they are compensated.
The Certified Financial Planner Board also has a directory of financial advisors who hold the [CFP](https://www.investopedia.com/terms/c/cfp.asp)® [designation](https://www.investopedia.com/terms/c/cfp.asp). Again, being a CFP® does not mean the advisor is fee-only. The CFP® Board recently has revised its compensation classifications to include fee-only, fee-and-commission, and commission. There has been some controversy surrounding its definition of fee-only, so investors using this database need to ask and be diligent in investigating advisors found here to ensure they are fee-only. The CFP® Board hosts a '[Find a Financial Planner](https://www.letsmakeaplan.org/)' tool on their website.
## What Does a Fee-Only Financial Advisor Cost?
A fee-only financial advisor's costs can range greatly, depending on their expertise and years of experience, their region, and the services they offer. A flat fee of $1,500 to $3,000 is typical for the original creation of a comprehensive financial plan, according to financial advisors. Timed or retainer rates can run between $150 to $400 an hour and between $1,000 to $7,500 annually.
## What Does a Commission-Based Financial Advisor Cost?
A commission-based financial advisor doesn't cost you anything—directly, that is. They get compensated by commissions from the products they sell to you or sell for you.
Typical commissions for investment products and packages range from 3-6% of the sale. That sum comes out of the amount that actually gets invested, so in a sense, that commission "costs" you in terms of future returns.
Insurance product commissions, which are taken out of your first-year premium payments, range from 1% to 8% on annuities. On life insurance policies, an advisor may get 40% to 90% of the first year premium as a commission and between 2% to 5% commission from the second to the fourth year.
## What's the Difference Between a Financial Planner and a Financial Advisor?
There's definitely [overlap between the two](https://www.investopedia.com/articles/personal-finance/040215/financial-advisor-vs-financial-planner.asp). A financial planner is a professional who helps individuals identify and create a system/schedule to meet long-term financial and life goals. Some just advise, and others actually find investment products.
A financial advisor can apply to those who help you plan *and* also to those who manage the money in your portfolio and investment accounts. Financial advisors can include brokers and investment managers. "Financial advisor" is a broader, more generic term. All financial planners can be considered financial advisors, but not all financial advisors are financial planners.
## How Do I Find a Fee-Only Financial Advisor?
Aside from asking around, you can zero in on a fee-only financial advisor by going to organizations that specialize in the same field. The National Association of Personal Financial Advisors (NAPFA) and The Garrett Planning Network both have searchable directories on their websites.
Other, more general advisor organizations offer a good place to start. For example, the Financial Planning Association (FPA) has a database of financial planners that you can search according to location. On their website, you can easily filter the list to highlight fee-only planners—compensation is indicated in their profiles.
## The Bottom Line
It is important to understand that the quality of the advice you receive is not solely tied to an advisor’s compensation model. However, the kind of advice you receive may be affected by the advisor’s compensation model. Compensation arising from sales commissions on financial products could cause advisors to recommend products mandated by their employer and/or products generating the highest commissions for the advisor. These products might not always be the best fit for your situation even if they meet the standard of [suitability](https://www.investopedia.com/terms/s/suitable.asp).
Critics of fee-only argue that this sort of arrangement tends to be more expensive. Of course, fees are an up-front [expense](https://www.investopedia.com/terms/e/expense.asp)—but make no mistake, the commissions paid to a financial advisor also come out of your pocket in the form of lower [returns on your investment](https://www.investopedia.com/terms/r/returnoninvestment.asp). Fee-only is not a perfect arrangement, but it is generally a bit more transparent and fees charged for advice are more visible. Commissions may be harder to ascertain.
Also, no advisor (or advisor group) can excel at everything. There are times when you may be better off working with an advisor who specializes in certain commission-based products such as a disability or [health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp). You may also want an advisor who is most current on all investment options. However, if you want advice on retirement planning and do not necessarily need to buy a specific product, an advisor who charges fees may be the right choice.
|
In the financial world, advisors and planners are compensated in one of two basic ways: by earning flat fees or by earning commissions. A fee-only financial advisor is paid a set rate for the services they provide rather than getting paid by commission on the products they sell or trade.
Should you be working with a fee-only financial advisor? There are many benefits to someone who is compensated solely by what they charge directly to clients and not from the commissions earned from the sale of financial products or financial transactions. However, there are drawbacks as well. Let's review.
Key Takeaways
Many financial advisors are shifting to a fee-only compensation structure, where they receive a fee for their planning services in lieu of traditional commissions.The benefits of fee-only include transparency, no hidden charges, and no conflicts of interest to sell a certain product line or company offering.The downsides of fee-only advisors can include being more expensive or a limited scope of products and services offered.Fee-only advisors aren't always completely free of conflicts. If they're compensated by a portion of AUM, they may be biased against you withdrawing funds. However, they may bound by fiduciary standards to always put their client’s interest first and to fully disclose any potential conflict of interest to the client.
Fee-Only or Commission-Based?
The basic compensation models for financial advisors are as follows:
Charging an hourly or a flat fee for the planning services they provide. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.
Charging a percentage based on assets under management (AUM)—say, 1% of the investment account value. The engagement may or may not include planning and/or other advice, which is usually secondary to money management.
Earning commissions based on the sale of a product or a financial transaction, such as a stock trade. Advice or planning might be ancillary to the product sale (as with a stockbroker), or they might be a key part of services (as with a financial planner).
Getting compensated through a combination of flat fees, percentage of AUM, or commissions. The exact mix varies by the advisor. Also known as "fee-based," this model allows advisors to offer clients a wider range of services as well as work with them to implement recommendations and monitor progress.
There has been some debate as to how "fee-only" compensation should be defined—mainly, whether or not it should include the second group, those who charge based on AUM. Generally, though, most agree, fee-only refers to payment from fixed, flat, hourly, or percentage-based fees.
Advantages of Using a Fee-Only Advisor
One of the major benefits of selecting a fee-only advisor is the freedom from the inherent conflict of interest that can arise when a significant portion of the advisor’s income comes from selling financial products to you. The concern you should have as a potential client is whether or not the advisor is recommending a certain investment because it enhances their bottom line and if the products recommended are truly in your best interest.
In fact, there are some registered reps and others who earn all or part of their compensation via commission that may be required to favor products offered by their employer—which may or may not be the best investments for your portfolio strategy.
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
In addition, an advisor is usually a fiduciary when they charge a fee for planning services and/or they are investing money for an advisory account; as a result, they are legally required to always act in the best interest of their clients, and to disclose anything that might smack of impropriety. Registered Investment Advisors (RIAs) and certified financial planners (CFP®s) both swear to act as fiduciaries, for example.
An advisor who only earns commissions—like a stockbroker—is held to a lower standard and does not have to make a "best-interest" recommendation, but rather one that is "suitable" for your needs.
Another benefit of using fee-only financial advisors is the opportunity for them to offer an objective second opinion of your situation. This is especially true if the advisor works with clients on an hourly, as-needed basis or perhaps will do a financial plan or financial review for a fixed project fee. Services here can range from addressing a specific financial question to a review of your investment portfolio or a full-blown financial plan.
Disadvantages of Using a Fee-Only Advisor
All of the above are great reasons to use fee-only advisors, but there are still some potential downsides to the fee-only model.
First, fee-only advisors might be more expensive. For example, let's say through the planning process, a fee-only advisor discovers a need and recommends that a client buys a commission-based product such as disability income insurance. If the fee-only advisor doesn’t sell the product, then the client would need to find and work with an insurance broker, adding additional steps to an already complex process.
Also, the insurance broker receives a commission from the sale of the product, so the client ends up paying both a fee and a commission (albeit to different people).
Some states limit an advisor's ability to charge a fee for the analysis of just insurance products or needs.
Consequently, the fee-only advisor has to either limit the services they offer or charge clients a higher fee. For wealthy individuals who are willing and able to pay a substantial retainer, a fee-only advisor could be the right choice. But, for many individuals with limited resources or whose assets are tied up in qualified plans, the out-of-pocket costs for a fee-only advisor could get prohibitive.
Fee-only advisors can be expensive in another sense. Investors with smaller portfolio balances or lower transaction activity may get favorable pricing with commission-based advisors. While fee-only advisors are relatively less expensive for clients with large portfolios, different fee structures impact investors differently.
Fee-only advisors are also in the unique position of holding fiduciary responsibility over your assets, yet they do not get incrementally rewarded for your success. Whether your portfolio doubles in size or gets cut in half, a fixed-fee advisor will likely receive the same fees to manage your portfolio. As there is minimal incentive to the advisor to ensure your investment success, you may find fixed-fee advisors may not always have your best interest at heart as well.
Another issue to consider is that being fee-only does not ensure that the advisor is competent or appropriate for you. While it conjures up the image of an erudite professional, like a lawyer or an accountant, this compensation model doesn't guarantee the advisor has expertise—or that their expertise dovetails with your needs and profile.
For example, a fee-only advisor who specializes in working with teachers and government employees nearing retirement probably would not be the best advisor for a high-earning thirtysomething professional in the private sector.
Fee-Only Financial Advisors
Pros
Less chance for conflicts of interest
More transparent pricing structure
More objective advice
Cons
Often more expensive/skewed to higher-income clients
More limited in product and service offerings
May not be totally disinterested (if you want to withdraw funds)
How to Find a Fee-Only Advisor
The National Association of Personal Financial Advisors (NAPFA) is one of the largest professional organizations of fee-only financial advisors in the country. It has a find an advisor link on its website. You can search by zip code and then further by area of specialization. Note that NAPFA members run the gamut from solo practitioners to large multi-advisor firms. Additionally, NAPFA members offer a wide range of service options, including hourly as-needed services, ongoing investment and portfolio advice, and almost everything in between.
The Garrett Planning Network is another organization of fee-only financial planners who mostly focus on providing hourly advice. There is a degree of overlap in the membership of the Garrett Planning Network and NAPFA. It also has a "find an advisor" function.
The accounting profession also has a financial planning designation for Certified Public Accountants (CPAs) called Personal Financial Specialists (PFS). Please note that while many holders of the PFS designation are fee-only, they are not required to be. As you contact advisors, you will need to ask these folks how they are compensated.
The Certified Financial Planner Board also has a directory of financial advisors who hold the CFP® designation. Again, being a CFP® does not mean the advisor is fee-only. The CFP® Board recently has revised its compensation classifications to include fee-only, fee-and-commission, and commission. There has been some controversy surrounding its definition of fee-only, so investors using this database need to ask and be diligent in investigating advisors found here to ensure they are fee-only. The CFP® Board hosts a 'Find a Financial Planner' tool on their website.
What Does a Fee-Only Financial Advisor Cost?
A fee-only financial advisor's costs can range greatly, depending on their expertise and years of experience, their region, and the services they offer. A flat fee of $1,500 to $3,000 is typical for the original creation of a comprehensive financial plan, according to financial advisors. Timed or retainer rates can run between $150 to $400 an hour and between $1,000 to $7,500 annually.
What Does a Commission-Based Financial Advisor Cost?
A commission-based financial advisor doesn't cost you anything—directly, that is. They get compensated by commissions from the products they sell to you or sell for you.Typical commissions for investment products and packages range from 3-6% of the sale. That sum comes out of the amount that actually gets invested, so in a sense, that commission "costs" you in terms of future returns.Insurance product commissions, which are taken out of your first-year premium payments, range from 1% to 8% on annuities. On life insurance policies, an advisor may get 40% to 90% of the first year premium as a commission and between 2% to 5% commission from the second to the fourth year.
What's the Difference Between a Financial Planner and a Financial Advisor?
There's definitely overlap between the two. A financial planner is a professional who helps individuals identify and create a system/schedule to meet long-term financial and life goals. Some just advise, and others actually find investment products.A financial advisor can apply to those who help you plan and also to those who manage the money in your portfolio and investment accounts. Financial advisors can include brokers and investment managers. "Financial advisor" is a broader, more generic term. All financial planners can be considered financial advisors, but not all financial advisors are financial planners.
How Do I Find a Fee-Only Financial Advisor?
Aside from asking around, you can zero in on a fee-only financial advisor by going to organizations that specialize in the same field. The National Association of Personal Financial Advisors (NAPFA) and The Garrett Planning Network both have searchable directories on their websites.Other, more general advisor organizations offer a good place to start. For example, the Financial Planning Association (FPA) has a database of financial planners that you can search according to location. On their website, you can easily filter the list to highlight fee-only planners—compensation is indicated in their profiles.
The Bottom Line
It is important to understand that the quality of the advice you receive is not solely tied to an advisor’s compensation model. However, the kind of advice you receive may be affected by the advisor’s compensation model. Compensation arising from sales commissions on financial products could cause advisors to recommend products mandated by their employer and/or products generating the highest commissions for the advisor. These products might not always be the best fit for your situation even if they meet the standard of suitability.
Critics of fee-only argue that this sort of arrangement tends to be more expensive. Of course, fees are an up-front expense—but make no mistake, the commissions paid to a financial advisor also come out of your pocket in the form of lower returns on your investment. Fee-only is not a perfect arrangement, but it is generally a bit more transparent and fees charged for advice are more visible. Commissions may be harder to ascertain.
Also, no advisor (or advisor group) can excel at everything. There are times when you may be better off working with an advisor who specializes in certain commission-based products such as a disability or health insurance. You may also want an advisor who is most current on all investment options. However, if you want advice on retirement planning and do not necessarily need to buy a specific product, an advisor who charges fees may be the right choice.
|
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https://www.investopedia.com/mid-cap-investing-strategies-5225553
|
Mid-Cap Investing Strategies
|
<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 investing, there are countless <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentstrategy.asp">strategies</a> and styles aimed at trying to maximize profit amid an acceptable level of risk. Given the diversity of the markets, it is as common to find an investor who is looking to buy shares of individual companies that meet specific metrics as it is to find another who wants to reduce company-specific risk and buy into funds that track broad <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sectors</a> or markets.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> One segment of the market that is well poised to capture the attention of all types of investors is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/midcapstock.asp">mid-caps</a>, which are those companies in the market that have a <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> between $2 billion and $10 billion. In this article, we'll look at several common investing strategies that are utilized by investors seeking to gain exposure to mid-cap companies.
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<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>
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<li>Passive buy-and-hold strategies are employed by investors interested in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-companies-in-mid-cap-etfs-5225505">mid-cap companies</a> mainly through the use of exchange-traded funds (ETFs).</li>
<li>Identifying growth and value stocks within the mid-cap segment is among the popular investment strategies, and these stocks are the focus of many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/largest-mid-cap-etfs-5225571">mid-cap ETFs</a>.</li>
<li>Investors can create custom investment strategies by combining any qualitative or quantitative factor that is of particular interest.</li>
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<span class="heading-toc" id="toc-mid-cap-market-segment"></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"> Mid-Cap Market Segment </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The mid-cap segment is considered by many investors to be the "sweet spot" of the market. Mid-cap companies are medium-sized businesses and are found in the middle of the business cycle, which means they no longer carry the same amount of <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">survival risk</a> they did when they were smaller. Though mid-cap companies aren't as well established as the household names that comprise the large-cap segment, most companies that trade within this group are well-positioned for the future.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The mid-cap segment tends to be relatively underfollowed by both retail and institutional investors despite strong levels of relative performance. According to S&P Dow Jones Indices, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp-midcap-400-index.asp">S&P MidCap 400</a> has beaten the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp600.asp">S&P SmallCap 600</a> by an annualized rate of 2.03% and 0.92%, respectively, between December 1994 and May 2019.<span class="ql-inline-citation" data-cite="2"></span> This type of strong relative performance could suggest that <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passiveinvesting.asp">passive investors</a> may be interested in gaining broad exposure to the entire mid-cap segment.
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<span class="heading-toc" id="toc-mid-cap-etfs"></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"> Mid-Cap ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Many investors use a passive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyandhold.asp">buy-and-hold</a> strategy to gain broad exposure to the mid-cap segment. This type of strategy is best carried out using <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</a> (ETFs) such as a blended mid-cap ETF that carries low fees and is designed to track a well-known mid-cap <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> such as the S&P 400, CRSP U.S. Mid Cap Index, or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_midcap_index.asp">Russell MidCap Index</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> With most ETFs that target a certain market segment, there are slight differences between the funds based on the composition of the underlying constituents, which is something worth considering before you invest. Some common mid-cap focused ETFs based on total net assets are the iShares Core S&P Mid-Cap ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ijh">IJH</a>), Vanguard Mid-Cap ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vo">VO</a>), iShares Russell Mid-Cap ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwr">IWR</a>), and SPDR S&P MIDCAP 400 ETF Trust (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdy">MDY</a>).
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<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">Tip</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyandhold.asp">Buy-and-hold</a> investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer <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 taxes</a>.<span class="ql-inline-citation" data-cite="3"></span><br/></p></div></div></div>
<span class="heading-toc" id="toc-mid-cap-value-stocks-and-etfs"></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"> Mid-Cap Value Stocks and ETFs </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/v/valueinvesting.asp">Value investors</a> are on the lookout for companies that have share prices that are trading for less than their intrinsic value. Put more simply, this means that value investors try to identify companies that have share prices that are cheap or on sale relative to what the investor believes the true value ought to be. To determine when a stock is on sale, value investors often turn to financial metrics such as <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</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-to-earnings</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/freecashflow.asp">free cash flow</a>, and a variety of others. In essence, value investors utilize all public information and any research-driven insight to determine what they view as a fair price. If the market price is less than the investor's researched price, then the stock becomes a candidate for investment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Of course, investors can build a portfolio of value stocks based on their research, but many retail investors lack the time, skill, or interest required to conduct the necessary research that is essential to long-term success. Investors who want to apply a value-investing approach to the mid-cap segment will be interested to know that there is a wide variety of ETFs to choose from. Some examples include the Vanguard Mid-Cap Value ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=voe">VOE</a>), iShares Russell Mid-Cap Value ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=iws">IWS</a>), iShares S&P Mid-Cap 400 Value ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ijj">IJJ</a>), and SPDR S&P 400 Mid-Cap Value ETF (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdyv">MDYV</a>).
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<span class="heading-toc" id="toc-mid-cap-growth-stocks-and-etfs"></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"> Mid-Cap Growth Stocks and ETFs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Another type of investment strategy that is commonly applied to the mid-cap segment is focused on investing in companies that are expected to increase their earnings at an above-average rate compared to the rest of the sector or market. Strong and consistent earnings growth suggests that a mid-cap company could be on its way to becoming a large-cap and that the investor could be into their position early enough to make a substantial profit. <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> anticipate that share prices of the companies they've identified could soon demand a higher premium based on increasing earnings when recognized by the broader market.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Investors who are interested in exposure to mid-cap growth companies may want to consider one of the growth-oriented mid-cap ETFs. Some examples to consider include the Vanguard Mid-Cap Growth ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=vot">VOT</a>), SPDR S&P 400 Growth ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdyg">MDYG</a>), and iShares Morningstar Mid-Cap Growth ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=imcg">IMCG</a>).
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<span class="heading-toc" id="toc-targeted-or-custom-investing-strategies"></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"> Targeted or Custom Investing Strategies </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> As mentioned earlier, there are countless strategies when it comes to investing in mid-caps. The root of why there can be so many different strategies comes from the fact that potential investment candidates can be identified by filtering based on myriad qualitative or quantitative factors.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Qualitative factors are those that are difficult to identify numerically or by using traditional screening techniques because the factors of interest are intangible by nature. Some examples of qualitative factors include the type of corporate culture, management experience, and product quality.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Quantitative factors are those that have associated data points, which can then be compared about the same data points from other companies within the sector or the broader market. Quantitative factors include the data points and derived ratios or indicators that come from sources such as corporate financial statements, historical stock prices, or industry reports. Some examples of quantitative factors include <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</a> (EPS), spending on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/randd.asp">research and development</a> (R&D), <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtequityratio.asp">debt-to-equity (D/E) ratio</a>, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/net_margin.asp">net profit margin</a>.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Investors can mix any number of qualitative and quantitative factors when it comes to building out their custom strategies.
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<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-metrics-can-help-identify-value-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Metrics Can Help Identify Value Stocks?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Value investing is a strategy for identifying undervalued stocks based on fundamental analysis. Some common metrics value investors use include a price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-to-equity ratio (D/E), free cash flow (FCF), and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pegratio.asp">price/earnings-to-growth ratio</a> (PEG).<br/></p></div>
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<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-are-etfs-risky-to-use-as-part-of-an-investment-strategy"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are ETFs Risky to Use As Part of an Investment Strategy?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>All investment strategies carry a certain element of risk. ETFs, like <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>, are often lauded for the diversification they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to risk and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatility</a>. The potential for large swings will mainly depend on the scope of the fund. As investors, it is important to know what benchmark an ETF is designed to track, what types of companies are held within the fund, and whether the ETF lacks <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> or utilizes <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a>.</p></div>
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<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-an-example-of-a-growth-stock"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of a Growth Stock?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As a hypothetical example, a growth stock could be a mid-cap tech company that has recently started a new division to focus on the development of a new virtual reality app. Let's assume that the company has aspirations of expanding into international markets. Currently, the product is only available in the United States and has been adding new users at blinding speed. Earnings and revenue have been growing at a high rate over the past couple of years. If the app is well received in the new markets, it could mean huge profits and capital gains for investors.</p></div>
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<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"> Investors who are interested in gaining exposure to mid-cap companies can utilize a host of different types of strategies. Investors who want to take a passive approach and capture returns that closely match an underlying benchmark such as the S&P 400 may be interested in adding a position in a blended mid-cap ETF.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Other investors may be interested in identifying candidates that exhibit certain value or growth characteristics. More specifically, those that are drawn to more common value and growth strategies may be interested in one of the many available strategy-specific funds that target the mid-cap segment.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Lastly, more adventurous investors may want to consider building out their strategies by identifying qualitative or quantitative factors that resonate and then combining them in a way that meets their investment goals.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> <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>
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When it comes to investing, there are countless [strategies](https://www.investopedia.com/terms/i/investmentstrategy.asp) and styles aimed at trying to maximize profit amid an acceptable level of risk. Given the diversity of the markets, it is as common to find an investor who is looking to buy shares of individual companies that meet specific metrics as it is to find another who wants to reduce company-specific risk and buy into funds that track broad [sectors](https://www.investopedia.com/terms/s/sector.asp) or markets.
One segment of the market that is well poised to capture the attention of all types of investors is known as the [mid-caps](https://www.investopedia.com/terms/m/midcapstock.asp), which are those companies in the market that have a [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) between $2 billion and $10 billion. In this article, we'll look at several common investing strategies that are utilized by investors seeking to gain exposure to mid-cap companies.
### Key Takeaways
* Passive buy-and-hold strategies are employed by investors interested in [mid-cap companies](https://www.investopedia.com/top-companies-in-mid-cap-etfs-5225505) mainly through the use of exchange-traded funds (ETFs).
* Identifying growth and value stocks within the mid-cap segment is among the popular investment strategies, and these stocks are the focus of many [mid-cap ETFs](https://www.investopedia.com/largest-mid-cap-etfs-5225571).
* Investors can create custom investment strategies by combining any qualitative or quantitative factor that is of particular interest.
## Mid-Cap Market Segment
The mid-cap segment is considered by many investors to be the "sweet spot" of the market. Mid-cap companies are medium-sized businesses and are found in the middle of the business cycle, which means they no longer carry the same amount of [survival risk](https://www.investopedia.com/how-do-mid-caps-perform-during-bear-markets-5224694) they did when they were smaller. Though mid-cap companies aren't as well established as the household names that comprise the large-cap segment, most companies that trade within this group are well-positioned for the future.
The mid-cap segment tends to be relatively underfollowed by both retail and institutional investors despite strong levels of relative performance. According to S&P Dow Jones Indices, the [S&P MidCap 400](https://www.investopedia.com/terms/s/sp-midcap-400-index.asp) has beaten the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) and the [S&P SmallCap 600](https://www.investopedia.com/terms/s/sp600.asp) by an annualized rate of 2.03% and 0.92%, respectively, between December 1994 and May 2019. This type of strong relative performance could suggest that [passive investors](https://www.investopedia.com/terms/p/passiveinvesting.asp) may be interested in gaining broad exposure to the entire mid-cap segment.
## Mid-Cap ETFs
Many investors use a passive [buy-and-hold](https://www.investopedia.com/terms/b/buyandhold.asp) strategy to gain broad exposure to the mid-cap segment. This type of strategy is best carried out using [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) such as a blended mid-cap ETF that carries low fees and is designed to track a well-known mid-cap [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) such as the S&P 400, CRSP U.S. Mid Cap Index, or [Russell MidCap Index](https://www.investopedia.com/terms/r/russell_midcap_index.asp).
With most ETFs that target a certain market segment, there are slight differences between the funds based on the composition of the underlying constituents, which is something worth considering before you invest. Some common mid-cap focused ETFs based on total net assets are the iShares Core S&P Mid-Cap ETF ([IJH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ijh)), Vanguard Mid-Cap ETF ([VO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vo)), iShares Russell Mid-Cap ETF ([IWR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iwr)), and SPDR S&P MIDCAP 400 ETF Trust ([MDY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdy)).
### Tip
[Buy-and-hold](https://www.investopedia.com/terms/b/buyandhold.asp) investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer [capital gains taxes](https://www.investopedia.com/terms/c/capital_gains_tax.asp).
## Mid-Cap Value Stocks and ETFs
[Value investors](https://www.investopedia.com/terms/v/valueinvesting.asp) are on the lookout for companies that have share prices that are trading for less than their intrinsic value. Put more simply, this means that value investors try to identify companies that have share prices that are cheap or on sale relative to what the investor believes the true value ought to be. To determine when a stock is on sale, value investors often turn to financial metrics such as [price-to-book](https://www.investopedia.com/terms/p/price-to-bookratio.asp), [price-to-earnings](https://www.investopedia.com/terms/p/price-earningsratio.asp), [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp), and a variety of others. In essence, value investors utilize all public information and any research-driven insight to determine what they view as a fair price. If the market price is less than the investor's researched price, then the stock becomes a candidate for investment.
Of course, investors can build a portfolio of value stocks based on their research, but many retail investors lack the time, skill, or interest required to conduct the necessary research that is essential to long-term success. Investors who want to apply a value-investing approach to the mid-cap segment will be interested to know that there is a wide variety of ETFs to choose from. Some examples include the Vanguard Mid-Cap Value ETF ([VOE](https://www.investopedia.com/markets/quote?tvwidgetsymbol=voe)), iShares Russell Mid-Cap Value ETF ([IWS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=iws)), iShares S&P Mid-Cap 400 Value ETF ([IJJ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ijj)), and SPDR S&P 400 Mid-Cap Value ETF ([MDYV](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdyv)).
## Mid-Cap Growth Stocks and ETFs
Another type of investment strategy that is commonly applied to the mid-cap segment is focused on investing in companies that are expected to increase their earnings at an above-average rate compared to the rest of the sector or market. Strong and consistent earnings growth suggests that a mid-cap company could be on its way to becoming a large-cap and that the investor could be into their position early enough to make a substantial profit. [Growth investors](https://www.investopedia.com/terms/g/growthinvesting.asp) anticipate that share prices of the companies they've identified could soon demand a higher premium based on increasing earnings when recognized by the broader market.
Investors who are interested in exposure to mid-cap growth companies may want to consider one of the growth-oriented mid-cap ETFs. Some examples to consider include the Vanguard Mid-Cap Growth ETF ([VOT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=vot)), SPDR S&P 400 Growth ETF ([MDYG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=mdyg)), and iShares Morningstar Mid-Cap Growth ETF ([IMCG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=imcg)).
## Targeted or Custom Investing Strategies
As mentioned earlier, there are countless strategies when it comes to investing in mid-caps. The root of why there can be so many different strategies comes from the fact that potential investment candidates can be identified by filtering based on myriad qualitative or quantitative factors.
Qualitative factors are those that are difficult to identify numerically or by using traditional screening techniques because the factors of interest are intangible by nature. Some examples of qualitative factors include the type of corporate culture, management experience, and product quality.
Quantitative factors are those that have associated data points, which can then be compared about the same data points from other companies within the sector or the broader market. Quantitative factors include the data points and derived ratios or indicators that come from sources such as corporate financial statements, historical stock prices, or industry reports. Some examples of quantitative factors include [earnings per share](https://www.investopedia.com/terms/e/eps.asp) (EPS), spending on [research and development](https://www.investopedia.com/terms/r/randd.asp) (R&D), [debt-to-equity (D/E) ratio](https://www.investopedia.com/terms/d/debtequityratio.asp), and [net profit margin](https://www.investopedia.com/terms/n/net_margin.asp).
Investors can mix any number of qualitative and quantitative factors when it comes to building out their custom strategies.
## What Metrics Can Help Identify Value Stocks?
Value investing is a strategy for identifying undervalued stocks based on fundamental analysis. Some common metrics value investors use include a price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-to-equity ratio (D/E), free cash flow (FCF), and [price/earnings-to-growth ratio](https://www.investopedia.com/terms/p/pegratio.asp) (PEG).
## Are ETFs Risky to Use As Part of an Investment Strategy?
All investment strategies carry a certain element of risk. ETFs, like [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), are often lauded for the diversification they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to risk and [volatility](https://www.investopedia.com/terms/v/volatility.asp). The potential for large swings will mainly depend on the scope of the fund. As investors, it is important to know what benchmark an ETF is designed to track, what types of companies are held within the fund, and whether the ETF lacks [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) or utilizes [leverage](https://www.investopedia.com/terms/l/leverage.asp).
## What Is an Example of a Growth Stock?
As a hypothetical example, a growth stock could be a mid-cap tech company that has recently started a new division to focus on the development of a new virtual reality app. Let's assume that the company has aspirations of expanding into international markets. Currently, the product is only available in the United States and has been adding new users at blinding speed. Earnings and revenue have been growing at a high rate over the past couple of years. If the app is well received in the new markets, it could mean huge profits and capital gains for investors.
## The Bottom Line
Investors who are interested in gaining exposure to mid-cap companies can utilize a host of different types of strategies. Investors who want to take a passive approach and capture returns that closely match an underlying benchmark such as the S&P 400 may be interested in adding a position in a blended mid-cap ETF.
Other investors may be interested in identifying candidates that exhibit certain value or growth characteristics. More specifically, those that are drawn to more common value and growth strategies may be interested in one of the many available strategy-specific funds that target the mid-cap segment.
Lastly, more adventurous investors may want to consider building out their strategies by identifying qualitative or quantitative factors that resonate and then combining them in a way that meets their investment goals.
*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.*
|
When it comes to investing, there are countless strategies and styles aimed at trying to maximize profit amid an acceptable level of risk. Given the diversity of the markets, it is as common to find an investor who is looking to buy shares of individual companies that meet specific metrics as it is to find another who wants to reduce company-specific risk and buy into funds that track broad sectors or markets.
One segment of the market that is well poised to capture the attention of all types of investors is known as the mid-caps, which are those companies in the market that have a market capitalization between $2 billion and $10 billion. In this article, we'll look at several common investing strategies that are utilized by investors seeking to gain exposure to mid-cap companies.
Key Takeaways
Passive buy-and-hold strategies are employed by investors interested in mid-cap companies mainly through the use of exchange-traded funds (ETFs).
Identifying growth and value stocks within the mid-cap segment is among the popular investment strategies, and these stocks are the focus of many mid-cap ETFs.
Investors can create custom investment strategies by combining any qualitative or quantitative factor that is of particular interest.
Mid-Cap Market Segment
The mid-cap segment is considered by many investors to be the "sweet spot" of the market. Mid-cap companies are medium-sized businesses and are found in the middle of the business cycle, which means they no longer carry the same amount of survival risk they did when they were smaller. Though mid-cap companies aren't as well established as the household names that comprise the large-cap segment, most companies that trade within this group are well-positioned for the future.
The mid-cap segment tends to be relatively underfollowed by both retail and institutional investors despite strong levels of relative performance. According to S&P Dow Jones Indices, the S&P MidCap 400 has beaten the S&P 500 and the S&P SmallCap 600 by an annualized rate of 2.03% and 0.92%, respectively, between December 1994 and May 2019. This type of strong relative performance could suggest that passive investors may be interested in gaining broad exposure to the entire mid-cap segment.
Mid-Cap ETFs
Many investors use a passive buy-and-hold strategy to gain broad exposure to the mid-cap segment. This type of strategy is best carried out using exchange-traded funds (ETFs) such as a blended mid-cap ETF that carries low fees and is designed to track a well-known mid-cap benchmark such as the S&P 400, CRSP U.S. Mid Cap Index, or Russell MidCap Index.
With most ETFs that target a certain market segment, there are slight differences between the funds based on the composition of the underlying constituents, which is something worth considering before you invest. Some common mid-cap focused ETFs based on total net assets are the iShares Core S&P Mid-Cap ETF (IJH), Vanguard Mid-Cap ETF (VO), iShares Russell Mid-Cap ETF (IWR), and SPDR S&P MIDCAP 400 ETF Trust (MDY).
Tip
Buy-and-hold investors tend to outperform active management, on average, over longer time horizons and after fees, and they can typically defer capital gains taxes.
Mid-Cap Value Stocks and ETFs
Value investors are on the lookout for companies that have share prices that are trading for less than their intrinsic value. Put more simply, this means that value investors try to identify companies that have share prices that are cheap or on sale relative to what the investor believes the true value ought to be. To determine when a stock is on sale, value investors often turn to financial metrics such as price-to-book, price-to-earnings, free cash flow, and a variety of others. In essence, value investors utilize all public information and any research-driven insight to determine what they view as a fair price. If the market price is less than the investor's researched price, then the stock becomes a candidate for investment.
Of course, investors can build a portfolio of value stocks based on their research, but many retail investors lack the time, skill, or interest required to conduct the necessary research that is essential to long-term success. Investors who want to apply a value-investing approach to the mid-cap segment will be interested to know that there is a wide variety of ETFs to choose from. Some examples include the Vanguard Mid-Cap Value ETF (VOE), iShares Russell Mid-Cap Value ETF (IWS), iShares S&P Mid-Cap 400 Value ETF (IJJ), and SPDR S&P 400 Mid-Cap Value ETF (MDYV).
Mid-Cap Growth Stocks and ETFs
Another type of investment strategy that is commonly applied to the mid-cap segment is focused on investing in companies that are expected to increase their earnings at an above-average rate compared to the rest of the sector or market. Strong and consistent earnings growth suggests that a mid-cap company could be on its way to becoming a large-cap and that the investor could be into their position early enough to make a substantial profit. Growth investors anticipate that share prices of the companies they've identified could soon demand a higher premium based on increasing earnings when recognized by the broader market.
Investors who are interested in exposure to mid-cap growth companies may want to consider one of the growth-oriented mid-cap ETFs. Some examples to consider include the Vanguard Mid-Cap Growth ETF (VOT), SPDR S&P 400 Growth ETF (MDYG), and iShares Morningstar Mid-Cap Growth ETF (IMCG).
Targeted or Custom Investing Strategies
As mentioned earlier, there are countless strategies when it comes to investing in mid-caps. The root of why there can be so many different strategies comes from the fact that potential investment candidates can be identified by filtering based on myriad qualitative or quantitative factors.
Qualitative factors are those that are difficult to identify numerically or by using traditional screening techniques because the factors of interest are intangible by nature. Some examples of qualitative factors include the type of corporate culture, management experience, and product quality.
Quantitative factors are those that have associated data points, which can then be compared about the same data points from other companies within the sector or the broader market. Quantitative factors include the data points and derived ratios or indicators that come from sources such as corporate financial statements, historical stock prices, or industry reports. Some examples of quantitative factors include earnings per share (EPS), spending on research and development (R&D), debt-to-equity (D/E) ratio, and net profit margin.
Investors can mix any number of qualitative and quantitative factors when it comes to building out their custom strategies.
What Metrics Can Help Identify Value Stocks?
Value investing is a strategy for identifying undervalued stocks based on fundamental analysis. Some common metrics value investors use include a price-to-earnings ratio (P/E), price-to-book ratio (P/B), debt-to-equity ratio (D/E), free cash flow (FCF), and price/earnings-to-growth ratio (PEG).
Are ETFs Risky to Use As Part of an Investment Strategy?
All investment strategies carry a certain element of risk. ETFs, like mutual funds, are often lauded for the diversification they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to risk and volatility. The potential for large swings will mainly depend on the scope of the fund. As investors, it is important to know what benchmark an ETF is designed to track, what types of companies are held within the fund, and whether the ETF lacks liquidity or utilizes leverage.
What Is an Example of a Growth Stock?
As a hypothetical example, a growth stock could be a mid-cap tech company that has recently started a new division to focus on the development of a new virtual reality app. Let's assume that the company has aspirations of expanding into international markets. Currently, the product is only available in the United States and has been adding new users at blinding speed. Earnings and revenue have been growing at a high rate over the past couple of years. If the app is well received in the new markets, it could mean huge profits and capital gains for investors.
The Bottom Line
Investors who are interested in gaining exposure to mid-cap companies can utilize a host of different types of strategies. Investors who want to take a passive approach and capture returns that closely match an underlying benchmark such as the S&P 400 may be interested in adding a position in a blended mid-cap ETF.
Other investors may be interested in identifying candidates that exhibit certain value or growth characteristics. More specifically, those that are drawn to more common value and growth strategies may be interested in one of the many available strategy-specific funds that target the mid-cap segment.
Lastly, more adventurous investors may want to consider building out their strategies by identifying qualitative or quantitative factors that resonate and then combining them in a way that meets their investment goals.
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.
|
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https://www.investopedia.com/when-personal-loans-bad-idea-7565533
|
When Are Personal Loans a Bad Idea?
|
<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/best-personal-loans-4773300">Personal loans</a> offer flexible funding to take care of emergencies and reach other financial goals. However, taking out a personal loan isn’t always a good idea.
</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"> Here’s what you need to know before you take out a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-5076027">personal loan</a>.<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>Personal loans aren’t usually designed for education or business costs.</li><li>Consider reviewing your budget if you’re trying to use a personal loan for basic living expenses.</li><li>The interest rate on a personal loan can be higher than your potential annualized investment return.</li></ul></div></div></div>
<span class="heading-toc" id="toc-things-that-you-shouldnt-use-a-personal-loan-for"></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"> Things That You Shouldn’t Use a Personal Loan for </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Thanks to their flexibility, you can take out a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-reasons-personal-loan-7508655">personal loan to fund a wide variety of purposes</a>, including financial emergencies, medical bills, and large purchases. However, there are a few items that personal loans shouldn’t be used for.
</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"> Even if you could use a loan for the following purposes without getting in trouble, there still might be better alternatives to taking out a personal loan. Here are some things to think about before you move forward with a personal loan application.
</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"> College Tuition </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Many lenders make it clear that you shouldn’t use a personal loan to fund a college education.<span class="ql-inline-citation" data-cite="1"></span> Additionally, a lender might not offer a high-enough amount to cover the cost of your tuition.
</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"> Consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp">federal and private student loans</a> rather than trying to use a personal loan to pay college costs. Student loan <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a> might be lower, and getting approved for an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/education-loan.asp">education loan</a> (especially a federal loan) might be easier than getting a personal loan.<span class="ql-inline-citation" data-cite="2"></span> Carefully weigh your college funding options, including <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/understanding-scholarships-need-and-merit-4783132">scholarships</a> and grants, before you turn to taking out debt.
</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"> Home Down Payment </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In general, you’re not supposed to use a loan to make a <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> on your home. Many <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders</a> review where your down payment money is coming from and might not approve your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage-application.asp">mortgage application</a> if you borrow money as part of the transaction.
</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"> Instead of trying to secure a down payment with a personal loan, you can apply for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110515/5-unusual-ways-come-home-down-payment.asp">down payment assistance programs</a>. Also, consider getting a family member or a monetary gift to help fund your down payment.
</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"> Business Expenses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> As the name suggests, personal loans are supposed to be used for personal purposes. In many cases, if you plan to use the money to start or expand a business, you might not be able to get approved for a personal loan. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lender</a> might even require you to affirm that you won’t use the money for business costs before they approve your application.
</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"> Instead of trying to get a loan for business costs, consider looking into a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-small-business-loans-5079093">small business loan</a>. You might be able to get a better deal—and you might be eligible for a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/business-interest-expense.asp">tax deduction on the interest you pay for a business loan</a>.
</p>
<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"> Investing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Some lenders specify in the loan documentation that you shouldn’t use the proceeds from the loan to invest. Besides, a personal loan might not be the best way to get the money needed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp">if you want to invest</a>. Personal loans often have higher interest rates than many investors see in annualized returns. As a result, you run the risk of paying more in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> than you gain from successful investment decisions.
</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"> Basic Living Expenses </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Finally, it might not be a good idea to use a personal loan for your basic living expenses. In general, basic living expenses like groceries, rent (or mortgage) payments, utilities, insurance payments, and clothing should be paid for with budgeted funds.
</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"> If you find yourself regularly in a cash crunch and you’re thinking about getting a personal loan to get out of it, you might need to consider a new <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/112116/four-easy-budgeting-techniques-you-should-master.asp">budgeting</a> approach. Whenever possible, it’s better to cover basic living expenses with your regular income rather than taking on debt.
</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"> Other Items That You Shouldn’t Use a Personal Loan for </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Most lenders specify that you can’t use your personal loan money for gambling. The possibility that you could <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gamblingloss.asp">lose the money by gambling</a> presents a risk to the lender.
</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"> It hopefully goes without saying, but you also shouldn’t use a personal loan for illegal purposes. Loan documentation often addresses the issue of illegal activities, and the lender won’t provide you with funds if you won’t agree to use the money strictly for purposes that are in line with the law.
</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-what-you-can-use-a-personal-loan-for"></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"> What You Can Use a Personal Loan for </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> As previously mentioned, personal loans can be used for a variety of purposes, including:
</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>Medical bills</li><li>Replacing broken appliances</li><li>Car repairs</li><li>Vacation</li><li>Major life events, like a wedding</li><li>Home improvements</li><li>Large purchases</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"> Even though you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-use-personal-loan-7562541">use a personal loan</a> for many of these items, it might make more sense to plan ahead if you’re able. For example, if you have the ability, you could build an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a> that you can use for medical bills or car repairs. And rather than paying for a vacation, wedding, or large purchases by using a personal loan, you could create a savings plan and build a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nestegg.asp">nest egg</a> over 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"> Carefully consider your overall financial situation and goals before you decide to go into debt using a personal loan.
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_49-0"><span class="heading-toc" id="toc-can-you-use-a-personal-loan-for-groceries"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Use a Personal Loan for Groceries?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While a lender might not know (or care) if you use a personal loan to pay for groceries, it still might not be the best use of those funds. Before getting a loan for basic living expenses like groceries, check to see if you can access a food pantry or some other way to get emergency food.</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-can-you-use-a-personal-loan-to-pay-off-another-personal-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Use a Personal Loan to Pay Off Another Personal Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, it’s possible to use a personal loan to pay off another personal loan. Depending on the situation, if you can get a lower interest rate or other favorable terms, it might make more sense for you to use personal loan funding this way, especially if you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtconsolidation.asp">consolidate other debts</a> (such as a personal loan and credit card debt).</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-you-pay-bills-with-a-personal-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Pay Bills with a Personal Loan?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>While you might be able to pay utilities and other bills with the funding you get from a personal loan, taking on debt just to pay your monthly bills might not be the best idea if you can avoid it. Consider how you might adjust your spending and saving habits so that your bills fit within your regular budget.</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"> A personal loan can assist you with various financial goals, in addition to helping you smooth your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflow.asp">cash flow</a> and/or getting out of unexpected expenses like medical bills. However, even though personal loans are flexible and can be used for several different purposes, they aren’t supposed to be used for everything.
</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"> Certain expenses, especially school and business costs, shouldn’t be paid for with personal loans. Additionally, it’s important to carefully consider whether paying interest on some of your spending makes sense. While you can use a personal loan to take a vacation, for instance, there’s a real possibility that you’ll still be paying down that debt years after you spent the money.
</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"> Before <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-you-should-know-before-taking-out-a-personal-loan-5201657">taking out a personal loan</a>, carefully weigh the pros and cons, and decide whether the cost is worth it for your situation.
</p></div>
|
[Personal loans](https://www.investopedia.com/best-personal-loans-4773300) offer flexible funding to take care of emergencies and reach other financial goals. However, taking out a personal loan isn’t always a good idea.
Here’s what you need to know before you take out a [personal loan](https://www.investopedia.com/personal-loan-5076027).
### Key Takeaways
* Personal loans aren’t usually designed for education or business costs.
* Consider reviewing your budget if you’re trying to use a personal loan for basic living expenses.
* The interest rate on a personal loan can be higher than your potential annualized investment return.
## Things That You Shouldn’t Use a Personal Loan for
Thanks to their flexibility, you can take out a [personal loan to fund a wide variety of purposes](https://www.investopedia.com/top-reasons-personal-loan-7508655), including financial emergencies, medical bills, and large purchases. However, there are a few items that personal loans shouldn’t be used for.
Even if you could use a loan for the following purposes without getting in trouble, there still might be better alternatives to taking out a personal loan. Here are some things to think about before you move forward with a personal loan application.
### College Tuition
Many lenders make it clear that you shouldn’t use a personal loan to fund a college education. Additionally, a lender might not offer a high-enough amount to cover the cost of your tuition.
Consider [federal and private student loans](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) rather than trying to use a personal loan to pay college costs. Student loan [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) might be lower, and getting approved for an [education loan](https://www.investopedia.com/terms/e/education-loan.asp) (especially a federal loan) might be easier than getting a personal loan. Carefully weigh your college funding options, including [scholarships](https://www.investopedia.com/understanding-scholarships-need-and-merit-4783132) and grants, before you turn to taking out debt.
### Home Down Payment
In general, you’re not supposed to use a loan to make a [down payment](https://www.investopedia.com/terms/d/down_payment.asp) on your home. Many [mortgage lenders](https://www.investopedia.com/best-mortgage-lenders-5076852) review where your down payment money is coming from and might not approve your [mortgage application](https://www.investopedia.com/terms/m/mortgage-application.asp) if you borrow money as part of the transaction.
Instead of trying to secure a down payment with a personal loan, you can apply for [down payment assistance programs](https://www.investopedia.com/articles/personal-finance/110515/5-unusual-ways-come-home-down-payment.asp). Also, consider getting a family member or a monetary gift to help fund your down payment.
### Business Expenses
As the name suggests, personal loans are supposed to be used for personal purposes. In many cases, if you plan to use the money to start or expand a business, you might not be able to get approved for a personal loan. A [lender](https://www.investopedia.com/terms/l/lender.asp) might even require you to affirm that you won’t use the money for business costs before they approve your application.
Instead of trying to get a loan for business costs, consider looking into a [small business loan](https://www.investopedia.com/best-small-business-loans-5079093). You might be able to get a better deal—and you might be eligible for a [tax deduction on the interest you pay for a business loan](https://www.investopedia.com/terms/b/business-interest-expense.asp).
### Investing
Some lenders specify in the loan documentation that you shouldn’t use the proceeds from the loan to invest. Besides, a personal loan might not be the best way to get the money needed [if you want to invest](https://www.investopedia.com/articles/basics/11/3-s-simple-investing.asp). Personal loans often have higher interest rates than many investors see in annualized returns. As a result, you run the risk of paying more in [interest](https://www.investopedia.com/terms/i/interest.asp) than you gain from successful investment decisions.
### Basic Living Expenses
Finally, it might not be a good idea to use a personal loan for your basic living expenses. In general, basic living expenses like groceries, rent (or mortgage) payments, utilities, insurance payments, and clothing should be paid for with budgeted funds.
If you find yourself regularly in a cash crunch and you’re thinking about getting a personal loan to get out of it, you might need to consider a new [budgeting](https://www.investopedia.com/articles/personal-finance/112116/four-easy-budgeting-techniques-you-should-master.asp) approach. Whenever possible, it’s better to cover basic living expenses with your regular income rather than taking on debt.
### Other Items That You Shouldn’t Use a Personal Loan for
Most lenders specify that you can’t use your personal loan money for gambling. The possibility that you could [lose the money by gambling](https://www.investopedia.com/terms/g/gamblingloss.asp) presents a risk to the lender.
It hopefully goes without saying, but you also shouldn’t use a personal loan for illegal purposes. Loan documentation often addresses the issue of illegal activities, and the lender won’t provide you with funds if you won’t agree to use the money strictly for purposes that are in line with the law.
## What You Can Use a Personal Loan for
As previously mentioned, personal loans can be used for a variety of purposes, including:
* Medical bills
* Replacing broken appliances
* Car repairs
* Vacation
* Major life events, like a wedding
* Home improvements
* Large purchases
Even though you can [use a personal loan](https://www.investopedia.com/how-use-personal-loan-7562541) for many of these items, it might make more sense to plan ahead if you’re able. For example, if you have the ability, you could build an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) that you can use for medical bills or car repairs. And rather than paying for a vacation, wedding, or large purchases by using a personal loan, you could create a savings plan and build a [nest egg](https://www.investopedia.com/terms/n/nestegg.asp) over time.
Carefully consider your overall financial situation and goals before you decide to go into debt using a personal loan.
## Can You Use a Personal Loan for Groceries?
While a lender might not know (or care) if you use a personal loan to pay for groceries, it still might not be the best use of those funds. Before getting a loan for basic living expenses like groceries, check to see if you can access a food pantry or some other way to get emergency food.
## Can You Use a Personal Loan to Pay Off Another Personal Loan?
Yes, it’s possible to use a personal loan to pay off another personal loan. Depending on the situation, if you can get a lower interest rate or other favorable terms, it might make more sense for you to use personal loan funding this way, especially if you can [consolidate other debts](https://www.investopedia.com/terms/d/debtconsolidation.asp) (such as a personal loan and credit card debt).
## Can You Pay Bills with a Personal Loan?
While you might be able to pay utilities and other bills with the funding you get from a personal loan, taking on debt just to pay your monthly bills might not be the best idea if you can avoid it. Consider how you might adjust your spending and saving habits so that your bills fit within your regular budget.
## The Bottom Line
A personal loan can assist you with various financial goals, in addition to helping you smooth your [cash flow](https://www.investopedia.com/terms/c/cashflow.asp) and/or getting out of unexpected expenses like medical bills. However, even though personal loans are flexible and can be used for several different purposes, they aren’t supposed to be used for everything.
Certain expenses, especially school and business costs, shouldn’t be paid for with personal loans. Additionally, it’s important to carefully consider whether paying interest on some of your spending makes sense. While you can use a personal loan to take a vacation, for instance, there’s a real possibility that you’ll still be paying down that debt years after you spent the money.
Before [taking out a personal loan](https://www.investopedia.com/what-you-should-know-before-taking-out-a-personal-loan-5201657), carefully weigh the pros and cons, and decide whether the cost is worth it for your situation.
|
Personal loans offer flexible funding to take care of emergencies and reach other financial goals. However, taking out a personal loan isn’t always a good idea.
Here’s what you need to know before you take out a personal loan.
Key Takeaways
Personal loans aren’t usually designed for education or business costs.Consider reviewing your budget if you’re trying to use a personal loan for basic living expenses.The interest rate on a personal loan can be higher than your potential annualized investment return.
Things That You Shouldn’t Use a Personal Loan for
Thanks to their flexibility, you can take out a personal loan to fund a wide variety of purposes, including financial emergencies, medical bills, and large purchases. However, there are a few items that personal loans shouldn’t be used for.
Even if you could use a loan for the following purposes without getting in trouble, there still might be better alternatives to taking out a personal loan. Here are some things to think about before you move forward with a personal loan application.
College Tuition
Many lenders make it clear that you shouldn’t use a personal loan to fund a college education. Additionally, a lender might not offer a high-enough amount to cover the cost of your tuition.
Consider federal and private student loans rather than trying to use a personal loan to pay college costs. Student loan interest rates might be lower, and getting approved for an education loan (especially a federal loan) might be easier than getting a personal loan. Carefully weigh your college funding options, including scholarships and grants, before you turn to taking out debt.
Home Down Payment
In general, you’re not supposed to use a loan to make a down payment on your home. Many mortgage lenders review where your down payment money is coming from and might not approve your mortgage application if you borrow money as part of the transaction.
Instead of trying to secure a down payment with a personal loan, you can apply for down payment assistance programs. Also, consider getting a family member or a monetary gift to help fund your down payment.
Business Expenses
As the name suggests, personal loans are supposed to be used for personal purposes. In many cases, if you plan to use the money to start or expand a business, you might not be able to get approved for a personal loan. A lender might even require you to affirm that you won’t use the money for business costs before they approve your application.
Instead of trying to get a loan for business costs, consider looking into a small business loan. You might be able to get a better deal—and you might be eligible for a tax deduction on the interest you pay for a business loan.
Investing
Some lenders specify in the loan documentation that you shouldn’t use the proceeds from the loan to invest. Besides, a personal loan might not be the best way to get the money needed if you want to invest. Personal loans often have higher interest rates than many investors see in annualized returns. As a result, you run the risk of paying more in interest than you gain from successful investment decisions.
Basic Living Expenses
Finally, it might not be a good idea to use a personal loan for your basic living expenses. In general, basic living expenses like groceries, rent (or mortgage) payments, utilities, insurance payments, and clothing should be paid for with budgeted funds.
If you find yourself regularly in a cash crunch and you’re thinking about getting a personal loan to get out of it, you might need to consider a new budgeting approach. Whenever possible, it’s better to cover basic living expenses with your regular income rather than taking on debt.
Other Items That You Shouldn’t Use a Personal Loan for
Most lenders specify that you can’t use your personal loan money for gambling. The possibility that you could lose the money by gambling presents a risk to the lender.
It hopefully goes without saying, but you also shouldn’t use a personal loan for illegal purposes. Loan documentation often addresses the issue of illegal activities, and the lender won’t provide you with funds if you won’t agree to use the money strictly for purposes that are in line with the law.
What You Can Use a Personal Loan for
As previously mentioned, personal loans can be used for a variety of purposes, including:
Medical billsReplacing broken appliancesCar repairsVacationMajor life events, like a weddingHome improvementsLarge purchases
Even though you can use a personal loan for many of these items, it might make more sense to plan ahead if you’re able. For example, if you have the ability, you could build an emergency fund that you can use for medical bills or car repairs. And rather than paying for a vacation, wedding, or large purchases by using a personal loan, you could create a savings plan and build a nest egg over time.
Carefully consider your overall financial situation and goals before you decide to go into debt using a personal loan.
Can You Use a Personal Loan for Groceries?
While a lender might not know (or care) if you use a personal loan to pay for groceries, it still might not be the best use of those funds. Before getting a loan for basic living expenses like groceries, check to see if you can access a food pantry or some other way to get emergency food.
Can You Use a Personal Loan to Pay Off Another Personal Loan?
Yes, it’s possible to use a personal loan to pay off another personal loan. Depending on the situation, if you can get a lower interest rate or other favorable terms, it might make more sense for you to use personal loan funding this way, especially if you can consolidate other debts (such as a personal loan and credit card debt).
Can You Pay Bills with a Personal Loan?
While you might be able to pay utilities and other bills with the funding you get from a personal loan, taking on debt just to pay your monthly bills might not be the best idea if you can avoid it. Consider how you might adjust your spending and saving habits so that your bills fit within your regular budget.
The Bottom Line
A personal loan can assist you with various financial goals, in addition to helping you smooth your cash flow and/or getting out of unexpected expenses like medical bills. However, even though personal loans are flexible and can be used for several different purposes, they aren’t supposed to be used for everything.
Certain expenses, especially school and business costs, shouldn’t be paid for with personal loans. Additionally, it’s important to carefully consider whether paying interest on some of your spending makes sense. While you can use a personal loan to take a vacation, for instance, there’s a real possibility that you’ll still be paying down that debt years after you spent the money.
Before taking out a personal loan, carefully weigh the pros and cons, and decide whether the cost is worth it for your situation.
|
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https://www.investopedia.com/ask/answers/110614/what-difference-between-overdraft-and-cash-credit.asp
|
Cash Credit vs. Overdraft: 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"> Cash credit and overdraft are two types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured.
</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"> Business accounts are more likely to receive cash credit, and it typically requires <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a> in some form. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">Overdrafts</a>, on the other hand, allow account holders to have a negative balance without incurring a large overdraft fee.<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>Cash credit and overdraft both refer to lines of credit with a lender.</li><li>Different types of overdraft accounts allow individual bank customers to carry negative balances in ways that avoid large overdraft fees.</li><li>Cash credit is more typical for businesses and generally involves some form of collateral.</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="Cash Credit vs. Overdraft" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/dRPc375uNrU5dzmLz3EEPGIQwvU=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/-EoRXj73d-STDkT_cM7g4UxX3BM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg" data-srcset="https://www.investopedia.com/thmb/rE5adI6yTQGN20kqQPK0jxVS6wE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg 750w" data-tracking-container="true" height="800" id="mntl-sc-block-image_1-0" width="1200"/>
<noscript>
<img alt="Cash Credit vs. Overdraft" class="img--noscript universal-image__image" height="800" sizes="750px" src="https://www.investopedia.com/thmb/-EoRXj73d-STDkT_cM7g4UxX3BM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg" srcset="https://www.investopedia.com/thmb/rE5adI6yTQGN20kqQPK0jxVS6wE=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg 750w" width="1200"/>
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</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 / Sabrina Jiang</p></span>
</figcaption></figure>
<span class="heading-toc" id="toc-how-cash-credit-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 Cash Credit Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Cash credit is commonly offered to businesses rather than to individual consumers. Financial institutions, such as banks and <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>, normally require a business customer to put down a form of security as collateral in exchange for cash. This security can be a tangible asset, such as stock or property. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_limit.asp">credit limit</a> extended on the cash credit account is normally a percentage of the value of the collateralized security.
</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"> As mentioned, cash credit is a short-term financing solution a business customer has at their disposal. If the customer doesn't have enough funds in their account, they can use the cash credit for routine banking transactions up to the credit limit. Unlike other credit products, interest is charged on the daily closing balance.
</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"> Cash credit may also be referred to as a cash reserve account. A cash reserve is an unsecured <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</a> that acts just like overdraft protection (see more below). It typically offers higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071114/what-are-pros-and-cons-overdraft-protection.asp">overdraft</a> limits and has smaller real interest costs on borrowed funds than an overdraft because penalty fees aren't triggered for using the account.
</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-how-an-overdraft-works"></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"> How an Overdraft Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Overdraft is a form of financing issued by a financial institution to individuals and is attached to a bank account—usually a checking account. If a customer doesn't have enough funds in their account to complete a transaction, the overdraft covers the difference, allowing the account to go into a negative balance.
</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"> Say you have $500 in his account and you write a $550 check. If you enrolled in overdraft protection, the bank may allow you to overdraw your account to cover the check, thus rendering you balance as -$50.<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>
<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_2-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The process of granting short-term credit to an account holder when their balance drops below zero is known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft-protection.asp">overdraft protection</a>.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Overdraft protection comes in several forms and functions differently, depending on the banking relationship. It is common for overdraft protection to link two accounts together, allowing funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero. This function can be helpful in avoiding overdraft fees or having insufficient funds to execute a transaction.<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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Banks charge you a fee—sometimes as high as $38.50—per overdraft plus <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> on the balance of you <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060916/can-checking-account-go-negative.asp">don't have overdraft protection</a> on.<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_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Overdraft protection also can be sold as a separate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/110614/whats-difference-between-secured-line-credit-and-unsecured-line-credit.asp">unsecured line of credit</a> tied to the primary account, acting as an emergency loan in the event of an overdraft. This type of overdraft protection doesn't have overdraft fees but charges interest on the credit line balance.<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_27-0"></div>
<span class="heading-toc" id="toc-types-of-overdrafts"></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"> Types of Overdrafts </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The two of the most common types of overdrafts are standard overdraft on a checking account and a secured overdraft account that lends cash against various financial instruments.<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_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"> Standard Overdraft </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A standard <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-banks-for-overdraft-protection-7373737">overdraft</a> is the act of withdrawing more funds from an account than the balance normally would permit. If you have $30 in a checking account and withdraw $35 to pay for an item, a bank that permits overdrafts covers the $5 and typically charges you a small fee for the service, as opposed to a much larger overdraft penalty. Customers are generally charged a separate fee for each transaction in excess of their account balance, though different institutions may handle fees differently.<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_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"> Secured Overdraft </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> A secured overdraft acts more like a traditional loan. As with a cash credit account, money is lent by a financial institution, but a wider range of collateral can be used to secure the credit. Customers may, for example, be allowed to use <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> or stock shares.<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>
<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"> Clean Overdraft </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> A clean overdraft account in one in which no specific collateral is offered, but an overdraft is permitted due to the net worth of the individual. Generally speaking, this is only possible when the borrower has a large account at the financial institution and has had a longstanding relationship.<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_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-warning" 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" 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>While cash credit is commonly renewed annually for a business, an account holder's access to overdraft protection is reviewed annually and may or may not be re-approved.</p></div></div></div>
<span class="heading-toc" id="toc-how-to-set-up-cash-credit-and-overdraft-protection"></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"> How To Set Up Cash Credit and Overdraft Protection </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Business customers that can provide some form of collateral may be easily able to get access to cash credit, which means they won't have any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> problems in the event they need capital in a hurry. In most cases, cash credits are commonly renewed on an annual basis for business customers. This means businesses don't need to re-apply for credit.
</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"> Interest payments made on cash credit are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">tax-deductible</a>, which means businesses can use them to lower their tax burden and save more money in the long run.<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_46-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> If a customer wants to add overdraft protection on their account, they must apply for the service just as they would for any other credit facility.<span class="ql-inline-citation" data-cite="1"></span> The bank reviews the application and approval is subject to the customer's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-worthiness.asp">creditworthiness</a>. Banks normally review whether to continue extending overdraft protection to a customer on a regular basis. Unlike cash credit, customers can't claim interest paid on overdraft protection for a tax <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deduction.asp">deduction</a>.<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_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-is-overdraft-protection-the-same-as-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Overdraft Protection the Same as Credit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An overdraft is a form of credit on your checking account. It allows you to withdraw money or pay bills from your bank account even if there is not enough money in it.<span class="ql-inline-citation" data-cite="9"></span> It's a type of short-term loan against your account.</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-are-three-types-of-overdraft-protection"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Three Types of Overdraft Protection?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Standard overdraft is withdrawing more funds from an account than the balance normally would permit. A second type is secured overdraft, which involves money being lent by a financial institution, but usually with collateral required to secure the credit. The third common type of overdraft service is called a clean overdraft. With this type, no specific collateral is offered, but an overdraft is allowed due to the net worth or size of deposits at the institution from the individual.</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-which-has-a-lower-interest-rate-cash-credit-or-overdraft"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Has a Lower Interest Rate, Cash Credit or Overdraft?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Interest-rate terms for use of a business cash credit service usually are lower than an individual bank customer's overdraft fees. It's also important to be aware that your overdraft limit is likely to be lower than what you probably could borrow with a credit card or personal loan. Interest rates may be comparable or higher.<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_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"> Cash credit and overdraft are types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured. Business accounts are more likely to be given cash credit, which typically requires collateral. With overdrafts, banks allow account holders to briefly have a negative balance without incurring a large overdraft fee.
</p></div>
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Cash credit and overdraft are two types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured.
Business accounts are more likely to receive cash credit, and it typically requires [collateral](https://www.investopedia.com/terms/c/collateral.asp) in some form. [Overdrafts](https://www.investopedia.com/terms/o/overdraft.asp), on the other hand, allow account holders to have a negative balance without incurring a large overdraft fee.
### Key Takeaways
* Cash credit and overdraft both refer to lines of credit with a lender.
* Different types of overdraft accounts allow individual bank customers to carry negative balances in ways that avoid large overdraft fees.
* Cash credit is more typical for businesses and generally involves some form of collateral.
![Cash Credit vs. Overdraft]()
:max_bytes(150000):strip_icc()/dotdash-what-difference-between-overdraft-and-cash-credit-Final-8e1e4594a99342748fc565d7c5dd66d3.jpg)
Investopedia / Sabrina Jiang
## How Cash Credit Works
Cash credit is commonly offered to businesses rather than to individual consumers. Financial institutions, such as banks and [credit unions](https://www.investopedia.com/terms/c/creditunion.asp), normally require a business customer to put down a form of security as collateral in exchange for cash. This security can be a tangible asset, such as stock or property. The [credit limit](https://www.investopedia.com/terms/c/credit_limit.asp) extended on the cash credit account is normally a percentage of the value of the collateralized security.
As mentioned, cash credit is a short-term financing solution a business customer has at their disposal. If the customer doesn't have enough funds in their account, they can use the cash credit for routine banking transactions up to the credit limit. Unlike other credit products, interest is charged on the daily closing balance.
Cash credit may also be referred to as a cash reserve account. A cash reserve is an unsecured [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp) that acts just like overdraft protection (see more below). It typically offers higher [overdraft](https://www.investopedia.com/ask/answers/071114/what-are-pros-and-cons-overdraft-protection.asp) limits and has smaller real interest costs on borrowed funds than an overdraft because penalty fees aren't triggered for using the account.
## How an Overdraft Works
Overdraft is a form of financing issued by a financial institution to individuals and is attached to a bank account—usually a checking account. If a customer doesn't have enough funds in their account to complete a transaction, the overdraft covers the difference, allowing the account to go into a negative balance.
Say you have $500 in his account and you write a $550 check. If you enrolled in overdraft protection, the bank may allow you to overdraw your account to cover the check, thus rendering you balance as -$50.
### Note
The process of granting short-term credit to an account holder when their balance drops below zero is known as [overdraft protection](https://www.investopedia.com/terms/o/overdraft-protection.asp).
Overdraft protection comes in several forms and functions differently, depending on the banking relationship. It is common for overdraft protection to link two accounts together, allowing funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero. This function can be helpful in avoiding overdraft fees or having insufficient funds to execute a transaction.
Banks charge you a fee—sometimes as high as $38.50—per overdraft plus [interest](https://www.investopedia.com/terms/i/interest.asp) on the balance of you [don't have overdraft protection](https://www.investopedia.com/ask/answers/060916/can-checking-account-go-negative.asp) on.
Overdraft protection also can be sold as a separate [unsecured line of credit](https://www.investopedia.com/ask/answers/110614/whats-difference-between-secured-line-credit-and-unsecured-line-credit.asp) tied to the primary account, acting as an emergency loan in the event of an overdraft. This type of overdraft protection doesn't have overdraft fees but charges interest on the credit line balance.
## Types of Overdrafts
The two of the most common types of overdrafts are standard overdraft on a checking account and a secured overdraft account that lends cash against various financial instruments.
### Standard Overdraft
A standard [overdraft](https://www.investopedia.com/best-banks-for-overdraft-protection-7373737) is the act of withdrawing more funds from an account than the balance normally would permit. If you have $30 in a checking account and withdraw $35 to pay for an item, a bank that permits overdrafts covers the $5 and typically charges you a small fee for the service, as opposed to a much larger overdraft penalty. Customers are generally charged a separate fee for each transaction in excess of their account balance, though different institutions may handle fees differently.
### Secured Overdraft
A secured overdraft acts more like a traditional loan. As with a cash credit account, money is lent by a financial institution, but a wider range of collateral can be used to secure the credit. Customers may, for example, be allowed to use [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) or stock shares.
### Clean Overdraft
A clean overdraft account in one in which no specific collateral is offered, but an overdraft is permitted due to the net worth of the individual. Generally speaking, this is only possible when the borrower has a large account at the financial institution and has had a longstanding relationship.
###
While cash credit is commonly renewed annually for a business, an account holder's access to overdraft protection is reviewed annually and may or may not be re-approved.
## How To Set Up Cash Credit and Overdraft Protection
Business customers that can provide some form of collateral may be easily able to get access to cash credit, which means they won't have any [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) problems in the event they need capital in a hurry. In most cases, cash credits are commonly renewed on an annual basis for business customers. This means businesses don't need to re-apply for credit.
Interest payments made on cash credit are [tax-deductible](https://www.investopedia.com/terms/t/tax-deduction.asp), which means businesses can use them to lower their tax burden and save more money in the long run.
If a customer wants to add overdraft protection on their account, they must apply for the service just as they would for any other credit facility. The bank reviews the application and approval is subject to the customer's [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp). Banks normally review whether to continue extending overdraft protection to a customer on a regular basis. Unlike cash credit, customers can't claim interest paid on overdraft protection for a tax [deduction](https://www.investopedia.com/terms/d/deduction.asp).
## Is Overdraft Protection the Same as Credit?
An overdraft is a form of credit on your checking account. It allows you to withdraw money or pay bills from your bank account even if there is not enough money in it. It's a type of short-term loan against your account.
## What Are Three Types of Overdraft Protection?
Standard overdraft is withdrawing more funds from an account than the balance normally would permit. A second type is secured overdraft, which involves money being lent by a financial institution, but usually with collateral required to secure the credit. The third common type of overdraft service is called a clean overdraft. With this type, no specific collateral is offered, but an overdraft is allowed due to the net worth or size of deposits at the institution from the individual.
## Which Has a Lower Interest Rate, Cash Credit or Overdraft?
Interest-rate terms for use of a business cash credit service usually are lower than an individual bank customer's overdraft fees. It's also important to be aware that your overdraft limit is likely to be lower than what you probably could borrow with a credit card or personal loan. Interest rates may be comparable or higher.
## The Bottom Line
Cash credit and overdraft are types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured. Business accounts are more likely to be given cash credit, which typically requires collateral. With overdrafts, banks allow account holders to briefly have a negative balance without incurring a large overdraft fee.
|
Cash credit and overdraft are two types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured.
Business accounts are more likely to receive cash credit, and it typically requires collateral in some form. Overdrafts, on the other hand, allow account holders to have a negative balance without incurring a large overdraft fee.
Key Takeaways
Cash credit and overdraft both refer to lines of credit with a lender.Different types of overdraft accounts allow individual bank customers to carry negative balances in ways that avoid large overdraft fees.Cash credit is more typical for businesses and generally involves some form of collateral.
Investopedia / Sabrina Jiang
How Cash Credit Works
Cash credit is commonly offered to businesses rather than to individual consumers. Financial institutions, such as banks and credit unions, normally require a business customer to put down a form of security as collateral in exchange for cash. This security can be a tangible asset, such as stock or property. The credit limit extended on the cash credit account is normally a percentage of the value of the collateralized security.
As mentioned, cash credit is a short-term financing solution a business customer has at their disposal. If the customer doesn't have enough funds in their account, they can use the cash credit for routine banking transactions up to the credit limit. Unlike other credit products, interest is charged on the daily closing balance.
Cash credit may also be referred to as a cash reserve account. A cash reserve is an unsecured line of credit that acts just like overdraft protection (see more below). It typically offers higher overdraft limits and has smaller real interest costs on borrowed funds than an overdraft because penalty fees aren't triggered for using the account.
How an Overdraft Works
Overdraft is a form of financing issued by a financial institution to individuals and is attached to a bank account—usually a checking account. If a customer doesn't have enough funds in their account to complete a transaction, the overdraft covers the difference, allowing the account to go into a negative balance.
Say you have $500 in his account and you write a $550 check. If you enrolled in overdraft protection, the bank may allow you to overdraw your account to cover the check, thus rendering you balance as -$50.
Note
The process of granting short-term credit to an account holder when their balance drops below zero is known as overdraft protection.
Overdraft protection comes in several forms and functions differently, depending on the banking relationship. It is common for overdraft protection to link two accounts together, allowing funds to automatically be drawn on a reserve account in the event of the primary account being drawn below zero. This function can be helpful in avoiding overdraft fees or having insufficient funds to execute a transaction.
Banks charge you a fee—sometimes as high as $38.50—per overdraft plus interest on the balance of you don't have overdraft protection on.
Overdraft protection also can be sold as a separate unsecured line of credit tied to the primary account, acting as an emergency loan in the event of an overdraft. This type of overdraft protection doesn't have overdraft fees but charges interest on the credit line balance.
Types of Overdrafts
The two of the most common types of overdrafts are standard overdraft on a checking account and a secured overdraft account that lends cash against various financial instruments.
Standard Overdraft
A standard overdraft is the act of withdrawing more funds from an account than the balance normally would permit. If you have $30 in a checking account and withdraw $35 to pay for an item, a bank that permits overdrafts covers the $5 and typically charges you a small fee for the service, as opposed to a much larger overdraft penalty. Customers are generally charged a separate fee for each transaction in excess of their account balance, though different institutions may handle fees differently.
Secured Overdraft
A secured overdraft acts more like a traditional loan. As with a cash credit account, money is lent by a financial institution, but a wider range of collateral can be used to secure the credit. Customers may, for example, be allowed to use mutual fund or stock shares.
Clean Overdraft
A clean overdraft account in one in which no specific collateral is offered, but an overdraft is permitted due to the net worth of the individual. Generally speaking, this is only possible when the borrower has a large account at the financial institution and has had a longstanding relationship.
While cash credit is commonly renewed annually for a business, an account holder's access to overdraft protection is reviewed annually and may or may not be re-approved.
How To Set Up Cash Credit and Overdraft Protection
Business customers that can provide some form of collateral may be easily able to get access to cash credit, which means they won't have any liquidity problems in the event they need capital in a hurry. In most cases, cash credits are commonly renewed on an annual basis for business customers. This means businesses don't need to re-apply for credit.
Interest payments made on cash credit are tax-deductible, which means businesses can use them to lower their tax burden and save more money in the long run.
If a customer wants to add overdraft protection on their account, they must apply for the service just as they would for any other credit facility. The bank reviews the application and approval is subject to the customer's creditworthiness. Banks normally review whether to continue extending overdraft protection to a customer on a regular basis. Unlike cash credit, customers can't claim interest paid on overdraft protection for a tax deduction.
Is Overdraft Protection the Same as Credit?
An overdraft is a form of credit on your checking account. It allows you to withdraw money or pay bills from your bank account even if there is not enough money in it. It's a type of short-term loan against your account.
What Are Three Types of Overdraft Protection?
Standard overdraft is withdrawing more funds from an account than the balance normally would permit. A second type is secured overdraft, which involves money being lent by a financial institution, but usually with collateral required to secure the credit. The third common type of overdraft service is called a clean overdraft. With this type, no specific collateral is offered, but an overdraft is allowed due to the net worth or size of deposits at the institution from the individual.
Which Has a Lower Interest Rate, Cash Credit or Overdraft?
Interest-rate terms for use of a business cash credit service usually are lower than an individual bank customer's overdraft fees. It's also important to be aware that your overdraft limit is likely to be lower than what you probably could borrow with a credit card or personal loan. Interest rates may be comparable or higher.
The Bottom Line
Cash credit and overdraft are types of short-term financing that financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in checking accounts. The primary difference between these forms of borrowing is how they are secured. Business accounts are more likely to be given cash credit, which typically requires collateral. With overdrafts, banks allow account holders to briefly have a negative balance without incurring a large overdraft fee.
|
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https://www.investopedia.com/recover-student-loan-default-7373460
|
How to Recover from Student Loan Default
|
<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’ve defaulted on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/education-loan.asp">student loans</a>, you have several options to help you recover from it. Here’s what student loan <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> means for you right now and how to get out of it.
</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>For federal student loans, the primary ways to recover from default are the Fresh Start program, student loan rehabilitation, or a direct consolidation loan. For private student loans, your lender may offer default rehabilitation programs.</li><li>To determine if your student loans are in default, check their status by either logging into studentaid.gov with your Federal Student Aid (FSA) ID or looking at your credit report.</li><li>Defaulting on your student loans can reduce your credit score, limit your borrowing opportunities, make the full balance of your loans due, and potentially result in wage garnishment.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-to-recover-from-student-loan-default"></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"> How to Recover From Student Loan Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/impact-defaulting-student-loan-5324784">Defaulting on your student loans</a> can be detrimental, but you can come back from it. There are a few ways that you can recover from student loan default:
</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"> Fresh Start Program </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Fresh Start is a federal program that’s designed to get your loans back on track.
</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"> You can contact the U.S. Department of Education by going to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://myeddebt.ed.gov/">myeddebt.ed.gov</a> and logging in. You’ll see an option for Fresh Start, and this is the easiest route for enrolling in the program. You can also call them at 1-800-621-3115. It’s a good idea to have your latest income information on hand, which comes from your most recent tax filing, but it’s not required.
</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"> On the call, you’ll discuss your interest in the Fresh Start program and getting out of student loan default. You’ll then get enrolled in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp">income-driven repayment (IDR) plan</a> so your payments match up to what you can reasonably afford to pay.
</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"> Once enrolled, your loans will get moved to a Department of Education <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan_servicing.asp">loan servicer</a> (if they’re in default, your loans may currently be with a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt-collector.asp">debt collector</a> or a similar agency). Your loan status changes from “default” to “in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayment</a>,” and the “default” status will also be removed from your <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</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"> Fresh Start gives you access to all federal financial aid, including borrowing student loans in the future. You’ll also gain access to federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defermentperiod.asp">deferment</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forbearance.asp">forbearance</a>, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">forgiveness</a> plans.
</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"> Not all loans are eligible for Fresh Start, so be sure to check if you’re eligible before trying to enroll in the program.<span class="ql-inline-citation" data-cite="2"></span> Current eligible loans 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>William D. Ford Federal Loan (Direct Loan) Program loans</li><li>Federal Family Education (FFEL) Program loans</li><li>Perkins Loans held by the Department of Education</li>
</ul>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-subheading__text"> Rehabilitation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Federal student loan rehabilitation is when you make a series of on-time payments for a set period of time. Your monthly payment is based on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a>, and rehabilitation is complete when you make nine monthly payments over the course of 10 months.<span class="ql-inline-citation" data-cite="7"></span> Specifically, you must agree in writing to make nine voluntary, reasonable and affordable monthly payments, as determined by the servicer, within 20 days of the due date and make all nine payments within 10 consecutive months.
</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"> You can only rehabilitate your defaulted loans once.<span class="ql-inline-citation" data-cite="4"></span> If you went through the Fresh Start program and defaulted on your loans again, you can still enroll in rehabilitation. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov">Log in to your account</a>, then select “View Details” under “My Aid.” From there, you’ll be able to see who your loan servicer is and can contact them about enrolling in rehabilitation.<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"> Consolidation </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp">consolidate your student loans</a> whether you’re in default or not by taking out a direct consolidation loan with the Department of Education. This loan doesn’t have a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-checking.asp">credit check</a> or an income requirement.
</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"> Consolidating your loans is when you combine all of your federal student loans into one loan. Your new <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> is the weighted average of your current interest rates, rounded up to the nearest one-eighth percent. For consolidated defaulted loans, you’ll need to agree to repay your new direct consolidation loan under an income-driven repayment (IDR) plan or make three consecutive full monthly payments on the defaulted loan before you consolidate.
</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"> Not all loans are eligible for consolidation, so make sure you know which ones qualify before applying for a direct consolidation loan.<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_34-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Keep in mind that there is no one-size-fits-all approach—if one doesn’t work for you, explore other options before settling on the one that’s best for your situation.
</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"> Recovering From Private Student Loan Default </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp">Private student loans</a> don’t have the same protections, benefits, or programs as federal student loans. If you’re looking to get out of default from a private student loan lender, you may have more work to do.<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_39-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Like federal student loans, you can see who your loan servicer is by checking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.annualcreditreport.com/index.action">AnnualCreditReport.com</a>. Even if your loan servicer has sold your loan to a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collectionagency.asp">collection agency</a>, they should be able to direct you to the debt collector.
</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"> Contact your lender to review your repayment options. Some lenders might offer default rehabilitation programs, but those terms can vary by lender. You can also explore credit counseling to help you build out a payment plan based on your income. You can check the U.S. Department of Justice for a list of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111">approved credit counseling agencies</a> to avoid getting scammed by fraudsters.
</p>
<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-how-to-know-if-your-student-loans-are-in-default"></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"> How to Know if Your Student Loans Are in Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> You can check your student loan status by logging into StudentAid.gov with your Federal Student Aid (FSA) ID. When you select your loan, you can see if the status is listed as default.
</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"> You can also check to see your student loan status by checking your credit report. You can pull your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.annualcreditreport.com/index.action">AnnualCreditReport.com</a>. There will be a section that details negative marks on your report, and if your student loans are in default, it will be in this section.
</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-consequences-of-student-loan-default"></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"> Consequences of Student Loan Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Having your student loans in default can have detrimental impacts on your financial future, including:
</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>Your credit history</strong>: Your payment history is the most important part of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO credit score</a>, making up 35% of it.<span class="ql-inline-citation" data-cite="1"></span> Being late on even one payment can cause your credit score to drop. Having your loans in default could mean your score plummets.</li>
<li><strong>Your borrowing opportunities</strong>: A low credit score impacts everything you need when it comes to borrowing, whether you’re trying to buy a home and secure a mortgage, take out an auto loan, or even get a credit card. Your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit score</a> is tied to everything related to borrowing money, so if you ever need to borrow in the future, having student loans in default could hurt your chances. Even then, if you are accepted for lines of credit or loans despite your reduced credit score, your interest rates will be much higher with poor or fair credit compared to borrowers with good or excellent credit.<span class="ql-inline-citation" data-cite="10"></span></li>
<li><strong>Your repayment plan</strong>: If you’ve fallen so far behind on payments that your loans have been accelerated, that means your full balance is immediately due. Depending on how much you owe, that could significantly hurt your finances if you need to pay off your student loans in one lump sum rather than several smaller payments over time.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>Your income</strong>: In some states, you can face <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/garnishment.asp">wage garnishment</a> (i.e., having a portion of your paycheck taken out) to pay for your defaulted student loans.<span class="ql-inline-citation" data-cite="11"></span> Student loan default could also result in a potential loss in federal retirement income benefits like Social Security.</li>
</ul>
<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-how-do-i-recover-from-defaulting-on-student-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Recover From Defaulting on Student Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>You have several options to recover from defaulting on your student loans. Federal student loans can be rehabilitated or consolidated, or you can take advantage of the Fresh Start program. Private student loans offer fewer options—your lender may have a default rehabilitation program, but you’ll have to contact them to be certain, and terms will vary by state.</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-defaulted-student-loans-go-away-after-7-years"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Defaulted Student Loans Go Away After 7 Years?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Defaulted student loans generally won’t go away on their own. Late payments, meanwhile, will typically remain on your credit report for seven years.<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_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-what-is-the-average-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the average student loan debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>As of the third quarter of 2023, the average student loan debt is $37,645.16 per person.<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_59-0"></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_60-0"> <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_61-0"> Student loan default can be hurtful to many borrowers who haven’t been able to make payments and don’t feel like there’s any way to get out. But for federal student loan borrowers, you have a few different ways to recover from default. Review your options and stay diligent with payments so that you avoid default again.
</p></div>
|
If you’ve defaulted on your [student loans](https://www.investopedia.com/terms/e/education-loan.asp), you have several options to help you recover from it. Here’s what student loan [default](https://www.investopedia.com/terms/d/default2.asp) means for you right now and how to get out of it.
### Key Takeaways
* For federal student loans, the primary ways to recover from default are the Fresh Start program, student loan rehabilitation, or a direct consolidation loan. For private student loans, your lender may offer default rehabilitation programs.
* To determine if your student loans are in default, check their status by either logging into studentaid.gov with your Federal Student Aid (FSA) ID or looking at your credit report.
* Defaulting on your student loans can reduce your credit score, limit your borrowing opportunities, make the full balance of your loans due, and potentially result in wage garnishment.
## How to Recover From Student Loan Default
[Defaulting on your student loans](https://www.investopedia.com/impact-defaulting-student-loan-5324784) can be detrimental, but you can come back from it. There are a few ways that you can recover from student loan default:
### Fresh Start Program
Fresh Start is a federal program that’s designed to get your loans back on track.
You can contact the U.S. Department of Education by going to [myeddebt.ed.gov](https://myeddebt.ed.gov/) and logging in. You’ll see an option for Fresh Start, and this is the easiest route for enrolling in the program. You can also call them at 1-800-621-3115. It’s a good idea to have your latest income information on hand, which comes from your most recent tax filing, but it’s not required.
On the call, you’ll discuss your interest in the Fresh Start program and getting out of student loan default. You’ll then get enrolled in an [income-driven repayment (IDR) plan](https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp) so your payments match up to what you can reasonably afford to pay.
Once enrolled, your loans will get moved to a Department of Education [loan servicer](https://www.investopedia.com/terms/l/loan_servicing.asp) (if they’re in default, your loans may currently be with a [debt collector](https://www.investopedia.com/terms/d/debt-collector.asp) or a similar agency). Your loan status changes from “default” to “in [repayment](https://www.investopedia.com/terms/r/repayment.asp),” and the “default” status will also be removed from your [credit report](https://www.investopedia.com/terms/c/creditreport.asp).
Fresh Start gives you access to all federal financial aid, including borrowing student loans in the future. You’ll also gain access to federal [deferment](https://www.investopedia.com/terms/d/defermentperiod.asp), [forbearance](https://www.investopedia.com/terms/f/forbearance.asp), and [forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) plans.
Not all loans are eligible for Fresh Start, so be sure to check if you’re eligible before trying to enroll in the program. Current eligible loans include:
* William D. Ford Federal Loan (Direct Loan) Program loans
* Federal Family Education (FFEL) Program loans
* Perkins Loans held by the Department of Education
### Rehabilitation
Federal student loan rehabilitation is when you make a series of on-time payments for a set period of time. Your monthly payment is based on your [income](https://www.investopedia.com/terms/i/income.asp), and rehabilitation is complete when you make nine monthly payments over the course of 10 months. Specifically, you must agree in writing to make nine voluntary, reasonable and affordable monthly payments, as determined by the servicer, within 20 days of the due date and make all nine payments within 10 consecutive months.
You can only rehabilitate your defaulted loans once. If you went through the Fresh Start program and defaulted on your loans again, you can still enroll in rehabilitation. [Log in to your account](https://studentaid.gov), then select “View Details” under “My Aid.” From there, you’ll be able to see who your loan servicer is and can contact them about enrolling in rehabilitation.
### Consolidation
You can [consolidate your student loans](https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp) whether you’re in default or not by taking out a direct consolidation loan with the Department of Education. This loan doesn’t have a [credit check](https://www.investopedia.com/terms/c/credit-checking.asp) or an income requirement.
Consolidating your loans is when you combine all of your federal student loans into one loan. Your new [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) is the weighted average of your current interest rates, rounded up to the nearest one-eighth percent. For consolidated defaulted loans, you’ll need to agree to repay your new direct consolidation loan under an income-driven repayment (IDR) plan or make three consecutive full monthly payments on the defaulted loan before you consolidate.
Not all loans are eligible for consolidation, so make sure you know which ones qualify before applying for a direct consolidation loan.
Keep in mind that there is no one-size-fits-all approach—if one doesn’t work for you, explore other options before settling on the one that’s best for your situation.
### Recovering From Private Student Loan Default
[Private student loans](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) don’t have the same protections, benefits, or programs as federal student loans. If you’re looking to get out of default from a private student loan lender, you may have more work to do.
Like federal student loans, you can see who your loan servicer is by checking [AnnualCreditReport.com](https://www.annualcreditreport.com/index.action). Even if your loan servicer has sold your loan to a [collection agency](https://www.investopedia.com/terms/c/collectionagency.asp), they should be able to direct you to the debt collector.
Contact your lender to review your repayment options. Some lenders might offer default rehabilitation programs, but those terms can vary by lender. You can also explore credit counseling to help you build out a payment plan based on your income. You can check the U.S. Department of Justice for a list of [approved credit counseling agencies](https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111) to avoid getting scammed by fraudsters.
## How to Know if Your Student Loans Are in Default
You can check your student loan status by logging into StudentAid.gov with your Federal Student Aid (FSA) ID. When you select your loan, you can see if the status is listed as default.
You can also check to see your student loan status by checking your credit report. You can pull your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—via [AnnualCreditReport.com](https://www.annualcreditreport.com/index.action). There will be a section that details negative marks on your report, and if your student loans are in default, it will be in this section.
## Consequences of Student Loan Default
Having your student loans in default can have detrimental impacts on your financial future, including:
* **Your credit history**: Your payment history is the most important part of your [FICO credit score](https://www.investopedia.com/terms/f/ficoscore.asp), making up 35% of it. Being late on even one payment can cause your credit score to drop. Having your loans in default could mean your score plummets.
* **Your borrowing opportunities**: A low credit score impacts everything you need when it comes to borrowing, whether you’re trying to buy a home and secure a mortgage, take out an auto loan, or even get a credit card. Your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) is tied to everything related to borrowing money, so if you ever need to borrow in the future, having student loans in default could hurt your chances. Even then, if you are accepted for lines of credit or loans despite your reduced credit score, your interest rates will be much higher with poor or fair credit compared to borrowers with good or excellent credit.
* **Your repayment plan**: If you’ve fallen so far behind on payments that your loans have been accelerated, that means your full balance is immediately due. Depending on how much you owe, that could significantly hurt your finances if you need to pay off your student loans in one lump sum rather than several smaller payments over time.
* **Your income**: In some states, you can face [wage garnishment](https://www.investopedia.com/terms/g/garnishment.asp) (i.e., having a portion of your paycheck taken out) to pay for your defaulted student loans. Student loan default could also result in a potential loss in federal retirement income benefits like Social Security.
## How Do I Recover From Defaulting on Student Loans?
You have several options to recover from defaulting on your student loans. Federal student loans can be rehabilitated or consolidated, or you can take advantage of the Fresh Start program. Private student loans offer fewer options—your lender may have a default rehabilitation program, but you’ll have to contact them to be certain, and terms will vary by state.
## Do Defaulted Student Loans Go Away After 7 Years?
Defaulted student loans generally won’t go away on their own. Late payments, meanwhile, will typically remain on your credit report for seven years.
## What is the average student loan debt?
As of the third quarter of 2023, the average student loan debt is $37,645.16 per person.
## The Bottom Line
Student loan default can be hurtful to many borrowers who haven’t been able to make payments and don’t feel like there’s any way to get out. But for federal student loan borrowers, you have a few different ways to recover from default. Review your options and stay diligent with payments so that you avoid default again.
|
If you’ve defaulted on your student loans, you have several options to help you recover from it. Here’s what student loan default means for you right now and how to get out of it.
Key Takeaways
For federal student loans, the primary ways to recover from default are the Fresh Start program, student loan rehabilitation, or a direct consolidation loan. For private student loans, your lender may offer default rehabilitation programs.To determine if your student loans are in default, check their status by either logging into studentaid.gov with your Federal Student Aid (FSA) ID or looking at your credit report.Defaulting on your student loans can reduce your credit score, limit your borrowing opportunities, make the full balance of your loans due, and potentially result in wage garnishment.
How to Recover From Student Loan Default
Defaulting on your student loans can be detrimental, but you can come back from it. There are a few ways that you can recover from student loan default:
Fresh Start Program
Fresh Start is a federal program that’s designed to get your loans back on track.
You can contact the U.S. Department of Education by going to myeddebt.ed.gov and logging in. You’ll see an option for Fresh Start, and this is the easiest route for enrolling in the program. You can also call them at 1-800-621-3115. It’s a good idea to have your latest income information on hand, which comes from your most recent tax filing, but it’s not required.
On the call, you’ll discuss your interest in the Fresh Start program and getting out of student loan default. You’ll then get enrolled in an income-driven repayment (IDR) plan so your payments match up to what you can reasonably afford to pay.
Once enrolled, your loans will get moved to a Department of Education loan servicer (if they’re in default, your loans may currently be with a debt collector or a similar agency). Your loan status changes from “default” to “in repayment,” and the “default” status will also be removed from your credit report.
Fresh Start gives you access to all federal financial aid, including borrowing student loans in the future. You’ll also gain access to federal deferment, forbearance, and forgiveness plans.
Not all loans are eligible for Fresh Start, so be sure to check if you’re eligible before trying to enroll in the program. Current eligible loans include:
William D. Ford Federal Loan (Direct Loan) Program loansFederal Family Education (FFEL) Program loansPerkins Loans held by the Department of Education
Rehabilitation
Federal student loan rehabilitation is when you make a series of on-time payments for a set period of time. Your monthly payment is based on your income, and rehabilitation is complete when you make nine monthly payments over the course of 10 months. Specifically, you must agree in writing to make nine voluntary, reasonable and affordable monthly payments, as determined by the servicer, within 20 days of the due date and make all nine payments within 10 consecutive months.
You can only rehabilitate your defaulted loans once. If you went through the Fresh Start program and defaulted on your loans again, you can still enroll in rehabilitation. Log in to your account, then select “View Details” under “My Aid.” From there, you’ll be able to see who your loan servicer is and can contact them about enrolling in rehabilitation.
Consolidation
You can consolidate your student loans whether you’re in default or not by taking out a direct consolidation loan with the Department of Education. This loan doesn’t have a credit check or an income requirement.
Consolidating your loans is when you combine all of your federal student loans into one loan. Your new interest rate is the weighted average of your current interest rates, rounded up to the nearest one-eighth percent. For consolidated defaulted loans, you’ll need to agree to repay your new direct consolidation loan under an income-driven repayment (IDR) plan or make three consecutive full monthly payments on the defaulted loan before you consolidate.
Not all loans are eligible for consolidation, so make sure you know which ones qualify before applying for a direct consolidation loan.
Keep in mind that there is no one-size-fits-all approach—if one doesn’t work for you, explore other options before settling on the one that’s best for your situation.
Recovering From Private Student Loan Default
Private student loans don’t have the same protections, benefits, or programs as federal student loans. If you’re looking to get out of default from a private student loan lender, you may have more work to do.
Like federal student loans, you can see who your loan servicer is by checking AnnualCreditReport.com. Even if your loan servicer has sold your loan to a collection agency, they should be able to direct you to the debt collector.
Contact your lender to review your repayment options. Some lenders might offer default rehabilitation programs, but those terms can vary by lender. You can also explore credit counseling to help you build out a payment plan based on your income. You can check the U.S. Department of Justice for a list of approved credit counseling agencies to avoid getting scammed by fraudsters.
How to Know if Your Student Loans Are in Default
You can check your student loan status by logging into StudentAid.gov with your Federal Student Aid (FSA) ID. When you select your loan, you can see if the status is listed as default.
You can also check to see your student loan status by checking your credit report. You can pull your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—via AnnualCreditReport.com. There will be a section that details negative marks on your report, and if your student loans are in default, it will be in this section.
Consequences of Student Loan Default
Having your student loans in default can have detrimental impacts on your financial future, including:
Your credit history: Your payment history is the most important part of your FICO credit score, making up 35% of it. Being late on even one payment can cause your credit score to drop. Having your loans in default could mean your score plummets.
Your borrowing opportunities: A low credit score impacts everything you need when it comes to borrowing, whether you’re trying to buy a home and secure a mortgage, take out an auto loan, or even get a credit card. Your credit score is tied to everything related to borrowing money, so if you ever need to borrow in the future, having student loans in default could hurt your chances. Even then, if you are accepted for lines of credit or loans despite your reduced credit score, your interest rates will be much higher with poor or fair credit compared to borrowers with good or excellent credit.
Your repayment plan: If you’ve fallen so far behind on payments that your loans have been accelerated, that means your full balance is immediately due. Depending on how much you owe, that could significantly hurt your finances if you need to pay off your student loans in one lump sum rather than several smaller payments over time.
Your income: In some states, you can face wage garnishment (i.e., having a portion of your paycheck taken out) to pay for your defaulted student loans. Student loan default could also result in a potential loss in federal retirement income benefits like Social Security.
How Do I Recover From Defaulting on Student Loans?
You have several options to recover from defaulting on your student loans. Federal student loans can be rehabilitated or consolidated, or you can take advantage of the Fresh Start program. Private student loans offer fewer options—your lender may have a default rehabilitation program, but you’ll have to contact them to be certain, and terms will vary by state.
Do Defaulted Student Loans Go Away After 7 Years?
Defaulted student loans generally won’t go away on their own. Late payments, meanwhile, will typically remain on your credit report for seven years.
What is the average student loan debt?
As of the third quarter of 2023, the average student loan debt is $37,645.16 per person.
The Bottom Line
Student loan default can be hurtful to many borrowers who haven’t been able to make payments and don’t feel like there’s any way to get out. But for federal student loan borrowers, you have a few different ways to recover from default. Review your options and stay diligent with payments so that you avoid default again.
|
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https://www.investopedia.com/ask/answers/091815/can-your-insurance-company-cancel-your-policy-without-notice.asp
|
Can Your Insurance Company Cancel Your Policy Without Notice?
|
<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"> Most Americans carry some type of insurance on their cars, homes, and even themselves. There are multiple kinds of insurance available to consumers, each with different features, benefits, and obligations.
</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 most states, an insurance company must give a policyholder written notice of cancellation at least 30 days before canceling the policy.<span class="ql-inline-citation" data-cite="1"></span> The policy contract specifies the reasons the insurer can cancel the policy and the time frame and method in which it can do it. Being at risk of losing your insurance can be frightening and a financial burden, but there are ways to communicate and negotiate with your insurance company should this occur.
</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-rights-of-the-insured"></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"> Rights of the Insured </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Once an insurance policy is issued, an insurance company cannot cancel the policy except for reasons specifically stated in the policy. State laws usually limit what an insurance company can include as reasons for the cancellation of the policy. It is important to read all insurance policies carefully and ask your insurance agent to provide you with answers if you have any questions. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.insurance.com/coverage/homeowners-insurance-survey-2018" rel="nofollow">2018 survey</a> done by Insurance.com found that nearly one-fourth of polled homeowners stated they did not read their policies, which could leave them open for problems down the road.<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_7-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Each state has an insurance commission or division charged with protecting consumers while encouraging a financially stable and competitive insurance marketplace. State insurance regulators confirm whether insurance companies are financially sound/solvent and can pay claims. They also strive to ensure that insurance companies treat policyholders and insureds fairly, handle their claims promptly and accurately, and honor the policies. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nainsurancec.asp">National Association of Insurance Commissioners</a> (NAIC) is a great resource and lists each state commission's office.
</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-advisorinsight" 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">Key Takeaways</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>There are different types of insurance policies available to consumers, and each may have different provisions for cancellation.</li><li>States typically require insurance companies to provide a 30-day notice of cancellation to the policyholder before the cancellation date.</li><li>State insurance commissions are formed to protect the consumer and ensure that insurance companies are solvent and honor their promises, such as paying claims.</li><li>Negotiating with the insurance company can stop a cancellation.</li></ul></div></div></div>
<span class="heading-toc" id="toc-reasons-for-cancellation"></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"> Reasons for Cancellation </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Policy contracts contain the provisions of the policy, including reasons for cancellation. Some common reasons include:
</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>Intentional damage to a covered asset by the insured, policyholder, or interested third-party</li><li>Criminal record</li><li>Insured poses a "moral risk"</li><li>Life changes</li><li>Too many missed payments</li><li>Too many claims</li><li>Significant changes in risk.</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-ways-to-negotiate"></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"> Ways to Negotiate </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> It is worth a call to your insurance company to try to halt the cancellation by providing a satisfactory solution to the complaints made by the company. First, make sure the information in your file is up to date and accurate. Review the complaint and come up with several possible solutions. For example, if your homeowner's insurance is being canceled due to too many claims for water damage, ask if you can remove coverage for water damage from your policy going forward, or ask if they have another policy that does not cover water damage.
</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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insurance-4427716">insurance</a> company has the right to cancel your policy if you do not fulfill your obligations under the policy agreement. However, by using resources like the NAIC, which can offer free advice and services to policyholders, and trying to negotiate with your insurance company, it may be possible to keep your insurance.
</p></div>
|
Most Americans carry some type of insurance on their cars, homes, and even themselves. There are multiple kinds of insurance available to consumers, each with different features, benefits, and obligations.
In most states, an insurance company must give a policyholder written notice of cancellation at least 30 days before canceling the policy. The policy contract specifies the reasons the insurer can cancel the policy and the time frame and method in which it can do it. Being at risk of losing your insurance can be frightening and a financial burden, but there are ways to communicate and negotiate with your insurance company should this occur.
## Rights of the Insured
Once an insurance policy is issued, an insurance company cannot cancel the policy except for reasons specifically stated in the policy. State laws usually limit what an insurance company can include as reasons for the cancellation of the policy. It is important to read all insurance policies carefully and ask your insurance agent to provide you with answers if you have any questions. A [2018 survey](https://www.insurance.com/coverage/homeowners-insurance-survey-2018) done by Insurance.com found that nearly one-fourth of polled homeowners stated they did not read their policies, which could leave them open for problems down the road.
Each state has an insurance commission or division charged with protecting consumers while encouraging a financially stable and competitive insurance marketplace. State insurance regulators confirm whether insurance companies are financially sound/solvent and can pay claims. They also strive to ensure that insurance companies treat policyholders and insureds fairly, handle their claims promptly and accurately, and honor the policies. The [National Association of Insurance Commissioners](https://www.investopedia.com/terms/n/nainsurancec.asp) (NAIC) is a great resource and lists each state commission's office.
### Key Takeaways
* There are different types of insurance policies available to consumers, and each may have different provisions for cancellation.
* States typically require insurance companies to provide a 30-day notice of cancellation to the policyholder before the cancellation date.
* State insurance commissions are formed to protect the consumer and ensure that insurance companies are solvent and honor their promises, such as paying claims.
* Negotiating with the insurance company can stop a cancellation.
## Reasons for Cancellation
Policy contracts contain the provisions of the policy, including reasons for cancellation. Some common reasons include:
* Intentional damage to a covered asset by the insured, policyholder, or interested third-party
* Criminal record
* Insured poses a "moral risk"
* Life changes
* Too many missed payments
* Too many claims
* Significant changes in risk.
## Ways to Negotiate
It is worth a call to your insurance company to try to halt the cancellation by providing a satisfactory solution to the complaints made by the company. First, make sure the information in your file is up to date and accurate. Review the complaint and come up with several possible solutions. For example, if your homeowner's insurance is being canceled due to too many claims for water damage, ask if you can remove coverage for water damage from your policy going forward, or ask if they have another policy that does not cover water damage.
## The Bottom Line
An [insurance](https://www.investopedia.com/insurance-4427716) company has the right to cancel your policy if you do not fulfill your obligations under the policy agreement. However, by using resources like the NAIC, which can offer free advice and services to policyholders, and trying to negotiate with your insurance company, it may be possible to keep your insurance.
|
Most Americans carry some type of insurance on their cars, homes, and even themselves. There are multiple kinds of insurance available to consumers, each with different features, benefits, and obligations.
In most states, an insurance company must give a policyholder written notice of cancellation at least 30 days before canceling the policy. The policy contract specifies the reasons the insurer can cancel the policy and the time frame and method in which it can do it. Being at risk of losing your insurance can be frightening and a financial burden, but there are ways to communicate and negotiate with your insurance company should this occur.
Rights of the Insured
Once an insurance policy is issued, an insurance company cannot cancel the policy except for reasons specifically stated in the policy. State laws usually limit what an insurance company can include as reasons for the cancellation of the policy. It is important to read all insurance policies carefully and ask your insurance agent to provide you with answers if you have any questions. A 2018 survey done by Insurance.com found that nearly one-fourth of polled homeowners stated they did not read their policies, which could leave them open for problems down the road.
Each state has an insurance commission or division charged with protecting consumers while encouraging a financially stable and competitive insurance marketplace. State insurance regulators confirm whether insurance companies are financially sound/solvent and can pay claims. They also strive to ensure that insurance companies treat policyholders and insureds fairly, handle their claims promptly and accurately, and honor the policies. The National Association of Insurance Commissioners (NAIC) is a great resource and lists each state commission's office.
Key Takeaways
There are different types of insurance policies available to consumers, and each may have different provisions for cancellation.States typically require insurance companies to provide a 30-day notice of cancellation to the policyholder before the cancellation date.State insurance commissions are formed to protect the consumer and ensure that insurance companies are solvent and honor their promises, such as paying claims.Negotiating with the insurance company can stop a cancellation.
Reasons for Cancellation
Policy contracts contain the provisions of the policy, including reasons for cancellation. Some common reasons include:
Intentional damage to a covered asset by the insured, policyholder, or interested third-partyCriminal recordInsured poses a "moral risk"Life changesToo many missed paymentsToo many claimsSignificant changes in risk.
Ways to Negotiate
It is worth a call to your insurance company to try to halt the cancellation by providing a satisfactory solution to the complaints made by the company. First, make sure the information in your file is up to date and accurate. Review the complaint and come up with several possible solutions. For example, if your homeowner's insurance is being canceled due to too many claims for water damage, ask if you can remove coverage for water damage from your policy going forward, or ask if they have another policy that does not cover water damage.
The Bottom Line
An insurance company has the right to cancel your policy if you do not fulfill your obligations under the policy agreement. However, by using resources like the NAIC, which can offer free advice and services to policyholders, and trying to negotiate with your insurance company, it may be possible to keep your insurance.
|
[
[
"2018 survey",
"https://www.insurance.com/coverage/homeowners-insurance-survey-2018"
],
[
"National Association of Insurance Commissioners",
"https://www.investopedia.com/terms/n/nainsurancec.asp"
],
[
"insurance",
"https://www.investopedia.com/insurance-4427716"
]
] |
https://www.investopedia.com/top-5-etfs-2022-6834550
|
Top 5 ETFs of 2022
|
<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/e/energy_sector.asp">Energ</a>y ETFs outperformed peers this year, buoyed by high oil and gas prices in an otherwise sinking market.
</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"> All five of the top ETFs invested in stocks in energy, an outperformer in a year in which the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> fell 16% and every other one of the 11 <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gics.asp">Global Industry Classification Standard (GICS)</a> classifications fell or was little changed.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span> The reason: crude oil prices jumped 31% and natural gas surged 76%.
</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"> Most of the gains stemmed from Russia's invasion of Ukraine in February, which triggered a spike in oil prices as the U.S. and EU moved to limit Russian energy exports.<span class="ql-inline-citation" data-cite="14"></span> <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/opec.asp">OPEC+</a> announced oil production cuts of 2 million barrels per day in October, further tightening global supply.<span class="ql-inline-citation" data-cite="15"></span> Toward the end of the year, prices came off their highs as China's pandemic lockdown and a global economic slowdown suppressed demand.<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_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 top-performing ETF of 2022 was the iShares U.S. Oil & Gas Exploration & Production fund, with YTD total returns of 70%.</li><li>For comparison, the S&P 500 Index fell by 16% over the same period.</li><li>All five of the top-performing funds this year focus on the energy sector, which saw oil prices surge for several months following Russia's invasion of Ukraine in February.</li></ul></div></div></div>
<span class="heading-toc" id="toc-methodology"></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"> Methodology </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The top five ETFs 2022 were selected from the broad spectrum of ETFs traded on U.S. markets found on the website VettaFi.<span class="ql-inline-citation" data-cite="22"></span> Inverse and leveraged ETFs were excluded from the selection process, as were ETFs with less than $1 billion under management (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">AUM</a>). The top five were then picked from the remaining group of 540 ETFs based on their YTD total return as of the close of markets on Nov. 30, 2022. All data below is as of that date.
</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-ishares-us-oil--gas-exploration--production-etf-ieo"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_12-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IEO" rel="nocaes">iShares U.S. Oil & Gas Exploration & Production ETF (IEO)</a> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <li>Year-to-Date Return: 69.9%<span class="ql-inline-citation" data-cite="4"></span></li><li>Fund Description: Multi-Cap Oil and Gas Fund</li><li>Expense Ratio: 0.39%</li><li>Inception Date: May 1, 2006</li><li>Issuer: BlackRock Financial Management</li>
</ul>
<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"> IEO invests in oil and gas companies, and attempts to track the Dow Jones U.S. Select Oil Exploration & Production Index. Oil and gas <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exploration-production-company.asp">exploration and production (E&P)</a> companies make up over 73% of its holdings. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalizationweightedindex.asp">market-cap-weighted</a> ETF also holds refining, marketing, and transportation companies, which receive about 20% portfolio allocation.<span class="ql-inline-citation" data-cite="1"></span> The fund doesn't focus solely on <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/growthstock.asp">growth</a> or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuestock.asp">value</a> stocks and invests in companies of a variety of sizes.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The top three holdings for IEO are ConocoPhillips (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=COP">COP</a>), an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/integrated-oil-gas-company.asp">integrated oil and gas company</a>; EOG Resources Inc. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=EOG">EOG</a>), an oil and gas E&P company; and Marathon Petroleum Corp. (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MPC">MPC</a>), a <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/downstream.asp">downstream</a> energy company focused on refining, marketing, and transportation.<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>
<span class="heading-toc" id="toc-fidelity-msci-energy-index-etf-feny"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=FENY" rel="nocaes">Fidelity MSCI Energy Index ETF (FENY)</a> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <li>Year-to-Date Return: 69.5%<span class="ql-inline-citation" data-cite="8"></span></li><li>Fund Description: Multi-Cap Energy Fund</li><li>Expense Ratio: 0.08%</li><li>Inception Date: Oct. 21, 2013</li><li>Issuer: Fidelity</li>
</ul>
<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"> FENY is a broad-based energy ETF that tracks the MSCI USA IMI Energy Index. The index represents the performance of the U.S. energy sector. FENY doesn't invest in all stocks in the index, attempting to pick a representative sample to provide similar returns to the index. Like IEO, the fund invests in companies with both large and small market caps.<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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Despite investing in companies across the sector, FENY is heavily concentrated in a small number of positions, with the top three holdings accounting for over 46% of the portfolio. These holdings are Exxon Mobil Corp. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM">XOM</a>) and Chevron Corp. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CVX">CVX</a>), both integrated oil and gas companies, and ConocoPhillips, described above.<span class="ql-inline-citation" data-cite="8"></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-energy-select-sector-spdr-fund-xle"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_26-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=XLE" rel="nocaes">Energy Select Sector SPDR Fund (XLE)</a> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <li>Year-to-Date Return: 69.5%<span class="ql-inline-citation" data-cite="6"></span></li><li>Fund Description: Large-Cap Energy Fund</li><li>Expense Ratio: 0.10%</li><li>Inception Date: Dec. 16, 1998</li><li>Issuer: State Street</li>
</ul>
<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"> XLE's portfolio focuses on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/large-cap.asp">large-cap</a> energy stocks. The fund's benchmark is the the Energy Select Sector Index, which aims to represent the energy sector of the large-cap S&P 500 Index.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Oil, gas, and consumable fuels stocks make up the large majority of the fund's portfolio at nearly 91%, with the remaining assets dedicated to energy equipment and services names.<span class="ql-inline-citation" data-cite="5"></span> Like FENY, the fund is heavily concentrated, with a few stocks comprising a large percentage of the portfolio, with its top two holdings accounting for over 42% of its AUM. The fund's top three holdings include Exxon Mobil and Chevron, both described above, and Schlumberger NV (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLB">SLB</a>), an oilfield services company.<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_32-0"></div>
<span class="heading-toc" id="toc-vanguard-energy-etf-vde"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=VDE" rel="nocaes">Vanguard Energy ETF (VDE)</a> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> <li>Year-to-Date Return: 69.5%<span class="ql-inline-citation" data-cite="7"></span></li><li>Fund Description: Multi-Cap Energy Fund</li><li>Expense Ratio: 0.10%</li><li>Inception Date: Sept. 23, 2004</li><li>Issuer: Vanguard</li>
</ul>
<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"> VDE seeks to track the performance of the MSCI U.S. Investable Market Energy 25/50 Index, a broad-based index of energy stocks. Unlike FENY, it attempts to fully replicate the holdings of its benchmark index, except when regulatory constraints prevent it from doing so.<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_37-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The top holdings of VDE include Exxon Mobil, Chevron, and ConocoPhillips.<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_39-0"></div>
<span class="heading-toc" id="toc-ishares-us-energy-etf-iye"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_40-0"> <a class="mntl-sc-block-heading__link" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IYE" rel="nocaes">iShares U.S. Energy ETF (IYE)</a> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> <li>Year-to-Date Return: 67.6%<span class="ql-inline-citation" data-cite="10"></span></li><li>Fund Description: Multi-Cap Energy Fund</li><li>Expense Ratio: 0.39%</li><li>Inception Date: June 12, 2000</li><li>Issuer: BlackRock Financial Management</li>
</ul>
<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"> IYE tracks the Russell 1000 Energy RIC 22.5/45 Capped Gross Index, an index composed of U.S. equities within the energy sector. Integrated oil and gas companies account for over 41% of invested assets, followed by oil and gas E&P companies at 29%.<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_44-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The multi-cap fund is primarily focused on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuestock.asp">value stocks</a>. Its holdings are concentrated on a small group of companies, with its top three holdings accounting for nearly half of its total AUM. Thus, it may be too concentrated for investors with a long time horizon, but could be useful as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/05/020305.asp">sector rotation strategy</a> or as a way to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overweight.asp">overweight</a> a specific corner of the energy sector.<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_46-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> IYE's top holdings include Exxon Mobil, Chevron, and ConocoPhillips.<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_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"> The top ETF of 2022 is the iShares U.S. Oil & Gas Exploration & Production (IEO) fund, which has YTD returns of 70%.<span class="ql-inline-citation" data-cite="4"></span> All five of the top funds invest in the energy sector, which has been enormously outperforming the broader market. This outperformance came as oil prices surged throughout most of the year amid Russia's invasion of Ukraine and subsequent embargoes on Russian crude imports to the EU, as well as production cuts by OPEC+.<span class="ql-inline-citation" data-cite="16"></span>
</p></div>
|
[Energ](https://www.investopedia.com/terms/e/energy_sector.asp)y ETFs outperformed peers this year, buoyed by high oil and gas prices in an otherwise sinking market.
All five of the top ETFs invested in stocks in energy, an outperformer in a year in which the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) fell 16% and every other one of the 11 [Global Industry Classification Standard (GICS)](https://www.investopedia.com/terms/g/gics.asp) classifications fell or was little changed. The reason: crude oil prices jumped 31% and natural gas surged 76%.
Most of the gains stemmed from Russia's invasion of Ukraine in February, which triggered a spike in oil prices as the U.S. and EU moved to limit Russian energy exports. [OPEC+](https://www.investopedia.com/terms/o/opec.asp) announced oil production cuts of 2 million barrels per day in October, further tightening global supply. Toward the end of the year, prices came off their highs as China's pandemic lockdown and a global economic slowdown suppressed demand.
### Key Takeaways
* The top-performing ETF of 2022 was the iShares U.S. Oil & Gas Exploration & Production fund, with YTD total returns of 70%.
* For comparison, the S&P 500 Index fell by 16% over the same period.
* All five of the top-performing funds this year focus on the energy sector, which saw oil prices surge for several months following Russia's invasion of Ukraine in February.
## Methodology
The top five ETFs 2022 were selected from the broad spectrum of ETFs traded on U.S. markets found on the website VettaFi. Inverse and leveraged ETFs were excluded from the selection process, as were ETFs with less than $1 billion under management ([AUM](https://www.investopedia.com/terms/a/aum.asp)). The top five were then picked from the remaining group of 540 ETFs based on their YTD total return as of the close of markets on Nov. 30, 2022. All data below is as of that date.
## [iShares U.S. Oil & Gas Exploration & Production ETF (IEO)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IEO)
* Year-to-Date Return: 69.9%
* Fund Description: Multi-Cap Oil and Gas Fund
* Expense Ratio: 0.39%
* Inception Date: May 1, 2006
* Issuer: BlackRock Financial Management
IEO invests in oil and gas companies, and attempts to track the Dow Jones U.S. Select Oil Exploration & Production Index. Oil and gas [exploration and production (E&P)](https://www.investopedia.com/terms/e/exploration-production-company.asp) companies make up over 73% of its holdings. The [market-cap-weighted](https://www.investopedia.com/terms/c/capitalizationweightedindex.asp) ETF also holds refining, marketing, and transportation companies, which receive about 20% portfolio allocation. The fund doesn't focus solely on [growth](https://www.investopedia.com/terms/g/growthstock.asp) or [value](https://www.investopedia.com/terms/v/valuestock.asp) stocks and invests in companies of a variety of sizes.
The top three holdings for IEO are ConocoPhillips ([COP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=COP)), an [integrated oil and gas company](https://www.investopedia.com/terms/i/integrated-oil-gas-company.asp); EOG Resources Inc. ([EOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=EOG)), an oil and gas E&P company; and Marathon Petroleum Corp. ([MPC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MPC)), a [downstream](https://www.investopedia.com/terms/d/downstream.asp) energy company focused on refining, marketing, and transportation.
## [Fidelity MSCI Energy Index ETF (FENY)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=FENY)
* Year-to-Date Return: 69.5%
* Fund Description: Multi-Cap Energy Fund
* Expense Ratio: 0.08%
* Inception Date: Oct. 21, 2013
* Issuer: Fidelity
FENY is a broad-based energy ETF that tracks the MSCI USA IMI Energy Index. The index represents the performance of the U.S. energy sector. FENY doesn't invest in all stocks in the index, attempting to pick a representative sample to provide similar returns to the index. Like IEO, the fund invests in companies with both large and small market caps.
Despite investing in companies across the sector, FENY is heavily concentrated in a small number of positions, with the top three holdings accounting for over 46% of the portfolio. These holdings are Exxon Mobil Corp. ([XOM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM)) and Chevron Corp. ([CVX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CVX)), both integrated oil and gas companies, and ConocoPhillips, described above.
## [Energy Select Sector SPDR Fund (XLE)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=XLE)
* Year-to-Date Return: 69.5%
* Fund Description: Large-Cap Energy Fund
* Expense Ratio: 0.10%
* Inception Date: Dec. 16, 1998
* Issuer: State Street
XLE's portfolio focuses on [large-cap](https://www.investopedia.com/terms/l/large-cap.asp) energy stocks. The fund's benchmark is the the Energy Select Sector Index, which aims to represent the energy sector of the large-cap S&P 500 Index.
Oil, gas, and consumable fuels stocks make up the large majority of the fund's portfolio at nearly 91%, with the remaining assets dedicated to energy equipment and services names. Like FENY, the fund is heavily concentrated, with a few stocks comprising a large percentage of the portfolio, with its top two holdings accounting for over 42% of its AUM. The fund's top three holdings include Exxon Mobil and Chevron, both described above, and Schlumberger NV ([SLB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLB)), an oilfield services company.
## [Vanguard Energy ETF (VDE)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=VDE)
* Year-to-Date Return: 69.5%
* Fund Description: Multi-Cap Energy Fund
* Expense Ratio: 0.10%
* Inception Date: Sept. 23, 2004
* Issuer: Vanguard
VDE seeks to track the performance of the MSCI U.S. Investable Market Energy 25/50 Index, a broad-based index of energy stocks. Unlike FENY, it attempts to fully replicate the holdings of its benchmark index, except when regulatory constraints prevent it from doing so.
The top holdings of VDE include Exxon Mobil, Chevron, and ConocoPhillips.
## [iShares U.S. Energy ETF (IYE)](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IYE)
* Year-to-Date Return: 67.6%
* Fund Description: Multi-Cap Energy Fund
* Expense Ratio: 0.39%
* Inception Date: June 12, 2000
* Issuer: BlackRock Financial Management
IYE tracks the Russell 1000 Energy RIC 22.5/45 Capped Gross Index, an index composed of U.S. equities within the energy sector. Integrated oil and gas companies account for over 41% of invested assets, followed by oil and gas E&P companies at 29%.
The multi-cap fund is primarily focused on [value stocks](https://www.investopedia.com/terms/v/valuestock.asp). Its holdings are concentrated on a small group of companies, with its top three holdings accounting for nearly half of its total AUM. Thus, it may be too concentrated for investors with a long time horizon, but could be useful as a [sector rotation strategy](https://www.investopedia.com/articles/trading/05/020305.asp) or as a way to [overweight](https://www.investopedia.com/terms/o/overweight.asp) a specific corner of the energy sector.
IYE's top holdings include Exxon Mobil, Chevron, and ConocoPhillips.
## The Bottom Line
The top ETF of 2022 is the iShares U.S. Oil & Gas Exploration & Production (IEO) fund, which has YTD returns of 70%. All five of the top funds invest in the energy sector, which has been enormously outperforming the broader market. This outperformance came as oil prices surged throughout most of the year amid Russia's invasion of Ukraine and subsequent embargoes on Russian crude imports to the EU, as well as production cuts by OPEC+.
|
Energy ETFs outperformed peers this year, buoyed by high oil and gas prices in an otherwise sinking market.
All five of the top ETFs invested in stocks in energy, an outperformer in a year in which the S&P 500 fell 16% and every other one of the 11 Global Industry Classification Standard (GICS) classifications fell or was little changed. The reason: crude oil prices jumped 31% and natural gas surged 76%.
Most of the gains stemmed from Russia's invasion of Ukraine in February, which triggered a spike in oil prices as the U.S. and EU moved to limit Russian energy exports. OPEC+ announced oil production cuts of 2 million barrels per day in October, further tightening global supply. Toward the end of the year, prices came off their highs as China's pandemic lockdown and a global economic slowdown suppressed demand.
Key Takeaways
The top-performing ETF of 2022 was the iShares U.S. Oil & Gas Exploration & Production fund, with YTD total returns of 70%.For comparison, the S&P 500 Index fell by 16% over the same period.All five of the top-performing funds this year focus on the energy sector, which saw oil prices surge for several months following Russia's invasion of Ukraine in February.
Methodology
The top five ETFs 2022 were selected from the broad spectrum of ETFs traded on U.S. markets found on the website VettaFi. Inverse and leveraged ETFs were excluded from the selection process, as were ETFs with less than $1 billion under management (AUM). The top five were then picked from the remaining group of 540 ETFs based on their YTD total return as of the close of markets on Nov. 30, 2022. All data below is as of that date.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
Year-to-Date Return: 69.9%Fund Description: Multi-Cap Oil and Gas FundExpense Ratio: 0.39%Inception Date: May 1, 2006Issuer: BlackRock Financial Management
IEO invests in oil and gas companies, and attempts to track the Dow Jones U.S. Select Oil Exploration & Production Index. Oil and gas exploration and production (E&P) companies make up over 73% of its holdings. The market-cap-weighted ETF also holds refining, marketing, and transportation companies, which receive about 20% portfolio allocation. The fund doesn't focus solely on growth or value stocks and invests in companies of a variety of sizes.
The top three holdings for IEO are ConocoPhillips (COP), an integrated oil and gas company; EOG Resources Inc. (EOG), an oil and gas E&P company; and Marathon Petroleum Corp. (MPC), a downstream energy company focused on refining, marketing, and transportation.
Fidelity MSCI Energy Index ETF (FENY)
Year-to-Date Return: 69.5%Fund Description: Multi-Cap Energy FundExpense Ratio: 0.08%Inception Date: Oct. 21, 2013Issuer: Fidelity
FENY is a broad-based energy ETF that tracks the MSCI USA IMI Energy Index. The index represents the performance of the U.S. energy sector. FENY doesn't invest in all stocks in the index, attempting to pick a representative sample to provide similar returns to the index. Like IEO, the fund invests in companies with both large and small market caps.
Despite investing in companies across the sector, FENY is heavily concentrated in a small number of positions, with the top three holdings accounting for over 46% of the portfolio. These holdings are Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), both integrated oil and gas companies, and ConocoPhillips, described above.
Energy Select Sector SPDR Fund (XLE)
Year-to-Date Return: 69.5%Fund Description: Large-Cap Energy FundExpense Ratio: 0.10%Inception Date: Dec. 16, 1998Issuer: State Street
XLE's portfolio focuses on large-cap energy stocks. The fund's benchmark is the the Energy Select Sector Index, which aims to represent the energy sector of the large-cap S&P 500 Index.
Oil, gas, and consumable fuels stocks make up the large majority of the fund's portfolio at nearly 91%, with the remaining assets dedicated to energy equipment and services names. Like FENY, the fund is heavily concentrated, with a few stocks comprising a large percentage of the portfolio, with its top two holdings accounting for over 42% of its AUM. The fund's top three holdings include Exxon Mobil and Chevron, both described above, and Schlumberger NV (SLB), an oilfield services company.
Vanguard Energy ETF (VDE)
Year-to-Date Return: 69.5%Fund Description: Multi-Cap Energy FundExpense Ratio: 0.10%Inception Date: Sept. 23, 2004Issuer: Vanguard
VDE seeks to track the performance of the MSCI U.S. Investable Market Energy 25/50 Index, a broad-based index of energy stocks. Unlike FENY, it attempts to fully replicate the holdings of its benchmark index, except when regulatory constraints prevent it from doing so.
The top holdings of VDE include Exxon Mobil, Chevron, and ConocoPhillips.
iShares U.S. Energy ETF (IYE)
Year-to-Date Return: 67.6%Fund Description: Multi-Cap Energy FundExpense Ratio: 0.39%Inception Date: June 12, 2000Issuer: BlackRock Financial Management
IYE tracks the Russell 1000 Energy RIC 22.5/45 Capped Gross Index, an index composed of U.S. equities within the energy sector. Integrated oil and gas companies account for over 41% of invested assets, followed by oil and gas E&P companies at 29%.
The multi-cap fund is primarily focused on value stocks. Its holdings are concentrated on a small group of companies, with its top three holdings accounting for nearly half of its total AUM. Thus, it may be too concentrated for investors with a long time horizon, but could be useful as a sector rotation strategy or as a way to overweight a specific corner of the energy sector.
IYE's top holdings include Exxon Mobil, Chevron, and ConocoPhillips.
The Bottom Line
The top ETF of 2022 is the iShares U.S. Oil & Gas Exploration & Production (IEO) fund, which has YTD returns of 70%. All five of the top funds invest in the energy sector, which has been enormously outperforming the broader market. This outperformance came as oil prices surged throughout most of the year amid Russia's invasion of Ukraine and subsequent embargoes on Russian crude imports to the EU, as well as production cuts by OPEC+.
|
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[
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],
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"https://www.investopedia.com/terms/s/sp500.asp"
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],
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"https://www.investopedia.com/terms/e/exploration-production-company.asp"
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],
[
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],
[
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],
[
"EOG",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=EOG"
],
[
"MPC",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=MPC"
],
[
"downstream",
"https://www.investopedia.com/terms/d/downstream.asp"
],
[
"Fidelity MSCI Energy Index ETF (FENY)",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=FENY"
],
[
"XOM",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=XOM"
],
[
"CVX",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=CVX"
],
[
"Energy Select Sector SPDR Fund (XLE)",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=XLE"
],
[
"large-cap",
"https://www.investopedia.com/terms/l/large-cap.asp"
],
[
"SLB",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLB"
],
[
"Vanguard Energy ETF (VDE)",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=VDE"
],
[
"iShares U.S. Energy ETF (IYE)",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=IYE"
],
[
"value stocks",
"https://www.investopedia.com/terms/v/valuestock.asp"
],
[
"sector rotation strategy",
"https://www.investopedia.com/articles/trading/05/020305.asp"
],
[
"overweight",
"https://www.investopedia.com/terms/o/overweight.asp"
]
] |
https://www.investopedia.com/consumer-financial-protection-bureau-wins-supreme-court-case-8649593
|
Government’s Consumer Watchdog Agency Fends Off Supreme Court Challenge
|
<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 Supreme Court ruled the Consumer Financial Protection Bureau's funding mechanism is constitutional, meaning the agency can continue to exist.<br/></li><li>Payday lenders regulated by the bureau had challenged the constitutionality of the agency's unique way of funding itself, which is through the Federal Reserve system rather than taxes.<br/></li><li>Invalidating the CFPB's funding could have unleashed "pandemonium" in the financial services industry and a flood of lawsuits, legal experts said.<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 Consumer Financial Protection Bureau (CFPB), the government’s consumer watchdog agency, has survived an attempt to de-fund it using the Supreme Court.
</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 a 7-2 ruling handed down Thursday, the high court found that the agency’s funding mechanism is constitutional, rejecting arguments by payday lenders, who challenged the agency’s authority in an attempt to overturn a regulation limiting how often they can try to withdraw funds from a borrower’s bank account.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A ruling against the CFPB could have unleashed what <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/payday-lenders-take-their-shot-to-bring-down-the-cfpb-in-the-supreme-court-8347270">one legal expert described as “pandemonium”</a> in the financial services industry. It could have thrown the bureau’s existing regulations into doubt, unleashed a flood of lawsuits, and removed consumer protections that have been established over the last decade and a half.
</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"> Writing for the majority, Justice Clarence Thomas said the CFPB’s unique funding mechanism did not conflict with the Appropriations Clause of the constitution, which gives Congress control over the federal budget, stating “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
</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"> When Congress created the bureau in 2010 in the wake of the Great Financial Crisis, lawmakers placed it within the Federal Reserve system, which is funded by its own operations apart from the overall federal budget. That makes it different from most other federal agencies, which run on taxpayer dollars and whose funding is decided by Congress each year as part of the budget process.<br/>
</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-did-this-case-get-to-the-supreme-court"></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 Did This Case Get to The Supreme Court? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The Community Financial Services Association of America, and the Consumer Service Alliance of Texas, trade groups representing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payday-loans.asp">payday lenders</a>, had argued otherwise. They had gone to court in Texas to overturn a 2017 CFPB rule that forbade them from repeatedly trying to draw funds from borrowers’ preauthorized bank accounts after two failed attempts—a practice that racked up <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft fees</a> for the borrowers.<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"> The case made its way to the conservative-leaning Supreme Court, which heard arguments last year. It was one of several cases that the court is currently <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/supreme-court-cases-could-affect-taxes-regulations-whistleblowers-and-more-7974639">considering that could weaken the authority of federal financial regulators</a>.
</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 a dissenting opinion, Justice Samuel Alito, also signed by Justice Neil Gorsuch, lamented that the ruling allows the bureau to “bankroll its own agenda without any congressional control or oversight.”<br/><br/>The bureau said the decision would allow it to carry on its activities regulating consumer financial services.<br/><br/>“Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent, and competitive,” the agency said in a press release. <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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* The Supreme Court ruled the Consumer Financial Protection Bureau's funding mechanism is constitutional, meaning the agency can continue to exist.
* Payday lenders regulated by the bureau had challenged the constitutionality of the agency's unique way of funding itself, which is through the Federal Reserve system rather than taxes.
* Invalidating the CFPB's funding could have unleashed "pandemonium" in the financial services industry and a flood of lawsuits, legal experts said.
The Consumer Financial Protection Bureau (CFPB), the government’s consumer watchdog agency, has survived an attempt to de-fund it using the Supreme Court.
In a 7-2 ruling handed down Thursday, the high court found that the agency’s funding mechanism is constitutional, rejecting arguments by payday lenders, who challenged the agency’s authority in an attempt to overturn a regulation limiting how often they can try to withdraw funds from a borrower’s bank account.
A ruling against the CFPB could have unleashed what [one legal expert described as “pandemonium”](https://www.investopedia.com/payday-lenders-take-their-shot-to-bring-down-the-cfpb-in-the-supreme-court-8347270) in the financial services industry. It could have thrown the bureau’s existing regulations into doubt, unleashed a flood of lawsuits, and removed consumer protections that have been established over the last decade and a half.
Writing for the majority, Justice Clarence Thomas said the CFPB’s unique funding mechanism did not conflict with the Appropriations Clause of the constitution, which gives Congress control over the federal budget, stating “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
When Congress created the bureau in 2010 in the wake of the Great Financial Crisis, lawmakers placed it within the Federal Reserve system, which is funded by its own operations apart from the overall federal budget. That makes it different from most other federal agencies, which run on taxpayer dollars and whose funding is decided by Congress each year as part of the budget process.
## How Did This Case Get to The Supreme Court?
The Community Financial Services Association of America, and the Consumer Service Alliance of Texas, trade groups representing [payday lenders](https://www.investopedia.com/terms/p/payday-loans.asp), had argued otherwise. They had gone to court in Texas to overturn a 2017 CFPB rule that forbade them from repeatedly trying to draw funds from borrowers’ preauthorized bank accounts after two failed attempts—a practice that racked up [overdraft fees](https://www.investopedia.com/terms/o/overdraft.asp) for the borrowers.
The case made its way to the conservative-leaning Supreme Court, which heard arguments last year. It was one of several cases that the court is currently [considering that could weaken the authority of federal financial regulators](https://www.investopedia.com/supreme-court-cases-could-affect-taxes-regulations-whistleblowers-and-more-7974639).
In a dissenting opinion, Justice Samuel Alito, also signed by Justice Neil Gorsuch, lamented that the ruling allows the bureau to “bankroll its own agenda without any congressional control or oversight.”
The bureau said the decision would allow it to carry on its activities regulating consumer financial services.
“Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent, and competitive,” the agency said in a press release.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
The Supreme Court ruled the Consumer Financial Protection Bureau's funding mechanism is constitutional, meaning the agency can continue to exist.Payday lenders regulated by the bureau had challenged the constitutionality of the agency's unique way of funding itself, which is through the Federal Reserve system rather than taxes.Invalidating the CFPB's funding could have unleashed "pandemonium" in the financial services industry and a flood of lawsuits, legal experts said.
The Consumer Financial Protection Bureau (CFPB), the government’s consumer watchdog agency, has survived an attempt to de-fund it using the Supreme Court.
In a 7-2 ruling handed down Thursday, the high court found that the agency’s funding mechanism is constitutional, rejecting arguments by payday lenders, who challenged the agency’s authority in an attempt to overturn a regulation limiting how often they can try to withdraw funds from a borrower’s bank account.
A ruling against the CFPB could have unleashed what one legal expert described as “pandemonium” in the financial services industry. It could have thrown the bureau’s existing regulations into doubt, unleashed a flood of lawsuits, and removed consumer protections that have been established over the last decade and a half.
Writing for the majority, Justice Clarence Thomas said the CFPB’s unique funding mechanism did not conflict with the Appropriations Clause of the constitution, which gives Congress control over the federal budget, stating “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
When Congress created the bureau in 2010 in the wake of the Great Financial Crisis, lawmakers placed it within the Federal Reserve system, which is funded by its own operations apart from the overall federal budget. That makes it different from most other federal agencies, which run on taxpayer dollars and whose funding is decided by Congress each year as part of the budget process.
How Did This Case Get to The Supreme Court?
The Community Financial Services Association of America, and the Consumer Service Alliance of Texas, trade groups representing payday lenders, had argued otherwise. They had gone to court in Texas to overturn a 2017 CFPB rule that forbade them from repeatedly trying to draw funds from borrowers’ preauthorized bank accounts after two failed attempts—a practice that racked up overdraft fees for the borrowers.
The case made its way to the conservative-leaning Supreme Court, which heard arguments last year. It was one of several cases that the court is currently considering that could weaken the authority of federal financial regulators.
In a dissenting opinion, Justice Samuel Alito, also signed by Justice Neil Gorsuch, lamented that the ruling allows the bureau to “bankroll its own agenda without any congressional control or oversight.”The bureau said the decision would allow it to carry on its activities regulating consumer financial services.“Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected from predatory corporations and that markets are fair, transparent, and competitive,” the agency said in a press release.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
[
[
"one legal expert described as “pandemonium”",
"https://www.investopedia.com/payday-lenders-take-their-shot-to-bring-down-the-cfpb-in-the-supreme-court-8347270"
],
[
"payday lenders",
"https://www.investopedia.com/terms/p/payday-loans.asp"
],
[
"overdraft fees",
"https://www.investopedia.com/terms/o/overdraft.asp"
],
[
"considering that could weaken the authority of federal financial regulators",
"https://www.investopedia.com/supreme-court-cases-could-affect-taxes-regulations-whistleblowers-and-more-7974639"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/mid-cap-esg-investing-5225784
|
Mid-Cap ESG 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"> When it comes to investing, it is natural for investors to seek exposure to themes that support their personal outlook as well as their associated investment goals. Investors commonly align their portfolios with a certain strategy or sector that they think is positioned to do well over the long term. For many, this means that they rarely know or understand the details of the holdings that make up their portfolios. In some cases, investors may want to gain or limit exposure to certain international markets, niche market segments, or even different types of securities, but they never really understand the details of how their portfolio is constructed.
</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"> Unfortunately, until recently, many investors never really stopped to consider the type of impact that the holdings of their portfolios have on the environment, society, communities, or the overall well-being of stakeholders. Commonly, profit and gain are primary investment goals, and little thought is given to anything else.
</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"> However, given the rise of <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> investing and the underlying concerns many investors have about related dimensions, strategies and the types of investment candidates that make it into portfolios are changing. In this article, we take a closer look at how <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/midcapstock.asp">mid-cap</a> investors are taking ESG factors into consideration when identifying candidates for their portfolios.
</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>ESG investing is becoming a dominant theme for mid-cap investors to consider as part of their overall investment strategies.</li><li>ESG scores and related metrics are becoming popular data points that can be found on ETF and company profile pages across financial media. These metrics will help mid-cap investors compare investment candidates through an ESG lens.</li><li>The top holdings of a wide variety of ETFs targeted at themes such as clean energy offer investors an interesting array of investment candidates.</li><li>ETFs such as the iShares ESG Screened S&P Mid-Cap ETF offer investors a new way of gaining exposure to a basket of ESG-filtered companies.<span class="ql-inline-citation" data-cite="3"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-environmental-and-sustainable-investing"></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"> Environmental and Sustainable Investing </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> One of the factors that is a top priority for ESG investors is the overall impact that investments have on the environment. The overarching goal of many ESG-based strategies is to reduce the global carbon footprint in an effort to address the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/051514/preparing-your-portfolio-climate-change.asp">climate crisis</a>.
</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"> According to Larry Fink, founder, chairman, and chief executive officer of BlackRock, Inc. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk">BLK</a>), in his 2022 letter to CEOs, "The next 1,000 unicorns won't be search engines or social media companies, they'll be sustainable, scalable innovators—startups that help the world decarbonize and make the energy transition affordable for all consumers." Fink goes on to say that it will not be only the small companies to pave the way forward, but that many incumbents have an advantage in capital, market knowledge, and technical expertise.<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_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> In the spirit of this sentiment, the BlackRock CEO would likely agree that mid-cap companies, or those that currently have a <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 between $2 billion and $10 billion, are also uniquely positioned to make a significant difference in the transition toward net-zero carbon emissions.
</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 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>Larry Fink is the CEO of BlackRock, which he and seven partners founded in 1988. Fink has been recognized for his leadership by <em>Fortune</em> and other publications. <em>Barron's</em> has named him one of the World's Best CEOs for 15 consecutive years.<span class="ql-inline-citation" data-cite="9"></span><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_18-0"> From a macro perspective, companies that prioritize the production and distribution of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sustainable-investing-4427774">clean energy</a> stand to benefit from government and corporate initiatives, as well as increased consumer demand for the foreseeable future. Each party mentioned above is calling for energy to come from sustainable sources such as wind, solar, and hydro.
</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"> Investors who are interested in gaining exposure to clean-tech companies can utilize standard stock screeners and then conduct their own research to narrow down the list of possible candidates. Or more simply, they can look to the top holdings of popular <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>, such as:
</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>VanEck Environmental Services ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=evx">EVX</a>)</li>
<li>iShares Global Clean Energy ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=icln">ICLN</a>)</li>
<li>Global X Lithium & Battery Tech ETF (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=lit">LIT</a>)</li>
<li>Invesco Solar ETF (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=tan">TAN</a>)</li>
<li>Invesco WilderHill Clean Energy ETF (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=pbw">PBW</a>)</li>
<li>ALPS Clean Energy ETF (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aces">ACES</a>)</li>
<li>Invesco Global Clean Energy ETF (<a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=pbd">PBD</a>)</li>
<li>VanEck Low Carbon Energy ETF (<a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=smog">SMOG</a>)</li>
<li>First Trust Global Wind Energy ETF (<a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fan">FAN</a>)</li>
<li>SPDR Kensho Clean Power ETF (<a data-component="link" data-ordinal="10" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=cnrg">CNRG</a>)</li>
</ul>
<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-warning" 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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Some "clean" ETFs contain securities from oil and auto companies because these companies devote some of their research to alternative energy. Investors should do their research to determine whether an ETF aligns with their values and investment goals.</p></div></div></div>
<span class="heading-toc" id="toc-esg-scoring"></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"> ESG Scoring </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Those who are new to ESG investing will be interested to know that several firms have established standardized scoring methodologies. ESG scores can serve as a basis for comparing companies and funds across many different metrics, such as a fund's exposure to carbon-intensive companies. In many cases, metrics are all taken together to come up with one total ESG score that can be found for a significant portion of publicly traded funds and securities.
</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"> For example, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/msci-esg-ratings-5111990">MSCI ESG</a> rating is designed to measure a company's resilience to long-term industry material environmental, social, and governance risks. The rules-based methodology identifies leaders and laggards based on a scale from AAA through to CCC.<span class="ql-inline-citation" data-cite="1"></span> MSCI also has an overall ESG Quality Score between 0 and 10 for ease of comparison.<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_30-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Aside from MSCI ESG Ratings, other common ESG scoring metrics come from S&P Global ESG Scores, or Refinitiv Lipper, all of which are becoming quite common on the detail pages of many publicly traded ETFs.<span class="ql-inline-citation" data-cite="6"></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_32-0"></div>
<span class="heading-toc" id="toc-ishares-esg-screened-sp-mid-cap-etf"></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"> iShares ESG Screened S&P Mid-Cap ETF </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> So far, this article has focused on the environmental and sustainable factors of ESG investing because they are currently the highest priority for most investors. However, dimensions such as exposure to controversial business areas and other governance-related issues are also very important. Though filtering based on specific types of business exposure and governance-related issues is more complicated than filtering based on exposure to broad industries such as wind or solar, it is not impossible for those who are interested.
</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"> Conversely, those who do not have the time, experience, or interest to conduct ESG-based screens may be interested in ETFs such as the iShares ESG Screened S&P Mid-Cap ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=xjh">XJH</a>), which utilizes screening techniques to reduce exposure to company involvement in controversies and controversial business activities. In the case of XJH, the fund's managers seek to remove exposure to controversial weapons, small arms, tobacco, oil sands and shale energy, thermal coal, and fossil fuel reserves. The fund has an MSCI ESG Fund Rating of AA and an overall ESG Quality Score of 7.15 out of 10.<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_37-0"></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_38-0"> <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_39-0"> The future of ESG investing is bright, especially when it comes to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-companies-in-mid-cap-etfs-5225505">mid-cap companies</a> that are aligning with government and consumer demand for energy from sustainable sources. Investors are more concerned than ever when it comes to ESG-related topics such as low carbon emissions strategies, reducing exposure to controversial business areas, product quality, worker safety, labor standards, voting rights, executive pay versus employee pay, and long-term sustainability.
</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"> ESG scoring metrics are starting to appear on many ETF profile pages as well as on company quote pages in financial media. As ESG continues to grow in prominence, it is natural that the role of scoring methodologies will continue to play an important role in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-invest-in-esg-7499371">investment strategies</a>, and that we will start to see more ETFs like the iShares ESG Screened S&P Mid-Cap ETF.<br/>
</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-is-esg-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is ESG Investing?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>ESG stands for environmental, social, and governance. Socially conscious investors use a variety of dimensions across these three areas to filter potential investment candidates.</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-is-buying-a-clean-etf-considered-esg-investing"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Buying a "Clean" ETF Considered ESG Investing?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Certain holdings of "clean" ETFs may not align with the goals and values of an ESG investor. For example, sometimes a holding such as a large-cap oil-and-gas company will be added to a "clean" ETF due to its investments or intentions in the alternative energy space. It is always a good idea to conduct your own research to ensure that investments align with your values and investment goals.</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-is-an-esg-rating"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an ESG Rating?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>ESG ratings are the comprehensive measures of a company or investment fund's long-term commitment to socially responsible investments and dimensions across environmental, social, and corporate governance. ESG scoring metrics are now available from a variety of companies. One of the most popular is the MSCI ESG ratings.</p></div>
</div></div>
|
When it comes to investing, it is natural for investors to seek exposure to themes that support their personal outlook as well as their associated investment goals. Investors commonly align their portfolios with a certain strategy or sector that they think is positioned to do well over the long term. For many, this means that they rarely know or understand the details of the holdings that make up their portfolios. In some cases, investors may want to gain or limit exposure to certain international markets, niche market segments, or even different types of securities, but they never really understand the details of how their portfolio is constructed.
Unfortunately, until recently, many investors never really stopped to consider the type of impact that the holdings of their portfolios have on the environment, society, communities, or the overall well-being of stakeholders. Commonly, profit and gain are primary investment goals, and little thought is given to anything else.
However, given the rise of [environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) investing and the underlying concerns many investors have about related dimensions, strategies and the types of investment candidates that make it into portfolios are changing. In this article, we take a closer look at how [mid-cap](https://www.investopedia.com/terms/m/midcapstock.asp) investors are taking ESG factors into consideration when identifying candidates for their portfolios.
### Key Takeaways
* ESG investing is becoming a dominant theme for mid-cap investors to consider as part of their overall investment strategies.
* ESG scores and related metrics are becoming popular data points that can be found on ETF and company profile pages across financial media. These metrics will help mid-cap investors compare investment candidates through an ESG lens.
* The top holdings of a wide variety of ETFs targeted at themes such as clean energy offer investors an interesting array of investment candidates.
* ETFs such as the iShares ESG Screened S&P Mid-Cap ETF offer investors a new way of gaining exposure to a basket of ESG-filtered companies.
## Environmental and Sustainable Investing
One of the factors that is a top priority for ESG investors is the overall impact that investments have on the environment. The overarching goal of many ESG-based strategies is to reduce the global carbon footprint in an effort to address the [climate crisis](https://www.investopedia.com/articles/investing/051514/preparing-your-portfolio-climate-change.asp).
According to Larry Fink, founder, chairman, and chief executive officer of BlackRock, Inc. ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk)), in his 2022 letter to CEOs, "The next 1,000 unicorns won't be search engines or social media companies, they'll be sustainable, scalable innovators—startups that help the world decarbonize and make the energy transition affordable for all consumers." Fink goes on to say that it will not be only the small companies to pave the way forward, but that many incumbents have an advantage in capital, market knowledge, and technical expertise.
In the spirit of this sentiment, the BlackRock CEO would likely agree that mid-cap companies, or those that currently have a [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of between $2 billion and $10 billion, are also uniquely positioned to make a significant difference in the transition toward net-zero carbon emissions.
###
Larry Fink is the CEO of BlackRock, which he and seven partners founded in 1988. Fink has been recognized for his leadership by *Fortune* and other publications. *Barron's* has named him one of the World's Best CEOs for 15 consecutive years.
From a macro perspective, companies that prioritize the production and distribution of [clean energy](https://www.investopedia.com/sustainable-investing-4427774) stand to benefit from government and corporate initiatives, as well as increased consumer demand for the foreseeable future. Each party mentioned above is calling for energy to come from sustainable sources such as wind, solar, and hydro.
Investors who are interested in gaining exposure to clean-tech companies can utilize standard stock screeners and then conduct their own research to narrow down the list of possible candidates. Or more simply, they can look to the top holdings of popular [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp), such as:
* VanEck Environmental Services ETF ([EVX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=evx))
* iShares Global Clean Energy ETF ([ICLN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=icln))
* Global X Lithium & Battery Tech ETF ([LIT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=lit))
* Invesco Solar ETF ([TAN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=tan))
* Invesco WilderHill Clean Energy ETF ([PBW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pbw))
* ALPS Clean Energy ETF ([ACES](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aces))
* Invesco Global Clean Energy ETF ([PBD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pbd))
* VanEck Low Carbon Energy ETF ([SMOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=smog))
* First Trust Global Wind Energy ETF ([FAN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fan))
* SPDR Kensho Clean Power ETF ([CNRG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=cnrg))
###
Some "clean" ETFs contain securities from oil and auto companies because these companies devote some of their research to alternative energy. Investors should do their research to determine whether an ETF aligns with their values and investment goals.
## ESG Scoring
Those who are new to ESG investing will be interested to know that several firms have established standardized scoring methodologies. ESG scores can serve as a basis for comparing companies and funds across many different metrics, such as a fund's exposure to carbon-intensive companies. In many cases, metrics are all taken together to come up with one total ESG score that can be found for a significant portion of publicly traded funds and securities.
For example, the [MSCI ESG](https://www.investopedia.com/msci-esg-ratings-5111990) rating is designed to measure a company's resilience to long-term industry material environmental, social, and governance risks. The rules-based methodology identifies leaders and laggards based on a scale from AAA through to CCC. MSCI also has an overall ESG Quality Score between 0 and 10 for ease of comparison.
Aside from MSCI ESG Ratings, other common ESG scoring metrics come from S&P Global ESG Scores, or Refinitiv Lipper, all of which are becoming quite common on the detail pages of many publicly traded ETFs.
## iShares ESG Screened S&P Mid-Cap ETF
So far, this article has focused on the environmental and sustainable factors of ESG investing because they are currently the highest priority for most investors. However, dimensions such as exposure to controversial business areas and other governance-related issues are also very important. Though filtering based on specific types of business exposure and governance-related issues is more complicated than filtering based on exposure to broad industries such as wind or solar, it is not impossible for those who are interested.
Conversely, those who do not have the time, experience, or interest to conduct ESG-based screens may be interested in ETFs such as the iShares ESG Screened S&P Mid-Cap ETF ([XJH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=xjh)), which utilizes screening techniques to reduce exposure to company involvement in controversies and controversial business activities. In the case of XJH, the fund's managers seek to remove exposure to controversial weapons, small arms, tobacco, oil sands and shale energy, thermal coal, and fossil fuel reserves. The fund has an MSCI ESG Fund Rating of AA and an overall ESG Quality Score of 7.15 out of 10.
## The Bottom Line
The future of ESG investing is bright, especially when it comes to [mid-cap companies](https://www.investopedia.com/top-companies-in-mid-cap-etfs-5225505) that are aligning with government and consumer demand for energy from sustainable sources. Investors are more concerned than ever when it comes to ESG-related topics such as low carbon emissions strategies, reducing exposure to controversial business areas, product quality, worker safety, labor standards, voting rights, executive pay versus employee pay, and long-term sustainability.
ESG scoring metrics are starting to appear on many ETF profile pages as well as on company quote pages in financial media. As ESG continues to grow in prominence, it is natural that the role of scoring methodologies will continue to play an important role in [investment strategies](https://www.investopedia.com/how-to-invest-in-esg-7499371), and that we will start to see more ETFs like the iShares ESG Screened S&P Mid-Cap ETF.
## What Is ESG Investing?
ESG stands for environmental, social, and governance. Socially conscious investors use a variety of dimensions across these three areas to filter potential investment candidates.
## Is Buying a "Clean" ETF Considered ESG Investing?
Certain holdings of "clean" ETFs may not align with the goals and values of an ESG investor. For example, sometimes a holding such as a large-cap oil-and-gas company will be added to a "clean" ETF due to its investments or intentions in the alternative energy space. It is always a good idea to conduct your own research to ensure that investments align with your values and investment goals.
## What Is an ESG Rating?
ESG ratings are the comprehensive measures of a company or investment fund's long-term commitment to socially responsible investments and dimensions across environmental, social, and corporate governance. ESG scoring metrics are now available from a variety of companies. One of the most popular is the MSCI ESG ratings.
|
When it comes to investing, it is natural for investors to seek exposure to themes that support their personal outlook as well as their associated investment goals. Investors commonly align their portfolios with a certain strategy or sector that they think is positioned to do well over the long term. For many, this means that they rarely know or understand the details of the holdings that make up their portfolios. In some cases, investors may want to gain or limit exposure to certain international markets, niche market segments, or even different types of securities, but they never really understand the details of how their portfolio is constructed.
Unfortunately, until recently, many investors never really stopped to consider the type of impact that the holdings of their portfolios have on the environment, society, communities, or the overall well-being of stakeholders. Commonly, profit and gain are primary investment goals, and little thought is given to anything else.
However, given the rise of environmental, social, and governance (ESG) investing and the underlying concerns many investors have about related dimensions, strategies and the types of investment candidates that make it into portfolios are changing. In this article, we take a closer look at how mid-cap investors are taking ESG factors into consideration when identifying candidates for their portfolios.
Key Takeaways
ESG investing is becoming a dominant theme for mid-cap investors to consider as part of their overall investment strategies.ESG scores and related metrics are becoming popular data points that can be found on ETF and company profile pages across financial media. These metrics will help mid-cap investors compare investment candidates through an ESG lens.The top holdings of a wide variety of ETFs targeted at themes such as clean energy offer investors an interesting array of investment candidates.ETFs such as the iShares ESG Screened S&P Mid-Cap ETF offer investors a new way of gaining exposure to a basket of ESG-filtered companies.
Environmental and Sustainable Investing
One of the factors that is a top priority for ESG investors is the overall impact that investments have on the environment. The overarching goal of many ESG-based strategies is to reduce the global carbon footprint in an effort to address the climate crisis.
According to Larry Fink, founder, chairman, and chief executive officer of BlackRock, Inc. (BLK), in his 2022 letter to CEOs, "The next 1,000 unicorns won't be search engines or social media companies, they'll be sustainable, scalable innovators—startups that help the world decarbonize and make the energy transition affordable for all consumers." Fink goes on to say that it will not be only the small companies to pave the way forward, but that many incumbents have an advantage in capital, market knowledge, and technical expertise.
In the spirit of this sentiment, the BlackRock CEO would likely agree that mid-cap companies, or those that currently have a market capitalization of between $2 billion and $10 billion, are also uniquely positioned to make a significant difference in the transition toward net-zero carbon emissions.
Larry Fink is the CEO of BlackRock, which he and seven partners founded in 1988. Fink has been recognized for his leadership by Fortune and other publications. Barron's has named him one of the World's Best CEOs for 15 consecutive years.
From a macro perspective, companies that prioritize the production and distribution of clean energy stand to benefit from government and corporate initiatives, as well as increased consumer demand for the foreseeable future. Each party mentioned above is calling for energy to come from sustainable sources such as wind, solar, and hydro.
Investors who are interested in gaining exposure to clean-tech companies can utilize standard stock screeners and then conduct their own research to narrow down the list of possible candidates. Or more simply, they can look to the top holdings of popular exchange-traded funds (ETFs), such as:
VanEck Environmental Services ETF (EVX)
iShares Global Clean Energy ETF (ICLN)
Global X Lithium & Battery Tech ETF (LIT)
Invesco Solar ETF (TAN)
Invesco WilderHill Clean Energy ETF (PBW)
ALPS Clean Energy ETF (ACES)
Invesco Global Clean Energy ETF (PBD)
VanEck Low Carbon Energy ETF (SMOG)
First Trust Global Wind Energy ETF (FAN)
SPDR Kensho Clean Power ETF (CNRG)
Some "clean" ETFs contain securities from oil and auto companies because these companies devote some of their research to alternative energy. Investors should do their research to determine whether an ETF aligns with their values and investment goals.
ESG Scoring
Those who are new to ESG investing will be interested to know that several firms have established standardized scoring methodologies. ESG scores can serve as a basis for comparing companies and funds across many different metrics, such as a fund's exposure to carbon-intensive companies. In many cases, metrics are all taken together to come up with one total ESG score that can be found for a significant portion of publicly traded funds and securities.
For example, the MSCI ESG rating is designed to measure a company's resilience to long-term industry material environmental, social, and governance risks. The rules-based methodology identifies leaders and laggards based on a scale from AAA through to CCC. MSCI also has an overall ESG Quality Score between 0 and 10 for ease of comparison.
Aside from MSCI ESG Ratings, other common ESG scoring metrics come from S&P Global ESG Scores, or Refinitiv Lipper, all of which are becoming quite common on the detail pages of many publicly traded ETFs.
iShares ESG Screened S&P Mid-Cap ETF
So far, this article has focused on the environmental and sustainable factors of ESG investing because they are currently the highest priority for most investors. However, dimensions such as exposure to controversial business areas and other governance-related issues are also very important. Though filtering based on specific types of business exposure and governance-related issues is more complicated than filtering based on exposure to broad industries such as wind or solar, it is not impossible for those who are interested.
Conversely, those who do not have the time, experience, or interest to conduct ESG-based screens may be interested in ETFs such as the iShares ESG Screened S&P Mid-Cap ETF (XJH), which utilizes screening techniques to reduce exposure to company involvement in controversies and controversial business activities. In the case of XJH, the fund's managers seek to remove exposure to controversial weapons, small arms, tobacco, oil sands and shale energy, thermal coal, and fossil fuel reserves. The fund has an MSCI ESG Fund Rating of AA and an overall ESG Quality Score of 7.15 out of 10.
The Bottom Line
The future of ESG investing is bright, especially when it comes to mid-cap companies that are aligning with government and consumer demand for energy from sustainable sources. Investors are more concerned than ever when it comes to ESG-related topics such as low carbon emissions strategies, reducing exposure to controversial business areas, product quality, worker safety, labor standards, voting rights, executive pay versus employee pay, and long-term sustainability.
ESG scoring metrics are starting to appear on many ETF profile pages as well as on company quote pages in financial media. As ESG continues to grow in prominence, it is natural that the role of scoring methodologies will continue to play an important role in investment strategies, and that we will start to see more ETFs like the iShares ESG Screened S&P Mid-Cap ETF.
What Is ESG Investing?
ESG stands for environmental, social, and governance. Socially conscious investors use a variety of dimensions across these three areas to filter potential investment candidates.
Is Buying a "Clean" ETF Considered ESG Investing?
Certain holdings of "clean" ETFs may not align with the goals and values of an ESG investor. For example, sometimes a holding such as a large-cap oil-and-gas company will be added to a "clean" ETF due to its investments or intentions in the alternative energy space. It is always a good idea to conduct your own research to ensure that investments align with your values and investment goals.
What Is an ESG Rating?
ESG ratings are the comprehensive measures of a company or investment fund's long-term commitment to socially responsible investments and dimensions across environmental, social, and corporate governance. ESG scoring metrics are now available from a variety of companies. One of the most popular is the MSCI ESG ratings.
|
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],
[
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],
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],
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[
"investment strategies",
"https://www.investopedia.com/how-to-invest-in-esg-7499371"
]
] |
https://www.investopedia.com/the-express-podcast-episode-144-7558515
|
Resetting our Money Mindset with a Financial Therapist
|
<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=MERE5932662852" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Resetting our Money Mindset with a Financial Therapist"></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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.drprestoncherry.com/" rel="nofollow">Dr. Preston Cherry</a> joins <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-investopedia-express-podcast-5215636">The Express</a> to talk about how financial therapy can help us break through our emotional barriers that prevent us from making the right investing, saving, and planning decisions at any age. Plus, we run through the first half scorecard and look for trends and patterns that provide clues for what the second half of the year may bring. Earnings season is upon us and the forecast calls for pain, but is it already priced in?
</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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</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)
[Dr. Preston Cherry](https://www.drprestoncherry.com/) joins [The Express](https://www.investopedia.com/the-investopedia-express-podcast-5215636) to talk about how financial therapy can help us break through our emotional barriers that prevent us from making the right investing, saving, and planning decisions at any age. Plus, we run through the first half scorecard and look for trends and patterns that provide clues for what the second half of the year may bring. Earnings season is upon us and the forecast calls for pain, but is it already priced in?
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM
Dr. Preston Cherry joins The Express to talk about how financial therapy can help us break through our emotional barriers that prevent us from making the right investing, saving, and planning decisions at any age. Plus, we run through the first half scorecard and look for trends and patterns that provide clues for what the second half of the year may bring. Earnings season is upon us and the forecast calls for pain, but is it already priced in?
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
[
[
"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"
],
[
"Dr. Preston Cherry",
"https://www.drprestoncherry.com/"
],
[
"The Express",
"https://www.investopedia.com/the-investopedia-express-podcast-5215636"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/terms/f/financial-health.asp
|
Financial Health: Definition and How to Measure and Improve It
|
<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-financial-health"></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 Financial Health? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Financial health is a term used to describe the state of one's personal monetary affairs. There are many dimensions to financial health, including the amount of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savings.asp">savings</a> you have, how much you’re putting away for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement.asp">retirement</a>, and how much of your income you are spending on fixed or non-discretionary expenses.
</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 state and stability of an individual's personal finances and financial affairs are called their financial health.</li><li>Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.</li><li>To improve your financial health, you need to assess your current net worth, create a budget you can stick to, build an emergency fund, and pay down your debts.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-financial-health"></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 Financial Health </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Financial experts have devised rough guidelines for each indicator of financial health, but each person's situation is different. For this reason, it is worthwhile to spend time developing your own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial_plan.asp">financial plan</a> to ensure that you are on track to reach your goals and that you’re not putting yourself at undue <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialrisk.asp">financial risk</a> if the unexpected occurs.
</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-measure-your-financial-health"></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"> Measure Your Financial Health </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:
</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>How prepared are you for unexpected events? Do you have an emergency fund?</li><li>What is your net worth? Is it positive or negative?</li><li>Do you have the things you need in life? How about the things you want?</li><li>What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?</li><li>Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal? </li><li>Do you have enough insurance coverage—whether it be health or life?</li>
</ul>
<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-financial-health-is-determined"></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 Financial Health Is Determined </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> An individual’s financial health can be measured in a number of ways. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage.asp">mortgages</a>, and auto and student loans.<span class="ql-inline-citation" data-cite="1"></span> Financial health is not a static figure. It changes based on an individual’s liquidity and assets, as well as the fluctuation of the price of goods and services.
</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"> For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite the good state of their initial financial health, the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods.
</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"> Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/returnoninvestment.asp">returns on investments</a> that have been made, and a cash balance that is growing and is on track to continue to grow.<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_20-0"></div>
<span class="heading-toc" id="toc-improving-your-financial-health"></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"> Improving Your Financial Health </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> To improve your financial health you must first take a hard, realistic look at where you’re currently at. Calculate your net worth and figure out where you stand. This includes taking everything you own, such as retirement accounts, vehicles, and other assets and subtracting any and all debts.<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_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"> Budgeting </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Then you need to create a budget. With your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">budget</a>, it’s not enough just to plan for where you’ll be spending, but it’s also important to take a hard and close look at where you already spend. Are there areas where you could cut back? Recurring subscriptions that you don’t really need—such as cable? It’s fortuitous to understand what your “needs” are versus what your “wants” are.
</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"> Use spreadsheets or mobile apps to help set up a budget. Or, use the time-tested <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalbudgeting.asp">envelope method</a>, which has you create an envelope for each budget item, such as groceries, and keeping the allocated cash in the respective envelope.<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"> One of the major keys to a budget, and maintaining your financial health, is to stick to your budget regardless of whether you start making more money or bringing in more income. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifestyle-creep.asp">Lifestyle creep</a>, which includes spending more money as you make more money, is detrimental to your financial health.
</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"> Emergency Fund </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Building an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/ofheo.asp">emergency fund</a> can materially boost your financial health. The fund is meant to be money that is saved and readily available for emergencies, such as car repairs or job loss. The goal should be to have three to six months’ worth of living expenses in your energy fund.<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_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"> Debt </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Pay down your debt. Use either the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt-avalanche.asp">avalanche</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/snowball.asp">snowball</a> methods. The avalanche method suggests paying as much as possible toward the highest interest debt while paying the minimum on all others. The snowball, meanwhile, suggests taking the smallest debt balance first and then work your way up to the largest debt.<span class="ql-inline-citation" data-cite="6"></span> There are <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp">pros and cons of each</a>; pick the one that works the best for your debt load and your money-handling preferences.
</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-rules-and-tips-for-financial-health"></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"> Rules and Tips for Financial Health </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> When it comes to effective personal finance—keeping your financial health in tip-top shape isn’t always easy. We get caught up with living life. However, here are a few quick rules and tips that you can follow to either improve or keep you in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inthepink.asp">good financial health</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0">
<li>Automate your bill pay and savings—that is, set up automatic transfers to a savings account and auto-pay all your bills.</li>
<li>Always look for free checking and free accounts.</li>
<li>Shop around for insurance, cable or and other recurring expenses. This includes if you already have these items.</li>
<li>Use a budgeting method, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp">50/30/20</a>, which says you should be spending 50% on needs, 30% on wants and saving 20% of your income. This 20% could include debt reduction if you have high-interest debts.<span class="ql-inline-citation" data-cite="7"></span></li>
<li>Try to limit spending on housing (rent or mortgage) to not more than 40% of your income.<span class="ql-inline-citation" data-cite="8"></span></li>
<li>Invest early and often. That is, try to put 10-15% of your income directly into a retirement account.<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_41-0"></div>
<span class="heading-toc" id="toc-business-financial-health"></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"> Business Financial Health </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The financial health of businesses can be gauged by comparable factors to assess the viability of a company as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goingconcern.asp">going concern</a>. For instance, if a company has revenue coming in and cash in the bank, yet is spending its resources on new investments in production equipment, office space, new hires, and other business services, it may raise questions about the long-term financial health and survivability of the company.
</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 more money is spent that does not contribute to the overall stability and potential growth of the business, it can lead to a decline that makes it difficult to pay regular expenses such as utilities and employee salaries. This may force businesses to freeze or cut salaries in order to give the company the ability to continue operations.
</p></div>
|
## What Is Financial Health?
Financial health is a term used to describe the state of one's personal monetary affairs. There are many dimensions to financial health, including the amount of [savings](https://www.investopedia.com/terms/s/savings.asp) you have, how much you’re putting away for [retirement](https://www.investopedia.com/terms/r/retirement.asp), and how much of your income you are spending on fixed or non-discretionary expenses.
### Key Takeaways
* The state and stability of an individual's personal finances and financial affairs are called their financial health.
* Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.
* To improve your financial health, you need to assess your current net worth, create a budget you can stick to, build an emergency fund, and pay down your debts.
## Understanding Financial Health
Financial experts have devised rough guidelines for each indicator of financial health, but each person's situation is different. For this reason, it is worthwhile to spend time developing your own [financial plan](https://www.investopedia.com/terms/f/financial_plan.asp) to ensure that you are on track to reach your goals and that you’re not putting yourself at undue [financial risk](https://www.investopedia.com/terms/f/financialrisk.asp) if the unexpected occurs.
## Measure Your Financial Health
To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:
* How prepared are you for unexpected events? Do you have an emergency fund?
* What is your net worth? Is it positive or negative?
* Do you have the things you need in life? How about the things you want?
* What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?
* Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal?
* Do you have enough insurance coverage—whether it be health or life?
## How Financial Health Is Determined
An individual’s financial health can be measured in a number of ways. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, [mortgages](https://www.investopedia.com/terms/m/mortgage.asp), and auto and student loans. Financial health is not a static figure. It changes based on an individual’s liquidity and assets, as well as the fluctuation of the price of goods and services.
For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite the good state of their initial financial health, the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods.
Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong [returns on investments](https://www.investopedia.com/terms/r/returnoninvestment.asp) that have been made, and a cash balance that is growing and is on track to continue to grow.
## Improving Your Financial Health
To improve your financial health you must first take a hard, realistic look at where you’re currently at. Calculate your net worth and figure out where you stand. This includes taking everything you own, such as retirement accounts, vehicles, and other assets and subtracting any and all debts.
### Budgeting
Then you need to create a budget. With your [budget](https://www.investopedia.com/terms/b/budget.asp), it’s not enough just to plan for where you’ll be spending, but it’s also important to take a hard and close look at where you already spend. Are there areas where you could cut back? Recurring subscriptions that you don’t really need—such as cable? It’s fortuitous to understand what your “needs” are versus what your “wants” are.
Use spreadsheets or mobile apps to help set up a budget. Or, use the time-tested [envelope method](https://www.investopedia.com/terms/c/capitalbudgeting.asp), which has you create an envelope for each budget item, such as groceries, and keeping the allocated cash in the respective envelope.
One of the major keys to a budget, and maintaining your financial health, is to stick to your budget regardless of whether you start making more money or bringing in more income. [Lifestyle creep](https://www.investopedia.com/terms/l/lifestyle-creep.asp), which includes spending more money as you make more money, is detrimental to your financial health.
### Emergency Fund
Building an [emergency fund](https://www.investopedia.com/terms/o/ofheo.asp) can materially boost your financial health. The fund is meant to be money that is saved and readily available for emergencies, such as car repairs or job loss. The goal should be to have three to six months’ worth of living expenses in your energy fund.
### Debt
Pay down your debt. Use either the [avalanche](https://www.investopedia.com/terms/d/debt-avalanche.asp) or [snowball](https://www.investopedia.com/terms/s/snowball.asp) methods. The avalanche method suggests paying as much as possible toward the highest interest debt while paying the minimum on all others. The snowball, meanwhile, suggests taking the smallest debt balance first and then work your way up to the largest debt. There are [pros and cons of each](https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp); pick the one that works the best for your debt load and your money-handling preferences.
## Rules and Tips for Financial Health
When it comes to effective personal finance—keeping your financial health in tip-top shape isn’t always easy. We get caught up with living life. However, here are a few quick rules and tips that you can follow to either improve or keep you in [good financial health](https://www.investopedia.com/terms/i/inthepink.asp).
* Automate your bill pay and savings—that is, set up automatic transfers to a savings account and auto-pay all your bills.
* Always look for free checking and free accounts.
* Shop around for insurance, cable or and other recurring expenses. This includes if you already have these items.
* Use a budgeting method, such as [50/30/20](https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp), which says you should be spending 50% on needs, 30% on wants and saving 20% of your income. This 20% could include debt reduction if you have high-interest debts.
* Try to limit spending on housing (rent or mortgage) to not more than 40% of your income.
* Invest early and often. That is, try to put 10-15% of your income directly into a retirement account.
## Business Financial Health
The financial health of businesses can be gauged by comparable factors to assess the viability of a company as a [going concern](https://www.investopedia.com/terms/g/goingconcern.asp). For instance, if a company has revenue coming in and cash in the bank, yet is spending its resources on new investments in production equipment, office space, new hires, and other business services, it may raise questions about the long-term financial health and survivability of the company.
If more money is spent that does not contribute to the overall stability and potential growth of the business, it can lead to a decline that makes it difficult to pay regular expenses such as utilities and employee salaries. This may force businesses to freeze or cut salaries in order to give the company the ability to continue operations.
|
What Is Financial Health?
Financial health is a term used to describe the state of one's personal monetary affairs. There are many dimensions to financial health, including the amount of savings you have, how much you’re putting away for retirement, and how much of your income you are spending on fixed or non-discretionary expenses.
Key Takeaways
The state and stability of an individual's personal finances and financial affairs are called their financial health.Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments, and a cash balance that is growing.To improve your financial health, you need to assess your current net worth, create a budget you can stick to, build an emergency fund, and pay down your debts.
Understanding Financial Health
Financial experts have devised rough guidelines for each indicator of financial health, but each person's situation is different. For this reason, it is worthwhile to spend time developing your own financial plan to ensure that you are on track to reach your goals and that you’re not putting yourself at undue financial risk if the unexpected occurs.
Measure Your Financial Health
To get a better grasp of your financial health, it might help to ask yourself a few key questions—consider this a self-assessment of your financial health:
How prepared are you for unexpected events? Do you have an emergency fund?What is your net worth? Is it positive or negative?Do you have the things you need in life? How about the things you want?What percent of your debt would you consider high interest, such as credit cards? Is it more than 50%?Are you actively saving for retirement? Do you feel you’re on track to meet your long-term goal? Do you have enough insurance coverage—whether it be health or life?
How Financial Health Is Determined
An individual’s financial health can be measured in a number of ways. A person’s savings and overall net worth represent the monetary resources at their disposal for current or future use. These can be affected by debt, such as credit cards, mortgages, and auto and student loans. Financial health is not a static figure. It changes based on an individual’s liquidity and assets, as well as the fluctuation of the price of goods and services.
For example, an individual’s salary might remain constant while the costs for gasoline, food, mortgages, and college tuition increase. Despite the good state of their initial financial health, the person may lose ground and lapse into decline if they do not keep pace with rising costs of goods.
Typical signs of strong financial health include a steady flow of income, rare changes in expenses, strong returns on investments that have been made, and a cash balance that is growing and is on track to continue to grow.
Improving Your Financial Health
To improve your financial health you must first take a hard, realistic look at where you’re currently at. Calculate your net worth and figure out where you stand. This includes taking everything you own, such as retirement accounts, vehicles, and other assets and subtracting any and all debts.
Budgeting
Then you need to create a budget. With your budget, it’s not enough just to plan for where you’ll be spending, but it’s also important to take a hard and close look at where you already spend. Are there areas where you could cut back? Recurring subscriptions that you don’t really need—such as cable? It’s fortuitous to understand what your “needs” are versus what your “wants” are.
Use spreadsheets or mobile apps to help set up a budget. Or, use the time-tested envelope method, which has you create an envelope for each budget item, such as groceries, and keeping the allocated cash in the respective envelope.
One of the major keys to a budget, and maintaining your financial health, is to stick to your budget regardless of whether you start making more money or bringing in more income. Lifestyle creep, which includes spending more money as you make more money, is detrimental to your financial health.
Emergency Fund
Building an emergency fund can materially boost your financial health. The fund is meant to be money that is saved and readily available for emergencies, such as car repairs or job loss. The goal should be to have three to six months’ worth of living expenses in your energy fund.
Debt
Pay down your debt. Use either the avalanche or snowball methods. The avalanche method suggests paying as much as possible toward the highest interest debt while paying the minimum on all others. The snowball, meanwhile, suggests taking the smallest debt balance first and then work your way up to the largest debt. There are pros and cons of each; pick the one that works the best for your debt load and your money-handling preferences.
Rules and Tips for Financial Health
When it comes to effective personal finance—keeping your financial health in tip-top shape isn’t always easy. We get caught up with living life. However, here are a few quick rules and tips that you can follow to either improve or keep you in good financial health.
Automate your bill pay and savings—that is, set up automatic transfers to a savings account and auto-pay all your bills.
Always look for free checking and free accounts.
Shop around for insurance, cable or and other recurring expenses. This includes if you already have these items.
Use a budgeting method, such as 50/30/20, which says you should be spending 50% on needs, 30% on wants and saving 20% of your income. This 20% could include debt reduction if you have high-interest debts.
Try to limit spending on housing (rent or mortgage) to not more than 40% of your income.
Invest early and often. That is, try to put 10-15% of your income directly into a retirement account.
Business Financial Health
The financial health of businesses can be gauged by comparable factors to assess the viability of a company as a going concern. For instance, if a company has revenue coming in and cash in the bank, yet is spending its resources on new investments in production equipment, office space, new hires, and other business services, it may raise questions about the long-term financial health and survivability of the company.
If more money is spent that does not contribute to the overall stability and potential growth of the business, it can lead to a decline that makes it difficult to pay regular expenses such as utilities and employee salaries. This may force businesses to freeze or cut salaries in order to give the company the ability to continue operations.
|
[
[
"savings",
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],
[
"retirement",
"https://www.investopedia.com/terms/r/retirement.asp"
],
[
"financial plan",
"https://www.investopedia.com/terms/f/financial_plan.asp"
],
[
"financial risk",
"https://www.investopedia.com/terms/f/financialrisk.asp"
],
[
"mortgages",
"https://www.investopedia.com/terms/m/mortgage.asp"
],
[
"returns on investments",
"https://www.investopedia.com/terms/r/returnoninvestment.asp"
],
[
"budget",
"https://www.investopedia.com/terms/b/budget.asp"
],
[
"envelope method",
"https://www.investopedia.com/terms/c/capitalbudgeting.asp"
],
[
"Lifestyle creep",
"https://www.investopedia.com/terms/l/lifestyle-creep.asp"
],
[
"emergency fund",
"https://www.investopedia.com/terms/o/ofheo.asp"
],
[
"avalanche",
"https://www.investopedia.com/terms/d/debt-avalanche.asp"
],
[
"snowball",
"https://www.investopedia.com/terms/s/snowball.asp"
],
[
"pros and cons of each",
"https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp"
],
[
"good financial health",
"https://www.investopedia.com/terms/i/inthepink.asp"
],
[
"50/30/20",
"https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp"
],
[
"going concern",
"https://www.investopedia.com/terms/g/goingconcern.asp"
]
] |
https://www.investopedia.com/terms/t/trade-line.asp
|
Trade Line: Definition, How It Works, and Included Records
|
<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-trade-line"></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 Trade Line? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A trade line is a record of activity for any type of credit extended to a borrower and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-reporting-agency.asp">reported to a credit reporting agency</a>. A trade line is established on a borrower’s credit report when a borrower is approved for credit. The trade line records all of the activity associated with an account.
</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"> Comprehensively, trade lines are used by credit reporting agencies to calculate a borrower’s credit score. Different credit reporting agencies give differing weights to the activities of trade lines when establishing a credit score for borrowers.
</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 trade line is created on a borrower’s credit report to keep track of all the activity on the account.</li><li>A trade line is created for every line of credit or account a debtor has such as a mortgage, car loan, student loan, credit card, or personal loan.</li><li>Trade lines include information on the creditor, the lender, and the type of credit given.</li><li>A closed credit account will generally remain on a trade line for seven to 10 years.</li><li>A trade line includes all relevant information used to determine your credit score. It is important to review your trade line to ensure all information is valid and free from error.</li></ul></div></div></div>
<span class="heading-toc" id="toc-how-a-trade-line-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 Trade Line Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A trade line is an important record-keeping mechanism that tracks the activity of borrowers on their credit reports. Each credit account has its own trade line. Borrowers will have multiple trade lines on their credit report, each representing the individual borrowing accounts for which they have been approved.
</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 basic types of accounts that have a trade line are those paid off in fixed installments, and these accounts are often broken into categories. First, revolving trade lines are reported on credit cards or other lines of credit. Second, installment trade lines report the history of car loans, mortgages, student loans, and personal loans. Open accounts, a third type of account on a trade line, are often associated with businesses as opposed to individuals.
</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-tip" 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"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Should a trade line be created in your name fraudulently, you can request to have the trade line removed from your credit history.</p></div></div></div>
<span class="heading-toc" id="toc-records-included-in-a-trade-line"></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"> Records Included in a Trade Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Trade lines may contain a variety of different data points related to the creditor, the lender, and the type of credit that is being provided. The trade line often contains the name of the creditor or lender, the account or another identifier for the type of credit being provided, the parties responsible for paying the loan, and the payment status of the account.
</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"> The trade line will also contain particular account milestones, such as the date the credit was extended, the credit limit, the payment history, all levels of delinquency if any missed payments have occurred, and the total amount owed as of the last report. If a consumer closes an account, that account will typically remain on his or her credit report as a trade line for seven years, though in some cases the account can go away sooner.
</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"> Payment status indicates whether or not payments for the loan are being made on time and how late they are if they are not being made on time. If the payments are being made on time, the payment status will indicate that the payments are being made according to the terms of the credit agreement.
</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-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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The information included in your trade lines is used to calculate your credit scores. While your credit score is a summarized snapshot of your creditworthiness, lenders may inquire to see a detailed report of your entire trade line.</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_24-0"> <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_25-0"> Late payments are usually grouped in a range of days according to how late they are. For example, delinquencies may be reported as 30 days late, 60 days late, or 90 days late. The payment status may be set to “charge off” if the creditor deems it unlikely that the debt will be repaid, and the status may also indicate that the credit recipient has entered bankruptcy.
</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"> As trade lines are used by credit reporting agencies to develop an individual’s credit score, credit scores vary, with higher scores generally given to individuals with more-favorable trade line reporting. Factors considered when calculating the credit score include the number of trade lines, types of trade lines, lengths of open accounts, and payment history.
</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"> In addition to reviewing a borrower’s credit score, a lender who pulls data from a credit-reporting agency may also comprehensively analyze all of the trade line reporting on a credit report when considering a credit application in the underwriting process.
</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"> FICO Credit Score </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> When applying for credit, your lender will often request your credit score as part of the approval process. Your FICO score is directly determined from the information listed on each trade line. Below is how your FICO score is calculated and how each section relates to trade lines.
</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>Payment History (35%):</strong> Trade lines include debt or lines of credit that have been closed for up to 10 years.</li><li><strong>Amounts Owed (30%):</strong> Trade lines are created for every line of credit. Each line of credit, revolving line, or installment agreement has its own trade line.</li><li><strong>Length of Credit History (15%):</strong> Trade lines include every payment you've ever made against every account or line. This also includes every installment payment you've missed.</li><li><strong>New Credit (10%):</strong> Trade lines are generally created within a month of the first payment being made on the associated line or account.</li><li><strong>Credit Mix (10%):</strong> Trade lines are created for a variety of types of accounts including mortgages, car loans, credit cards, student loans, and personal loans.<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>
<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-is-a-trade-line"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Trade Line?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trade line is a summary on every revolving or installment credit you have. This detailed report outlines your creditworthiness by communicating to creditors and lenders your payment history, your credit history, and your delinquencies.</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-what-is-an-example-of-a-trade-line"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is an Example of a Trade Line?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trade line is created for every credit line you own. An example of a trade line is your car payment history. When you begin repaying a car loan, a trade line is created that summarizes your contact information, your current payment status, the date the line of credit was opened, and the date the line was closed.</p><p>The trade line will also report current information such as the date of your last payment, the current balance remaining, and your monthly payment amount.</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-can-trade-lines-hurt-your-credit"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Trade Lines Hurt Your Credit?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, trade lines communicate to lenders your prior creditworthiness and details how much debt you have, what your current minimum monthly payments are, and what your historical payment delinquencies are.</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-how-do-you-get-a-trade-line"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Get a Trade Line?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A trade line is automatically created for you when a new line of credit is started. For example, when you sign up for a new credit card, a new trade line is created specific to that individual line of credit. As you incur purchases on the card and pay off debt balances, a record of history is created.</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-long-do-trade-lines-last"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Do Trade Lines Last?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Trade lines may show up on your credit report as soon as 15 days after the time of purchase. Alternatively, a trade line may be delayed on showing on your report up to 45 days depending on the timing of the purchase.</p><p>Each credit reporting agency may have varying terms on how long a trade line is maintained. In general, a trade line is often maintained on your account 10 years after the trade line has been closed. Trade lines with a negative history are generally closed between seven to 10 years.</p><p>Trade lines for fraudulent or erroneous reports can be disputed. After credit bureau agencies receive valid proof, these trade lines are often removed within 30 days of review.<span class="ql-inline-citation" data-cite="1"></span><br/></p></div>
</div></div>
|
## What Is a Trade Line?
A trade line is a record of activity for any type of credit extended to a borrower and [reported to a credit reporting agency](https://www.investopedia.com/terms/c/credit-reporting-agency.asp). A trade line is established on a borrower’s credit report when a borrower is approved for credit. The trade line records all of the activity associated with an account.
Comprehensively, trade lines are used by credit reporting agencies to calculate a borrower’s credit score. Different credit reporting agencies give differing weights to the activities of trade lines when establishing a credit score for borrowers.
### Key Takeaways
* A trade line is created on a borrower’s credit report to keep track of all the activity on the account.
* A trade line is created for every line of credit or account a debtor has such as a mortgage, car loan, student loan, credit card, or personal loan.
* Trade lines include information on the creditor, the lender, and the type of credit given.
* A closed credit account will generally remain on a trade line for seven to 10 years.
* A trade line includes all relevant information used to determine your credit score. It is important to review your trade line to ensure all information is valid and free from error.
## How a Trade Line Works
A trade line is an important record-keeping mechanism that tracks the activity of borrowers on their credit reports. Each credit account has its own trade line. Borrowers will have multiple trade lines on their credit report, each representing the individual borrowing accounts for which they have been approved.
The basic types of accounts that have a trade line are those paid off in fixed installments, and these accounts are often broken into categories. First, revolving trade lines are reported on credit cards or other lines of credit. Second, installment trade lines report the history of car loans, mortgages, student loans, and personal loans. Open accounts, a third type of account on a trade line, are often associated with businesses as opposed to individuals.
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Should a trade line be created in your name fraudulently, you can request to have the trade line removed from your credit history.
## Records Included in a Trade Line
Trade lines may contain a variety of different data points related to the creditor, the lender, and the type of credit that is being provided. The trade line often contains the name of the creditor or lender, the account or another identifier for the type of credit being provided, the parties responsible for paying the loan, and the payment status of the account.
The trade line will also contain particular account milestones, such as the date the credit was extended, the credit limit, the payment history, all levels of delinquency if any missed payments have occurred, and the total amount owed as of the last report. If a consumer closes an account, that account will typically remain on his or her credit report as a trade line for seven years, though in some cases the account can go away sooner.
Payment status indicates whether or not payments for the loan are being made on time and how late they are if they are not being made on time. If the payments are being made on time, the payment status will indicate that the payments are being made according to the terms of the credit agreement.
###
The information included in your trade lines is used to calculate your credit scores. While your credit score is a summarized snapshot of your creditworthiness, lenders may inquire to see a detailed report of your entire trade line.
## Special Considerations
Late payments are usually grouped in a range of days according to how late they are. For example, delinquencies may be reported as 30 days late, 60 days late, or 90 days late. The payment status may be set to “charge off” if the creditor deems it unlikely that the debt will be repaid, and the status may also indicate that the credit recipient has entered bankruptcy.
As trade lines are used by credit reporting agencies to develop an individual’s credit score, credit scores vary, with higher scores generally given to individuals with more-favorable trade line reporting. Factors considered when calculating the credit score include the number of trade lines, types of trade lines, lengths of open accounts, and payment history.
In addition to reviewing a borrower’s credit score, a lender who pulls data from a credit-reporting agency may also comprehensively analyze all of the trade line reporting on a credit report when considering a credit application in the underwriting process.
### FICO Credit Score
When applying for credit, your lender will often request your credit score as part of the approval process. Your FICO score is directly determined from the information listed on each trade line. Below is how your FICO score is calculated and how each section relates to trade lines.
* **Payment History (35%):** Trade lines include debt or lines of credit that have been closed for up to 10 years.
* **Amounts Owed (30%):** Trade lines are created for every line of credit. Each line of credit, revolving line, or installment agreement has its own trade line.
* **Length of Credit History (15%):** Trade lines include every payment you've ever made against every account or line. This also includes every installment payment you've missed.
* **New Credit (10%):** Trade lines are generally created within a month of the first payment being made on the associated line or account.
* **Credit Mix (10%):** Trade lines are created for a variety of types of accounts including mortgages, car loans, credit cards, student loans, and personal loans.
## What Is a Trade Line?
A trade line is a summary on every revolving or installment credit you have. This detailed report outlines your creditworthiness by communicating to creditors and lenders your payment history, your credit history, and your delinquencies.
## What Is an Example of a Trade Line?
A trade line is created for every credit line you own. An example of a trade line is your car payment history. When you begin repaying a car loan, a trade line is created that summarizes your contact information, your current payment status, the date the line of credit was opened, and the date the line was closed.
The trade line will also report current information such as the date of your last payment, the current balance remaining, and your monthly payment amount.
## Can Trade Lines Hurt Your Credit?
Yes, trade lines communicate to lenders your prior creditworthiness and details how much debt you have, what your current minimum monthly payments are, and what your historical payment delinquencies are.
## How Do You Get a Trade Line?
A trade line is automatically created for you when a new line of credit is started. For example, when you sign up for a new credit card, a new trade line is created specific to that individual line of credit. As you incur purchases on the card and pay off debt balances, a record of history is created.
## How Long Do Trade Lines Last?
Trade lines may show up on your credit report as soon as 15 days after the time of purchase. Alternatively, a trade line may be delayed on showing on your report up to 45 days depending on the timing of the purchase.
Each credit reporting agency may have varying terms on how long a trade line is maintained. In general, a trade line is often maintained on your account 10 years after the trade line has been closed. Trade lines with a negative history are generally closed between seven to 10 years.
Trade lines for fraudulent or erroneous reports can be disputed. After credit bureau agencies receive valid proof, these trade lines are often removed within 30 days of review.
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What Is a Trade Line?
A trade line is a record of activity for any type of credit extended to a borrower and reported to a credit reporting agency. A trade line is established on a borrower’s credit report when a borrower is approved for credit. The trade line records all of the activity associated with an account.
Comprehensively, trade lines are used by credit reporting agencies to calculate a borrower’s credit score. Different credit reporting agencies give differing weights to the activities of trade lines when establishing a credit score for borrowers.
Key Takeaways
A trade line is created on a borrower’s credit report to keep track of all the activity on the account.A trade line is created for every line of credit or account a debtor has such as a mortgage, car loan, student loan, credit card, or personal loan.Trade lines include information on the creditor, the lender, and the type of credit given.A closed credit account will generally remain on a trade line for seven to 10 years.A trade line includes all relevant information used to determine your credit score. It is important to review your trade line to ensure all information is valid and free from error.
How a Trade Line Works
A trade line is an important record-keeping mechanism that tracks the activity of borrowers on their credit reports. Each credit account has its own trade line. Borrowers will have multiple trade lines on their credit report, each representing the individual borrowing accounts for which they have been approved.
The basic types of accounts that have a trade line are those paid off in fixed installments, and these accounts are often broken into categories. First, revolving trade lines are reported on credit cards or other lines of credit. Second, installment trade lines report the history of car loans, mortgages, student loans, and personal loans. Open accounts, a third type of account on a trade line, are often associated with businesses as opposed to individuals.
Should a trade line be created in your name fraudulently, you can request to have the trade line removed from your credit history.
Records Included in a Trade Line
Trade lines may contain a variety of different data points related to the creditor, the lender, and the type of credit that is being provided. The trade line often contains the name of the creditor or lender, the account or another identifier for the type of credit being provided, the parties responsible for paying the loan, and the payment status of the account.
The trade line will also contain particular account milestones, such as the date the credit was extended, the credit limit, the payment history, all levels of delinquency if any missed payments have occurred, and the total amount owed as of the last report. If a consumer closes an account, that account will typically remain on his or her credit report as a trade line for seven years, though in some cases the account can go away sooner.
Payment status indicates whether or not payments for the loan are being made on time and how late they are if they are not being made on time. If the payments are being made on time, the payment status will indicate that the payments are being made according to the terms of the credit agreement.
The information included in your trade lines is used to calculate your credit scores. While your credit score is a summarized snapshot of your creditworthiness, lenders may inquire to see a detailed report of your entire trade line.
Special Considerations
Late payments are usually grouped in a range of days according to how late they are. For example, delinquencies may be reported as 30 days late, 60 days late, or 90 days late. The payment status may be set to “charge off” if the creditor deems it unlikely that the debt will be repaid, and the status may also indicate that the credit recipient has entered bankruptcy.
As trade lines are used by credit reporting agencies to develop an individual’s credit score, credit scores vary, with higher scores generally given to individuals with more-favorable trade line reporting. Factors considered when calculating the credit score include the number of trade lines, types of trade lines, lengths of open accounts, and payment history.
In addition to reviewing a borrower’s credit score, a lender who pulls data from a credit-reporting agency may also comprehensively analyze all of the trade line reporting on a credit report when considering a credit application in the underwriting process.
FICO Credit Score
When applying for credit, your lender will often request your credit score as part of the approval process. Your FICO score is directly determined from the information listed on each trade line. Below is how your FICO score is calculated and how each section relates to trade lines.
Payment History (35%): Trade lines include debt or lines of credit that have been closed for up to 10 years.Amounts Owed (30%): Trade lines are created for every line of credit. Each line of credit, revolving line, or installment agreement has its own trade line.Length of Credit History (15%): Trade lines include every payment you've ever made against every account or line. This also includes every installment payment you've missed.New Credit (10%): Trade lines are generally created within a month of the first payment being made on the associated line or account.Credit Mix (10%): Trade lines are created for a variety of types of accounts including mortgages, car loans, credit cards, student loans, and personal loans.
What Is a Trade Line?
A trade line is a summary on every revolving or installment credit you have. This detailed report outlines your creditworthiness by communicating to creditors and lenders your payment history, your credit history, and your delinquencies.
What Is an Example of a Trade Line?
A trade line is created for every credit line you own. An example of a trade line is your car payment history. When you begin repaying a car loan, a trade line is created that summarizes your contact information, your current payment status, the date the line of credit was opened, and the date the line was closed.The trade line will also report current information such as the date of your last payment, the current balance remaining, and your monthly payment amount.
Can Trade Lines Hurt Your Credit?
Yes, trade lines communicate to lenders your prior creditworthiness and details how much debt you have, what your current minimum monthly payments are, and what your historical payment delinquencies are.
How Do You Get a Trade Line?
A trade line is automatically created for you when a new line of credit is started. For example, when you sign up for a new credit card, a new trade line is created specific to that individual line of credit. As you incur purchases on the card and pay off debt balances, a record of history is created.
How Long Do Trade Lines Last?
Trade lines may show up on your credit report as soon as 15 days after the time of purchase. Alternatively, a trade line may be delayed on showing on your report up to 45 days depending on the timing of the purchase.Each credit reporting agency may have varying terms on how long a trade line is maintained. In general, a trade line is often maintained on your account 10 years after the trade line has been closed. Trade lines with a negative history are generally closed between seven to 10 years.Trade lines for fraudulent or erroneous reports can be disputed. After credit bureau agencies receive valid proof, these trade lines are often removed within 30 days of review.
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https://www.investopedia.com/mortgage/insurance/avoid-pmi/
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6 Reasons to Avoid Private Mortgage Insurance (PMI)
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<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"> Before buying a home, you should ideally save enough money for a 20% down payment. If you get a loan with a lower down payment, you will have to pay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/insurance/">private mortgage insurance</a> (PMI). The purpose of PMI is to protect the mortgage company if you default.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> PMI provides a way to buy a house without having to use a large down payment. Sometimes it is the only option for new homebuyers. However, there are many reasons to try to avoid PMI if possible. Learn more about those reasons as well as strategies for avoiding PMI.
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<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>Private mortgage insurance (PMI) protects the mortgage company if you default.</li><li>PMI adds significant expense to a mortgage payment.</li><li>Mortgage insurance premiums are not tax deductible.</li><li>In some circumstances, PMI can be avoided by using a piggyback second mortgage.</li></ul></div></div></div>
<span class="heading-toc" id="toc-six-reasons-to-avoid-private-mortgage-insurance-pmi"></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"> Six Reasons to Avoid Private Mortgage Insurance (PMI) </span> </h2>
<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"> 1. Cost </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The total costs of PMI over the life of the mortgage can be substantial. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071514/how-can-i-avoid-paying-private-mortgage-insurance-pmi.asp">PMI</a> typically costs between 0.5% to 1% of the entire loan amount on an annual basis. That means, for example, you could pay as much as $1,000 a year—or $83.33 per month—on a $100,000 loan, assuming a 1% PMI fee. The amount will vary based on your credit score and loan-to-value ratio.<span class="ql-inline-citation" data-cite="7"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Paying PMI can be more costly than paying interest on a piggyback second mortgage, which can be used in lieu of a cash down payment. Saving would depend on factors like the terms of the loans and cost of PMI.<br/>
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<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"> 2. Not Deductible </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Up until 2017, PMI was still tax-deductible, but only if a married taxpayer’s adjusted gross income was less than<strong> </strong>$110,000 per year. The 2017 Tax Cuts and Jobs Act (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/">TCJA</a>) ended the deduction for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/05/030905.asp">mortgage</a> insurance premiums entirely, effective 2018. PMI was deductible during the COVID-19 pandemic, but it is no longer deductible.<span class="ql-inline-citation" data-cite="6"></span>
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<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"> 3. Your Heirs Do Not Benefit </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The lending institution is the sole beneficiary of a mortgage insurance policy, and the proceeds are paid directly to the lender (not indirectly to the heirs). If you want to protect your heirs and provide them with money and a home upon your death, you’ll need to obtain a separate insurance policy. PMI will not provide financial protection to anyone but your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090915/mortgage-broker-vs-direct-lenders-which-best.asp">mortgage lender</a>.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> 4. Lost Investing Opportunity </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%. This could take years, and it amounts to a lot of money you pay to protect the lender without a benefit to yourself.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Money spent on PMI could have been invested and earned profits. For example, if a couple who owns a $250,000 home were to instead take the $208 per month they were spending on PMI and invest it in a mutual fund that earned an 8% annual compounded rate of return, that money would grow to $37,707 (assuming no taxes were taken out) within 10 years.<span class="ql-inline-citation" data-cite="8"></span>
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<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"> 5. Difficult to Cancel </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Usually when your equity tops 20%, you no longer have to pay PMI for conventional mortgages. However, eliminating the monthly expense isn’t as easy as just not sending in the payment. Many lenders require you to write a letter requesting that the PMI be canceled. They may require a formal appraisal of the home. This could take several months, depending upon the lender, during which time PMI still has to be paid.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> For some types of loans, like FHA loans, you cannot cancel mortgage insurance. Instead, to remove the mortgage insurance costs, you must refinance the loan or pay it down fully.<span class="ql-inline-citation" data-cite="1"></span>
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<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 Consumer Financial Protection Bureau (CFPB) recently found cases of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-the-cfpb-calls-a-junk-fee-and-what-to-do-about-them-7252923">bogus PMI charges</a> are among they types of junk fees that can occur. Be aware of mortgage servicers including a private mortgage insurance premium when one is not required.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></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"> 6. Payment Is Ongoing </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> One final issue that deserves mentioning is that some lenders require you to maintain a PMI contract for a designated period. So, even if you have met the 20% threshold, you may still be obligated to keep paying for the mortgage insurance. Read the fine print of your PMI contract to determine if this is the case for you. PMI isn’t automatically canceled until your equity hits 22%.
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<span class="heading-toc" id="toc-how-to-avoid-paying-pmi"></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"> How to Avoid Paying PMI </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> In some circumstances, PMI can be avoided by using a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/041415/how-combine-two-mortgages-one.asp">piggyback mortgage</a>. It works by using two mortgages so that neither mortgage provides for more than 80% of the value of the home.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> For example, if you want to purchase a house for $200,000 but only have enough money saved for a 10% down payment, you can enter into what is known as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/8/80_10_10_mortgage.asp">80/10/10 agreement</a>. You will take out one loan totaling 80% of the total value of the property, or $160,000, and then a second loan, referred to as a piggyback, for $20,000 (or 10% of the value). Finally, as part of the transaction, you put down the final 10%, or $20,000, in cash.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> By splitting up the loans, you may be able to deduct the interest on both of them and avoid PMI altogether. Of course, there is a catch. Very often the terms of a piggyback loan are risky. Many are adjustable-rate loans, contain balloon provisions, or are due in 15 or 20 years (as opposed to the more standard 30-year mortgage).
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<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-how-can-i-avoid-paying-pmi"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Avoid Paying PMI?</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/how-to-remove-pmi-from-your-mortgage-8623031">You can avoid paying PMI</a> by providing a down payment of more than 20% when you take out a mortgage. Mortgages with down payments of less than 20% will require PMI until you build up a loan-to-value ratio of at least 80%. You can also avoid paying PMI by using two mortgages, or a piggyback second mortgage.</p></div>
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<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-piggyback-mortgage"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Piggyback Mortgage?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/piggy_back_mortgage.asp">piggyback mortgage</a> is a second mortgage used to fulfill the down payment requirements so that the homebuyer does not have to pay private mortgage insurance (PMI). The buyer will hold two mortgages instead of one, and they may have different interest rates.<span class="ql-inline-citation" data-cite="3"></span></p></div>
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<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-can-you-remove-pmi-on-fha-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Remove PMI on FHA Loans?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>If you have private mortgage insurance (PMI) included on your FHA loan, you cannot remove it if you closed the loan after June 3, 2013. To remove PMI on an FHA loan, you must either pay the loan back in full or refinance the loan.<span class="ql-inline-citation" data-cite="4"></span></p></div>
</div>
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<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"> PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable. If you are buying a home and have a small down payment amount, consider consulting a financial advisor or mortgage professional to review the options that best fit your situation.
</p></div>
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Before buying a home, you should ideally save enough money for a 20% down payment. If you get a loan with a lower down payment, you will have to pay [private mortgage insurance](https://www.investopedia.com/mortgage/insurance/) (PMI). The purpose of PMI is to protect the mortgage company if you default.
PMI provides a way to buy a house without having to use a large down payment. Sometimes it is the only option for new homebuyers. However, there are many reasons to try to avoid PMI if possible. Learn more about those reasons as well as strategies for avoiding PMI.
### Key Takeaways
* Private mortgage insurance (PMI) protects the mortgage company if you default.
* PMI adds significant expense to a mortgage payment.
* Mortgage insurance premiums are not tax deductible.
* In some circumstances, PMI can be avoided by using a piggyback second mortgage.
## Six Reasons to Avoid Private Mortgage Insurance (PMI)
### 1. Cost
The total costs of PMI over the life of the mortgage can be substantial. [PMI](https://www.investopedia.com/ask/answers/071514/how-can-i-avoid-paying-private-mortgage-insurance-pmi.asp) typically costs between 0.5% to 1% of the entire loan amount on an annual basis. That means, for example, you could pay as much as $1,000 a year—or $83.33 per month—on a $100,000 loan, assuming a 1% PMI fee. The amount will vary based on your credit score and loan-to-value ratio.
Paying PMI can be more costly than paying interest on a piggyback second mortgage, which can be used in lieu of a cash down payment. Saving would depend on factors like the terms of the loans and cost of PMI.
### 2. Not Deductible
Up until 2017, PMI was still tax-deductible, but only if a married taxpayer’s adjusted gross income was less than$110,000 per year. The 2017 Tax Cuts and Jobs Act ([TCJA](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/)) ended the deduction for [mortgage](https://www.investopedia.com/articles/pf/05/030905.asp) insurance premiums entirely, effective 2018. PMI was deductible during the COVID-19 pandemic, but it is no longer deductible.
### 3. Your Heirs Do Not Benefit
The lending institution is the sole beneficiary of a mortgage insurance policy, and the proceeds are paid directly to the lender (not indirectly to the heirs). If you want to protect your heirs and provide them with money and a home upon your death, you’ll need to obtain a separate insurance policy. PMI will not provide financial protection to anyone but your [mortgage lender](https://www.investopedia.com/articles/personal-finance/090915/mortgage-broker-vs-direct-lenders-which-best.asp).
### 4. Lost Investing Opportunity
Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%. This could take years, and it amounts to a lot of money you pay to protect the lender without a benefit to yourself.
Money spent on PMI could have been invested and earned profits. For example, if a couple who owns a $250,000 home were to instead take the $208 per month they were spending on PMI and invest it in a mutual fund that earned an 8% annual compounded rate of return, that money would grow to $37,707 (assuming no taxes were taken out) within 10 years.
### 5. Difficult to Cancel
Usually when your equity tops 20%, you no longer have to pay PMI for conventional mortgages. However, eliminating the monthly expense isn’t as easy as just not sending in the payment. Many lenders require you to write a letter requesting that the PMI be canceled. They may require a formal appraisal of the home. This could take several months, depending upon the lender, during which time PMI still has to be paid.
For some types of loans, like FHA loans, you cannot cancel mortgage insurance. Instead, to remove the mortgage insurance costs, you must refinance the loan or pay it down fully.
###
The Consumer Financial Protection Bureau (CFPB) recently found cases of [bogus PMI charges](https://www.investopedia.com/what-the-cfpb-calls-a-junk-fee-and-what-to-do-about-them-7252923) are among they types of junk fees that can occur. Be aware of mortgage servicers including a private mortgage insurance premium when one is not required.
### 6. Payment Is Ongoing
One final issue that deserves mentioning is that some lenders require you to maintain a PMI contract for a designated period. So, even if you have met the 20% threshold, you may still be obligated to keep paying for the mortgage insurance. Read the fine print of your PMI contract to determine if this is the case for you. PMI isn’t automatically canceled until your equity hits 22%.
## How to Avoid Paying PMI
In some circumstances, PMI can be avoided by using a [piggyback mortgage](https://www.investopedia.com/articles/personal-finance/041415/how-combine-two-mortgages-one.asp). It works by using two mortgages so that neither mortgage provides for more than 80% of the value of the home.
For example, if you want to purchase a house for $200,000 but only have enough money saved for a 10% down payment, you can enter into what is known as an [80/10/10 agreement](https://www.investopedia.com/terms/8/80_10_10_mortgage.asp). You will take out one loan totaling 80% of the total value of the property, or $160,000, and then a second loan, referred to as a piggyback, for $20,000 (or 10% of the value). Finally, as part of the transaction, you put down the final 10%, or $20,000, in cash.
By splitting up the loans, you may be able to deduct the interest on both of them and avoid PMI altogether. Of course, there is a catch. Very often the terms of a piggyback loan are risky. Many are adjustable-rate loans, contain balloon provisions, or are due in 15 or 20 years (as opposed to the more standard 30-year mortgage).
## How Can I Avoid Paying PMI?
[You can avoid paying PMI](https://www.investopedia.com/how-to-remove-pmi-from-your-mortgage-8623031) by providing a down payment of more than 20% when you take out a mortgage. Mortgages with down payments of less than 20% will require PMI until you build up a loan-to-value ratio of at least 80%. You can also avoid paying PMI by using two mortgages, or a piggyback second mortgage.
## What Is a Piggyback Mortgage?
A [piggyback mortgage](https://www.investopedia.com/terms/p/piggy_back_mortgage.asp) is a second mortgage used to fulfill the down payment requirements so that the homebuyer does not have to pay private mortgage insurance (PMI). The buyer will hold two mortgages instead of one, and they may have different interest rates.
## Can You Remove PMI on FHA Loans?
If you have private mortgage insurance (PMI) included on your FHA loan, you cannot remove it if you closed the loan after June 3, 2013. To remove PMI on an FHA loan, you must either pay the loan back in full or refinance the loan.
## The Bottom Line
PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable. If you are buying a home and have a small down payment amount, consider consulting a financial advisor or mortgage professional to review the options that best fit your situation.
|
Before buying a home, you should ideally save enough money for a 20% down payment. If you get a loan with a lower down payment, you will have to pay private mortgage insurance (PMI). The purpose of PMI is to protect the mortgage company if you default.
PMI provides a way to buy a house without having to use a large down payment. Sometimes it is the only option for new homebuyers. However, there are many reasons to try to avoid PMI if possible. Learn more about those reasons as well as strategies for avoiding PMI.
Key Takeaways
Private mortgage insurance (PMI) protects the mortgage company if you default.PMI adds significant expense to a mortgage payment.Mortgage insurance premiums are not tax deductible.In some circumstances, PMI can be avoided by using a piggyback second mortgage.
Six Reasons to Avoid Private Mortgage Insurance (PMI)
1. Cost
The total costs of PMI over the life of the mortgage can be substantial. PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis. That means, for example, you could pay as much as $1,000 a year—or $83.33 per month—on a $100,000 loan, assuming a 1% PMI fee. The amount will vary based on your credit score and loan-to-value ratio.
Paying PMI can be more costly than paying interest on a piggyback second mortgage, which can be used in lieu of a cash down payment. Saving would depend on factors like the terms of the loans and cost of PMI.
2. Not Deductible
Up until 2017, PMI was still tax-deductible, but only if a married taxpayer’s adjusted gross income was less than $110,000 per year. The 2017 Tax Cuts and Jobs Act (TCJA) ended the deduction for mortgage insurance premiums entirely, effective 2018. PMI was deductible during the COVID-19 pandemic, but it is no longer deductible.
3. Your Heirs Do Not Benefit
The lending institution is the sole beneficiary of a mortgage insurance policy, and the proceeds are paid directly to the lender (not indirectly to the heirs). If you want to protect your heirs and provide them with money and a home upon your death, you’ll need to obtain a separate insurance policy. PMI will not provide financial protection to anyone but your mortgage lender.
4. Lost Investing Opportunity
Homebuyers who put down less than 20% of the sale price will have to pay PMI until the total equity of the home reaches 20%. This could take years, and it amounts to a lot of money you pay to protect the lender without a benefit to yourself.
Money spent on PMI could have been invested and earned profits. For example, if a couple who owns a $250,000 home were to instead take the $208 per month they were spending on PMI and invest it in a mutual fund that earned an 8% annual compounded rate of return, that money would grow to $37,707 (assuming no taxes were taken out) within 10 years.
5. Difficult to Cancel
Usually when your equity tops 20%, you no longer have to pay PMI for conventional mortgages. However, eliminating the monthly expense isn’t as easy as just not sending in the payment. Many lenders require you to write a letter requesting that the PMI be canceled. They may require a formal appraisal of the home. This could take several months, depending upon the lender, during which time PMI still has to be paid.
For some types of loans, like FHA loans, you cannot cancel mortgage insurance. Instead, to remove the mortgage insurance costs, you must refinance the loan or pay it down fully.
The Consumer Financial Protection Bureau (CFPB) recently found cases of bogus PMI charges are among they types of junk fees that can occur. Be aware of mortgage servicers including a private mortgage insurance premium when one is not required.
6. Payment Is Ongoing
One final issue that deserves mentioning is that some lenders require you to maintain a PMI contract for a designated period. So, even if you have met the 20% threshold, you may still be obligated to keep paying for the mortgage insurance. Read the fine print of your PMI contract to determine if this is the case for you. PMI isn’t automatically canceled until your equity hits 22%.
How to Avoid Paying PMI
In some circumstances, PMI can be avoided by using a piggyback mortgage. It works by using two mortgages so that neither mortgage provides for more than 80% of the value of the home.
For example, if you want to purchase a house for $200,000 but only have enough money saved for a 10% down payment, you can enter into what is known as an 80/10/10 agreement. You will take out one loan totaling 80% of the total value of the property, or $160,000, and then a second loan, referred to as a piggyback, for $20,000 (or 10% of the value). Finally, as part of the transaction, you put down the final 10%, or $20,000, in cash.
By splitting up the loans, you may be able to deduct the interest on both of them and avoid PMI altogether. Of course, there is a catch. Very often the terms of a piggyback loan are risky. Many are adjustable-rate loans, contain balloon provisions, or are due in 15 or 20 years (as opposed to the more standard 30-year mortgage).
How Can I Avoid Paying PMI?
You can avoid paying PMI by providing a down payment of more than 20% when you take out a mortgage. Mortgages with down payments of less than 20% will require PMI until you build up a loan-to-value ratio of at least 80%. You can also avoid paying PMI by using two mortgages, or a piggyback second mortgage.
What Is a Piggyback Mortgage?
A piggyback mortgage is a second mortgage used to fulfill the down payment requirements so that the homebuyer does not have to pay private mortgage insurance (PMI). The buyer will hold two mortgages instead of one, and they may have different interest rates.
Can You Remove PMI on FHA Loans?
If you have private mortgage insurance (PMI) included on your FHA loan, you cannot remove it if you closed the loan after June 3, 2013. To remove PMI on an FHA loan, you must either pay the loan back in full or refinance the loan.
The Bottom Line
PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable. If you are buying a home and have a small down payment amount, consider consulting a financial advisor or mortgage professional to review the options that best fit your situation.
|
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https://www.investopedia.com/globalfoundries-q1-2024-earnings-double-expectations-stock-rises-8644470
|
GlobalFoundries Stock Surges as Income Nearly Doubles Expectations
|
<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>Shares of semiconductor manufacturer GlobalFoundries surged as markets opened Tuesday on the back of a first-quarter earnings report that included income nearly doubling analyst expectations.</li><li>However, GlobalFoundries' financial performance fell year-over-year as the semiconductor market has corrected.</li><li>The company was also one of the beneficiaries of the CHIPS Act, receiving a $1.5 billion grant from the Biden administration earlier this year to expand its operations in New York and Vermont.</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 semiconductor maker GlobalFoundries (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GFS">GFS</a>) jumped after markets opened Tuesday following the release of a first-quarter earnings report that beat expectations.
</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-financial-metrics-fall-year-over-year-but-income-nearly-doubles-estimates"></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"> Financial Metrics Fall Year-Over-Year, But Income Nearly Doubles Estimates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Despite falling from last year's first-quarter levels, GlobalFoundries' net income of $134 million, or 24 cents per share, nearly doubled analyst expectations of $73.96 million and 13 cents per share, according to estimates compiled by Visible Alpha.<span class="ql-inline-citation" data-cite="1"></span> Last year, it reported $254 million in profit, or 46 cents per share.
</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"> Revenue also fell year-over-year to $1.55 billion from last year's mark of $1.84 billion, but topped estimates of $1.52 billion.
</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"> For the current quarter, GlobalFoundries projects revenue from $1.59 billion to $1.64 billion, with net income of $78 million to $146 million, or 14 cents to 26 cents per share.
</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-globalfoundries-set-to-receive-billions-in-chips-act-new-york-state-funding-to-expand-capacity"></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"> GlobalFoundries Set to Receive Billions in CHIPS Act, New York State Funding to Expand Capacity </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> "As pockets of the semiconductor industry begin to emerge from the inventory correction, our teams are driving foundry innovation and differentiation for our customers across their essential end-markets," GlobalFoundries <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/ceo.asp">Chief Executive Officer (CEO</a>) Dr. Thomas Caulfield said. "We are delighted with the awards from both the U.S. Department of Commerce and New York State to expand our manufacturing capability in the United States, which will complement our unique global capacity offering."
</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 company manufactures <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/semiconductors-supply-chain-7367716">semiconductors</a>, which are used across a number of industries from smartphones to powering the electronics systems inside cars and other vehicles.
</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 chipmaker has been one of the beneficiaries of the Biden administration's goal of making the U.S. a semiconductor manufacturing power, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/globalfoundries-stock-up-after-usd1-5b-grant-to-boost-chip-production-key-levels-to-watch-8585057">receiving $1.5 billion</a> in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chips-and-science-act-6500333">CHIPS Act</a> funding earlier this year to build a new facility in New York and expand its operations in Vermont. The state of New York also pledged about $600 million for GF's New York facilities.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/semiconductor-shares-rise-following-first-us-grant-under-chips-act-8414335">Tens of billions</a> have been handed out from the CHIPS funding so far, to GlobalFoundries as well as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/microchip-wins-usd162-million-in-chips-funding-to-expand-chip-factories-8422143">a number of</a> its competitors, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/intel-stock-rises-on-up-to-usd8-5b-chips-act-grant-8611513">including Intel</a> (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC">INTC</a>) and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tmsc-gets-usd6-6-billion-in-chips-act-funding-stock-rises-8628158">Taiwan Semiconductor Manufacturing Company</a> (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSM">TSM</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"> GlobalFoundries shares were up about 9.4% to $54.38 at 9:49 a.m. ET Tuesday, but have fallen about 10% so far this year.
</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"> <em>Correction—May 7, 2024: This article has been updated to correct a reference to which quarter results were from</em>.
</p></div>
|
### Key Takeaways
* Shares of semiconductor manufacturer GlobalFoundries surged as markets opened Tuesday on the back of a first-quarter earnings report that included income nearly doubling analyst expectations.
* However, GlobalFoundries' financial performance fell year-over-year as the semiconductor market has corrected.
* The company was also one of the beneficiaries of the CHIPS Act, receiving a $1.5 billion grant from the Biden administration earlier this year to expand its operations in New York and Vermont.
Shares of semiconductor maker GlobalFoundries ([GFS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GFS)) jumped after markets opened Tuesday following the release of a first-quarter earnings report that beat expectations.
## Financial Metrics Fall Year-Over-Year, But Income Nearly Doubles Estimates
Despite falling from last year's first-quarter levels, GlobalFoundries' net income of $134 million, or 24 cents per share, nearly doubled analyst expectations of $73.96 million and 13 cents per share, according to estimates compiled by Visible Alpha. Last year, it reported $254 million in profit, or 46 cents per share.
Revenue also fell year-over-year to $1.55 billion from last year's mark of $1.84 billion, but topped estimates of $1.52 billion.
For the current quarter, GlobalFoundries projects revenue from $1.59 billion to $1.64 billion, with net income of $78 million to $146 million, or 14 cents to 26 cents per share.
## GlobalFoundries Set to Receive Billions in CHIPS Act, New York State Funding to Expand Capacity
"As pockets of the semiconductor industry begin to emerge from the inventory correction, our teams are driving foundry innovation and differentiation for our customers across their essential end-markets," GlobalFoundries [Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) Dr. Thomas Caulfield said. "We are delighted with the awards from both the U.S. Department of Commerce and New York State to expand our manufacturing capability in the United States, which will complement our unique global capacity offering."
The company manufactures [semiconductors](https://www.investopedia.com/semiconductors-supply-chain-7367716), which are used across a number of industries from smartphones to powering the electronics systems inside cars and other vehicles.
The chipmaker has been one of the beneficiaries of the Biden administration's goal of making the U.S. a semiconductor manufacturing power, [receiving $1.5 billion](https://www.investopedia.com/globalfoundries-stock-up-after-usd1-5b-grant-to-boost-chip-production-key-levels-to-watch-8585057) in [CHIPS Act](https://www.investopedia.com/chips-and-science-act-6500333) funding earlier this year to build a new facility in New York and expand its operations in Vermont. The state of New York also pledged about $600 million for GF's New York facilities.
[Tens of billions](https://www.investopedia.com/semiconductor-shares-rise-following-first-us-grant-under-chips-act-8414335) have been handed out from the CHIPS funding so far, to GlobalFoundries as well as [a number of](https://www.investopedia.com/microchip-wins-usd162-million-in-chips-funding-to-expand-chip-factories-8422143) its competitors, [including Intel](https://www.investopedia.com/intel-stock-rises-on-up-to-usd8-5b-chips-act-grant-8611513) ([INTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC)) and [Taiwan Semiconductor Manufacturing Company](https://www.investopedia.com/tmsc-gets-usd6-6-billion-in-chips-act-funding-stock-rises-8628158) ([TSM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSM)).
GlobalFoundries shares were up about 9.4% to $54.38 at 9:49 a.m. ET Tuesday, but have fallen about 10% so far this year.
*Correction—May 7, 2024: This article has been updated to correct a reference to which quarter results were from*.
|
Key Takeaways
Shares of semiconductor manufacturer GlobalFoundries surged as markets opened Tuesday on the back of a first-quarter earnings report that included income nearly doubling analyst expectations.However, GlobalFoundries' financial performance fell year-over-year as the semiconductor market has corrected.The company was also one of the beneficiaries of the CHIPS Act, receiving a $1.5 billion grant from the Biden administration earlier this year to expand its operations in New York and Vermont.
Shares of semiconductor maker GlobalFoundries (GFS) jumped after markets opened Tuesday following the release of a first-quarter earnings report that beat expectations.
Financial Metrics Fall Year-Over-Year, But Income Nearly Doubles Estimates
Despite falling from last year's first-quarter levels, GlobalFoundries' net income of $134 million, or 24 cents per share, nearly doubled analyst expectations of $73.96 million and 13 cents per share, according to estimates compiled by Visible Alpha. Last year, it reported $254 million in profit, or 46 cents per share.
Revenue also fell year-over-year to $1.55 billion from last year's mark of $1.84 billion, but topped estimates of $1.52 billion.
For the current quarter, GlobalFoundries projects revenue from $1.59 billion to $1.64 billion, with net income of $78 million to $146 million, or 14 cents to 26 cents per share.
GlobalFoundries Set to Receive Billions in CHIPS Act, New York State Funding to Expand Capacity
"As pockets of the semiconductor industry begin to emerge from the inventory correction, our teams are driving foundry innovation and differentiation for our customers across their essential end-markets," GlobalFoundries Chief Executive Officer (CEO) Dr. Thomas Caulfield said. "We are delighted with the awards from both the U.S. Department of Commerce and New York State to expand our manufacturing capability in the United States, which will complement our unique global capacity offering."
The company manufactures semiconductors, which are used across a number of industries from smartphones to powering the electronics systems inside cars and other vehicles.
The chipmaker has been one of the beneficiaries of the Biden administration's goal of making the U.S. a semiconductor manufacturing power, receiving $1.5 billion in CHIPS Act funding earlier this year to build a new facility in New York and expand its operations in Vermont. The state of New York also pledged about $600 million for GF's New York facilities.
Tens of billions have been handed out from the CHIPS funding so far, to GlobalFoundries as well as a number of its competitors, including Intel (INTC) and Taiwan Semiconductor Manufacturing Company (TSM).
GlobalFoundries shares were up about 9.4% to $54.38 at 9:49 a.m. ET Tuesday, but have fallen about 10% so far this year.
Correction—May 7, 2024: This article has been updated to correct a reference to which quarter results were from.
|
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],
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],
[
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],
[
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"https://www.investopedia.com/intel-stock-rises-on-up-to-usd8-5b-chips-act-grant-8611513"
],
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"INTC",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC"
],
[
"Taiwan Semiconductor Manufacturing Company",
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] |
https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp
|
Free Application for Federal Student Aid (FAFSA): An Overview
|
<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-free-application-for-federal-student-aid-fafsa"></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 Free Application for Federal Student Aid (FAFSA)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Free Application for Federal Student Aid, known as the FAFSA, is the official form to apply for federal financial aid to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/paying-for-college-as-an-lgbtq-student-5176574">pay for college</a>. It is also used by many states, individual colleges, and universities in making their financial aid decisions.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Specifically, the FAFSA determines who will receive aid in the form of loans, scholarships, and grants based on the information collected from the application.
</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 Free Application for Federal Student Aid (FAFSA) is used by the federal government to determine a family’s eligibility for grants, work-study, and loans to pay for college.</li><li>States, individual colleges and universities, and private scholarship programs also use information from the FAFSA to make financial aid decisions.</li><li>Applications for the FAFSA typically open in October of the prior year to enrollment and close in June of the academic year.</li><li>Funding is often granted on a first-come, first-serve basis, with students applying in June typically eligible only for loans.<span class="ql-inline-citation" data-cite="5"></span></li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Each FAFSA application period is 19 months, starting Oct. 1 of the year before the award year and ending June 30 of the award year. For example, FAFSA applications for the 2023–24 academic year can be submitted from Oct. 1, 2022, to June 30, 2024. Filling it out as early as possible is a good idea, as many states have financial aid deadlines considerably earlier than June 30, and their aid may be available only on a first-come, first-served basis.<span class="ql-inline-citation" data-cite="6"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The FAFSA lists some of those deadlines, and the office of Federal Student Aid publishes a more comprehensive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/apply-for-aid/fafsa/fafsa-deadlines#state">list of state student aid deadlines</a>.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><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_13-0"><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 FAFSA form for the 2024–25 school year has been delayed. Instead of becoming available on Oct. 1, 2023, it will now be available in December 2023.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div>
<span class="heading-toc" id="toc-how-the-free-application-for-federal-student-aid-fafsa-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 the Free Application for Federal Student Aid (FAFSA) Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The office of Federal Student Aid, part of the U.S. Department of Education, has provided approximately $240.7 billion in federal aid this year, as of November 2023. That aid consists of grants, work-study, and loans.<span class="ql-inline-citation" data-cite="11"></span>
</p>
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<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0">
<li><strong>Grants</strong>, sometimes referred to as scholarships, are meant for students with “exceptional financial need” and don’t have to be repaid. Today’s most common federal grants for education are known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pell-grant.asp">Pell Grants</a>.</li>
<li><strong>Work-study </strong>programs provide paid part-time jobs for undergraduate and graduate students through participating colleges and universities.</li>
<li><strong>Loans</strong>, unlike grants or scholarships, must eventually be repaid. However, federal loans tend to have low interest rates compared with those available from private lenders, in addition to more favorable repayment terms. There are several types of federal loans for higher education. Direct subsidized loans have the best terms and are available only to families with financial need. Direct unsubsidized loans are available to families regardless of financial need. Direct PLUS loans are <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/divorced-parents-financial-aid-5206693">available to parents</a> and graduate or professional students, regardless of financial need, although borrowers must have an acceptable <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a>.<span class="ql-inline-citation" data-cite="2"></span></li>
</ul>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The FAFSA, which is administered by the office of Federal Student Aid, is the doorway to all of these types of aid.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The questions on the FAFSA are intended to determine the student’s level of financial need and establish their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expected-family-contribution.asp">Student Aid Index (SAI)</a>. The SAI represents an eligibility index for student aid. Overall, the federal government, state assistance programs, the colleges to which the student is applying, and other scholarship sources all use that data to determine how much aid—and what kinds of aid—the family is eligible for.<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_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_3-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Beginning in July 2023, the SAI replaced the term “Expected Family Contribution (EFC)” on all FAFSA forms, thanks to the 2021 Consolidated Appropriations Act. The change is an attempt to clarify what this figure actually is: an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses. Adjustments to how the SAI is calculated have also taken effect.<span class="ql-inline-citation" data-cite="14"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Students can expect to receive a financial aid offer around the time that students are accepted by a college. Financial assistance may consist of a package of grants, work-study, and loans. These offers can differ from college to college.
</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-to-fill-out-the-fafsa"></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 Fill Out the FAFSA </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The FAFSA is widely known as being complex. It requires students to respond to a number of questions that may take some time to complete. Importantly, families need to submit a new FAFSA every year in order to maintain their financial aid, or to try again if they didn’t get any aid the first time they applied.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Questions range from basic identifying information for the student and their parents (name, address, Social Security number, date of birth, etc.) to a detailed examination of their finances.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In addition, students and parents will need to supply information on their income and assets, including bank accounts, investments, real estate (except for the family home), and any businesses they own (excluding family farms and small businesses). Both parents and students have a FAFSA account, and each must complete the FAFSA.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Much of this information will be available from the family’s tax returns. The Internal Revenue Service Data Retrieval Tool (IRS DRT) makes it possible to download that data directly to the FAFSA in many cases.<span class="ql-inline-citation" data-cite="3"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> To answer the other financial questions, it will be helpful to have bank, brokerage, and mutual fund statements at hand. For a preview of the FAFSA’s questions, the office of Federal Student Aid makes a copy of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://studentaid.gov/sites/default/files/2023-24-fafsa.pdf">printed FAFSA form</a> available online. (Note that while it’s permissible to fill out and submit a paper FAFSA form, the online version can be faster and more efficient, unless you don’t have access to a computer or the internet.)
</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-the-fafsa-vs-the-css-profile"></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"> The FAFSA vs. the CSS Profile </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> While the FAFSA is the best known and most widely used financial aid application form, it is not the only one. Another is the CSS Profile, an online application administered by The College Board and used by several hundred colleges, universities, and private scholarship programs to determine the student’s eligibility for need-based, nonfederal financial aid.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Unlike the FAFSA, signing up for the CSS Profile isn’t always free. Families pay $25 for the first school their student applies to, then $16 for each additional school, although the fees are waived for families making less than $100,000 per year.<span class="ql-inline-citation" data-cite="13"></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_42-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The CSS Profile asks many questions similar to those on the FAFSA, yet it has some important differences. For example, the CSS Profile takes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/home_equity.asp">equity in the family home</a> into account, while the FAFSA does not. The CSS Profile also wants to know about any balances in retirement plans, while the FAFSA ignores them.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Some colleges and universities require families to fill out both the FAFSA and the CSS Profile. A number of schools also have their own, individualized scholarship applications—one more reason to get started as early as possible.
</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-who-qualifies-for-the-fafsa"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Qualifies for the FAFSA?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>To be eligible for the FAFSA, a student must have financial need, be enrolled in a college or university in either a diploma or certificate program, and be a U.S. citizen or eligible noncitizen. Federal eligibility requirements also include the following criteria: a valid Social Security number, continued satisfactory performance in school, and completing a high school diploma, among others.<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_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-deadline-for-the-fafsa"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Deadline for the FAFSA?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The FAFSA is available Oct. 1 of the year prior to enrollment, and may at times be administered based on a first-come, first-serve basis until June of the academic school year. For this reason, applying as early as possible can increase the likelihood of receiving financial assistance. For example, students who apply in June are often only eligible for loans.<span class="ql-inline-citation" data-cite="6"></span></p><p>The new simplified FAFSA has been delayed a bit—the form for the 2024–25 school year will not be available until December 2023.<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_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-is-the-income-limit-for-the-fafsa"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Income Limit for the FAFSA?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In short, no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> limit is in place to qualify for the FAFSA. Instead, factors including year of enrollment and family size are considered, along with displaying financial need.<span class="ql-inline-citation" data-cite="9"></span><br/></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"> Filling out the FAFSA is the first step many families take when <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/overlooked-sources-free-college-aid-5323083">seeking financial aid for college</a>. It helps establish eligibility for grants, work-study programs, and loans.
</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"> Fill it out as early as possible! Many states have financial aid deadlines earlier than June 30, the end of the 19-month FAFSA application period, and their aid may be available only on a first-come, first-served basis.<span class="ql-inline-citation" data-cite="6"></span><br/>
</p></div>
|
## What Is the Free Application for Federal Student Aid (FAFSA)?
The Free Application for Federal Student Aid, known as the FAFSA, is the official form to apply for federal financial aid to [pay for college](https://www.investopedia.com/paying-for-college-as-an-lgbtq-student-5176574). It is also used by many states, individual colleges, and universities in making their financial aid decisions.
Specifically, the FAFSA determines who will receive aid in the form of loans, scholarships, and grants based on the information collected from the application.
### Key Takeaways
* The Free Application for Federal Student Aid (FAFSA) is used by the federal government to determine a family’s eligibility for grants, work-study, and loans to pay for college.
* States, individual colleges and universities, and private scholarship programs also use information from the FAFSA to make financial aid decisions.
* Applications for the FAFSA typically open in October of the prior year to enrollment and close in June of the academic year.
* Funding is often granted on a first-come, first-serve basis, with students applying in June typically eligible only for loans.
Each FAFSA application period is 19 months, starting Oct. 1 of the year before the award year and ending June 30 of the award year. For example, FAFSA applications for the 2023–24 academic year can be submitted from Oct. 1, 2022, to June 30, 2024. Filling it out as early as possible is a good idea, as many states have financial aid deadlines considerably earlier than June 30, and their aid may be available only on a first-come, first-served basis.
The FAFSA lists some of those deadlines, and the office of Federal Student Aid publishes a more comprehensive [list of state student aid deadlines](https://studentaid.gov/apply-for-aid/fafsa/fafsa-deadlines#state).
###
The FAFSA form for the 2024–25 school year has been delayed. Instead of becoming available on Oct. 1, 2023, it will now be available in December 2023.
## How the Free Application for Federal Student Aid (FAFSA) Works
The office of Federal Student Aid, part of the U.S. Department of Education, has provided approximately $240.7 billion in federal aid this year, as of November 2023. That aid consists of grants, work-study, and loans.
* **Grants**, sometimes referred to as scholarships, are meant for students with “exceptional financial need” and don’t have to be repaid. Today’s most common federal grants for education are known as [Pell Grants](https://www.investopedia.com/terms/p/pell-grant.asp).
* **Work-study** programs provide paid part-time jobs for undergraduate and graduate students through participating colleges and universities.
* **Loans**, unlike grants or scholarships, must eventually be repaid. However, federal loans tend to have low interest rates compared with those available from private lenders, in addition to more favorable repayment terms. There are several types of federal loans for higher education. Direct subsidized loans have the best terms and are available only to families with financial need. Direct unsubsidized loans are available to families regardless of financial need. Direct PLUS loans are [available to parents](https://www.investopedia.com/divorced-parents-financial-aid-5206693) and graduate or professional students, regardless of financial need, although borrowers must have an acceptable [credit history](https://www.investopedia.com/terms/c/credit-history.asp).
The FAFSA, which is administered by the office of Federal Student Aid, is the doorway to all of these types of aid.
The questions on the FAFSA are intended to determine the student’s level of financial need and establish their [Student Aid Index (SAI)](https://www.investopedia.com/terms/e/expected-family-contribution.asp). The SAI represents an eligibility index for student aid. Overall, the federal government, state assistance programs, the colleges to which the student is applying, and other scholarship sources all use that data to determine how much aid—and what kinds of aid—the family is eligible for.
###
Beginning in July 2023, the SAI replaced the term “Expected Family Contribution (EFC)” on all FAFSA forms, thanks to the 2021 Consolidated Appropriations Act. The change is an attempt to clarify what this figure actually is: an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses. Adjustments to how the SAI is calculated have also taken effect.
Students can expect to receive a financial aid offer around the time that students are accepted by a college. Financial assistance may consist of a package of grants, work-study, and loans. These offers can differ from college to college.
## How to Fill Out the FAFSA
The FAFSA is widely known as being complex. It requires students to respond to a number of questions that may take some time to complete. Importantly, families need to submit a new FAFSA every year in order to maintain their financial aid, or to try again if they didn’t get any aid the first time they applied.
Questions range from basic identifying information for the student and their parents (name, address, Social Security number, date of birth, etc.) to a detailed examination of their finances.
In addition, students and parents will need to supply information on their income and assets, including bank accounts, investments, real estate (except for the family home), and any businesses they own (excluding family farms and small businesses). Both parents and students have a FAFSA account, and each must complete the FAFSA.
Much of this information will be available from the family’s tax returns. The Internal Revenue Service Data Retrieval Tool (IRS DRT) makes it possible to download that data directly to the FAFSA in many cases.
To answer the other financial questions, it will be helpful to have bank, brokerage, and mutual fund statements at hand. For a preview of the FAFSA’s questions, the office of Federal Student Aid makes a copy of the [printed FAFSA form](https://studentaid.gov/sites/default/files/2023-24-fafsa.pdf) available online. (Note that while it’s permissible to fill out and submit a paper FAFSA form, the online version can be faster and more efficient, unless you don’t have access to a computer or the internet.)
## The FAFSA vs. the CSS Profile
While the FAFSA is the best known and most widely used financial aid application form, it is not the only one. Another is the CSS Profile, an online application administered by The College Board and used by several hundred colleges, universities, and private scholarship programs to determine the student’s eligibility for need-based, nonfederal financial aid.
Unlike the FAFSA, signing up for the CSS Profile isn’t always free. Families pay $25 for the first school their student applies to, then $16 for each additional school, although the fees are waived for families making less than $100,000 per year.
The CSS Profile asks many questions similar to those on the FAFSA, yet it has some important differences. For example, the CSS Profile takes [equity in the family home](https://www.investopedia.com/terms/h/home_equity.asp) into account, while the FAFSA does not. The CSS Profile also wants to know about any balances in retirement plans, while the FAFSA ignores them.
Some colleges and universities require families to fill out both the FAFSA and the CSS Profile. A number of schools also have their own, individualized scholarship applications—one more reason to get started as early as possible.
## Who Qualifies for the FAFSA?
To be eligible for the FAFSA, a student must have financial need, be enrolled in a college or university in either a diploma or certificate program, and be a U.S. citizen or eligible noncitizen. Federal eligibility requirements also include the following criteria: a valid Social Security number, continued satisfactory performance in school, and completing a high school diploma, among others.
## What Is the Deadline for the FAFSA?
The FAFSA is available Oct. 1 of the year prior to enrollment, and may at times be administered based on a first-come, first-serve basis until June of the academic school year. For this reason, applying as early as possible can increase the likelihood of receiving financial assistance. For example, students who apply in June are often only eligible for loans.
The new simplified FAFSA has been delayed a bit—the form for the 2024–25 school year will not be available until December 2023.
## What Is the Income Limit for the FAFSA?
In short, no [income](https://www.investopedia.com/terms/i/income.asp) limit is in place to qualify for the FAFSA. Instead, factors including year of enrollment and family size are considered, along with displaying financial need.
## The Bottom Line
Filling out the FAFSA is the first step many families take when [seeking financial aid for college](https://www.investopedia.com/overlooked-sources-free-college-aid-5323083). It helps establish eligibility for grants, work-study programs, and loans.
Fill it out as early as possible! Many states have financial aid deadlines earlier than June 30, the end of the 19-month FAFSA application period, and their aid may be available only on a first-come, first-served basis.
|
What Is the Free Application for Federal Student Aid (FAFSA)?
The Free Application for Federal Student Aid, known as the FAFSA, is the official form to apply for federal financial aid to pay for college. It is also used by many states, individual colleges, and universities in making their financial aid decisions.
Specifically, the FAFSA determines who will receive aid in the form of loans, scholarships, and grants based on the information collected from the application.
Key Takeaways
The Free Application for Federal Student Aid (FAFSA) is used by the federal government to determine a family’s eligibility for grants, work-study, and loans to pay for college.States, individual colleges and universities, and private scholarship programs also use information from the FAFSA to make financial aid decisions.Applications for the FAFSA typically open in October of the prior year to enrollment and close in June of the academic year.Funding is often granted on a first-come, first-serve basis, with students applying in June typically eligible only for loans.
Each FAFSA application period is 19 months, starting Oct. 1 of the year before the award year and ending June 30 of the award year. For example, FAFSA applications for the 2023–24 academic year can be submitted from Oct. 1, 2022, to June 30, 2024. Filling it out as early as possible is a good idea, as many states have financial aid deadlines considerably earlier than June 30, and their aid may be available only on a first-come, first-served basis.
The FAFSA lists some of those deadlines, and the office of Federal Student Aid publishes a more comprehensive list of state student aid deadlines.
The FAFSA form for the 2024–25 school year has been delayed. Instead of becoming available on Oct. 1, 2023, it will now be available in December 2023.
How the Free Application for Federal Student Aid (FAFSA) Works
The office of Federal Student Aid, part of the U.S. Department of Education, has provided approximately $240.7 billion in federal aid this year, as of November 2023. That aid consists of grants, work-study, and loans.
Grants, sometimes referred to as scholarships, are meant for students with “exceptional financial need” and don’t have to be repaid. Today’s most common federal grants for education are known as Pell Grants.
Work-study programs provide paid part-time jobs for undergraduate and graduate students through participating colleges and universities.
Loans, unlike grants or scholarships, must eventually be repaid. However, federal loans tend to have low interest rates compared with those available from private lenders, in addition to more favorable repayment terms. There are several types of federal loans for higher education. Direct subsidized loans have the best terms and are available only to families with financial need. Direct unsubsidized loans are available to families regardless of financial need. Direct PLUS loans are available to parents and graduate or professional students, regardless of financial need, although borrowers must have an acceptable credit history.
The FAFSA, which is administered by the office of Federal Student Aid, is the doorway to all of these types of aid.
The questions on the FAFSA are intended to determine the student’s level of financial need and establish their Student Aid Index (SAI). The SAI represents an eligibility index for student aid. Overall, the federal government, state assistance programs, the colleges to which the student is applying, and other scholarship sources all use that data to determine how much aid—and what kinds of aid—the family is eligible for.
Beginning in July 2023, the SAI replaced the term “Expected Family Contribution (EFC)” on all FAFSA forms, thanks to the 2021 Consolidated Appropriations Act. The change is an attempt to clarify what this figure actually is: an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses. Adjustments to how the SAI is calculated have also taken effect.
Students can expect to receive a financial aid offer around the time that students are accepted by a college. Financial assistance may consist of a package of grants, work-study, and loans. These offers can differ from college to college.
How to Fill Out the FAFSA
The FAFSA is widely known as being complex. It requires students to respond to a number of questions that may take some time to complete. Importantly, families need to submit a new FAFSA every year in order to maintain their financial aid, or to try again if they didn’t get any aid the first time they applied.
Questions range from basic identifying information for the student and their parents (name, address, Social Security number, date of birth, etc.) to a detailed examination of their finances.
In addition, students and parents will need to supply information on their income and assets, including bank accounts, investments, real estate (except for the family home), and any businesses they own (excluding family farms and small businesses). Both parents and students have a FAFSA account, and each must complete the FAFSA.
Much of this information will be available from the family’s tax returns. The Internal Revenue Service Data Retrieval Tool (IRS DRT) makes it possible to download that data directly to the FAFSA in many cases.
To answer the other financial questions, it will be helpful to have bank, brokerage, and mutual fund statements at hand. For a preview of the FAFSA’s questions, the office of Federal Student Aid makes a copy of the printed FAFSA form available online. (Note that while it’s permissible to fill out and submit a paper FAFSA form, the online version can be faster and more efficient, unless you don’t have access to a computer or the internet.)
The FAFSA vs. the CSS Profile
While the FAFSA is the best known and most widely used financial aid application form, it is not the only one. Another is the CSS Profile, an online application administered by The College Board and used by several hundred colleges, universities, and private scholarship programs to determine the student’s eligibility for need-based, nonfederal financial aid.
Unlike the FAFSA, signing up for the CSS Profile isn’t always free. Families pay $25 for the first school their student applies to, then $16 for each additional school, although the fees are waived for families making less than $100,000 per year.
The CSS Profile asks many questions similar to those on the FAFSA, yet it has some important differences. For example, the CSS Profile takes equity in the family home into account, while the FAFSA does not. The CSS Profile also wants to know about any balances in retirement plans, while the FAFSA ignores them.
Some colleges and universities require families to fill out both the FAFSA and the CSS Profile. A number of schools also have their own, individualized scholarship applications—one more reason to get started as early as possible.
Who Qualifies for the FAFSA?
To be eligible for the FAFSA, a student must have financial need, be enrolled in a college or university in either a diploma or certificate program, and be a U.S. citizen or eligible noncitizen. Federal eligibility requirements also include the following criteria: a valid Social Security number, continued satisfactory performance in school, and completing a high school diploma, among others.
What Is the Deadline for the FAFSA?
The FAFSA is available Oct. 1 of the year prior to enrollment, and may at times be administered based on a first-come, first-serve basis until June of the academic school year. For this reason, applying as early as possible can increase the likelihood of receiving financial assistance. For example, students who apply in June are often only eligible for loans.The new simplified FAFSA has been delayed a bit—the form for the 2024–25 school year will not be available until December 2023.
What Is the Income Limit for the FAFSA?
In short, no income limit is in place to qualify for the FAFSA. Instead, factors including year of enrollment and family size are considered, along with displaying financial need.
The Bottom Line
Filling out the FAFSA is the first step many families take when seeking financial aid for college. It helps establish eligibility for grants, work-study programs, and loans.
Fill it out as early as possible! Many states have financial aid deadlines earlier than June 30, the end of the 19-month FAFSA application period, and their aid may be available only on a first-come, first-served basis.
|
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"pay for college",
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],
[
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],
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"Pell Grants",
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],
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"https://studentaid.gov/sites/default/files/2023-24-fafsa.pdf"
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],
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"seeking financial aid for college",
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]
] |
https://www.investopedia.com/instacart-shares-finish-first-day-of-trading-higher-7971792
|
Instacart Shares Finish First Day of Trading 12% Higher After Paring Back Early Gains
|
<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>Instacart shares gained 12% on their first day trading on the Nasdaq.</li><li>The food delivery firm priced shares at $30 each, at the top end of its estimate.</li><li>The move came less than a week after a blockbuster IPO for British chip designer Arm, the biggest U.S. IPO since 2021.</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 grocery delivery company Instacart (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tradingview.com/chart/?symbol=NASDAQ%3ACART" rel="nofollow">CART</a>) gained 12% on their first day of trading on Tuesday, fueling optimism about a potential turnaround for the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO)</a> market that has been <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/could-blockbuster-arm-and-instacart-ipos-signal-a-turnaround-in-the-sluggish-ipo-market-7971243">sluggish for two years</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"> Instacart shares had jumped to as high as $42.95 during the session, 43% above the IPO price of $30, which was at the high end of the company’s estimate of $28 to $30.<span class="ql-inline-citation" data-cite="1"></span> However, they pared back some of the gains later in the day, finishing at $33.70, giving the company a <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 $11.16 billion.<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"> CEO Fidji Simo said that “a massive digital transformation is underway in the grocery industry,” and that his firm is “a grocery technology company.”<span class="ql-inline-citation" data-cite="2"></span> He added that by combining Instacart’s technology and fulfillment capabilities with the expertise of retailers, “we can help the national, regional, and local retailers that people already know and trust offer their customers an even better experience.”<br>
</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"> The Instacart IPO came less than a week after British chip designer Arm (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ARM">ARM</a>) had the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/british-chip-designer-arm-debuts-on-nasdaq-in-biggest-us-ipo-since-2021-7969648">biggest IPO</a> in the U.S. since 2021 at $54.5 billion. Its <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ads.asp">American depositary shares (ADSs)</a> also skyrocketed on their first day of trading, but they’ve declined steadily since then.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* Instacart shares gained 12% on their first day trading on the Nasdaq.
* The food delivery firm priced shares at $30 each, at the top end of its estimate.
* The move came less than a week after a blockbuster IPO for British chip designer Arm, the biggest U.S. IPO since 2021.
Shares of grocery delivery company Instacart ([CART](https://www.tradingview.com/chart/?symbol=NASDAQ%3ACART)) gained 12% on their first day of trading on Tuesday, fueling optimism about a potential turnaround for the [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) market that has been [sluggish for two years](https://www.investopedia.com/could-blockbuster-arm-and-instacart-ipos-signal-a-turnaround-in-the-sluggish-ipo-market-7971243).
Instacart shares had jumped to as high as $42.95 during the session, 43% above the IPO price of $30, which was at the high end of the company’s estimate of $28 to $30. However, they pared back some of the gains later in the day, finishing at $33.70, giving the company a [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of $11.16 billion.
CEO Fidji Simo said that “a massive digital transformation is underway in the grocery industry,” and that his firm is “a grocery technology company.” He added that by combining Instacart’s technology and fulfillment capabilities with the expertise of retailers, “we can help the national, regional, and local retailers that people already know and trust offer their customers an even better experience.”
The Instacart IPO came less than a week after British chip designer Arm ([ARM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ARM)) had the [biggest IPO](https://www.investopedia.com/british-chip-designer-arm-debuts-on-nasdaq-in-biggest-us-ipo-since-2021-7969648) in the U.S. since 2021 at $54.5 billion. Its [American depositary shares (ADSs)](https://www.investopedia.com/terms/a/ads.asp) also skyrocketed on their first day of trading, but they’ve declined steadily since then.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
Instacart shares gained 12% on their first day trading on the Nasdaq.The food delivery firm priced shares at $30 each, at the top end of its estimate.The move came less than a week after a blockbuster IPO for British chip designer Arm, the biggest U.S. IPO since 2021.
Shares of grocery delivery company Instacart (CART) gained 12% on their first day of trading on Tuesday, fueling optimism about a potential turnaround for the initial public offering (IPO) market that has been sluggish for two years.
Instacart shares had jumped to as high as $42.95 during the session, 43% above the IPO price of $30, which was at the high end of the company’s estimate of $28 to $30. However, they pared back some of the gains later in the day, finishing at $33.70, giving the company a market capitalization of $11.16 billion.
CEO Fidji Simo said that “a massive digital transformation is underway in the grocery industry,” and that his firm is “a grocery technology company.” He added that by combining Instacart’s technology and fulfillment capabilities with the expertise of retailers, “we can help the national, regional, and local retailers that people already know and trust offer their customers an even better experience.”
The Instacart IPO came less than a week after British chip designer Arm (ARM) had the biggest IPO in the U.S. since 2021 at $54.5 billion. Its American depositary shares (ADSs) also skyrocketed on their first day of trading, but they’ve declined steadily since then.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
[
[
"CART",
"https://www.tradingview.com/chart/?symbol=NASDAQ%3ACART"
],
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],
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"American depositary shares (ADSs)",
"https://www.investopedia.com/terms/a/ads.asp"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/articles/mortgages-real-estate/10/how-mortgage-fraud-affects-markets.asp
|
Mortgage Fraud: Understanding and Avoiding It
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<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"> Ethical violations and criminal activities in various industries have affected our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economy.asp" rel="noopener noreferrer">economy</a> over the past few decades, particularly in the banking, financial, and housing sectors. When it comes to financial crimes, mortgages provide ample opportunity for bad actors to steal, defraud, or cut corners. Let's examine the complex ethical and criminal issues surrounding <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage-fraud.asp" rel="noopener noreferrer">mortgage fraud</a>.
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<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>Common individual mortgage fraud scams are identity theft and income/asset falsification, while industry professionals may use appraisal frauds and air loans to dupe the system.</li><li>Predatory lending activities, foreclosure rescue, and mortgage reduction scams all contributed to the Great Recession in 2007. </li><li>Mortgage fraud continues to be a problem in America. According to CoreLogic’s data in September 2022, one in every 131 mortgage applications shows indications of fraud.<span class="ql-inline-citation" data-cite="3"></span></li><li>There are professional organizations that monitor and investigate mortgage fraud, along with the FBI.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-is-mortgage-fraud"></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 Mortgage Fraud? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Fraud in its simplest form is deliberate misrepresentation and deception: One party deceives another by misrepresenting information, facts, and figures. So, mortgage fraud is not just predatory lending practices that target certain borrowers.
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<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Housing or mortgage fraud can be committed by individuals who intend to occupy a property as a primary residence or by groups of investors who defraud via rental properties or commit appraisal fraud when flipping homes.<span class="ql-inline-citation" data-cite="6"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> According to the Federal Bureau of Investigation (FBI), it is any sort of "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan."<span class="ql-inline-citation" data-cite="2"></span> With this working definition, we see that mortgage fraud can be committed by both individual borrowers and industry professionals. And the sums involved are high. For example, in Sacramento, Calif., seven people were convicted in a $10 million mortgage scam in early 2019.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> There are two distinct areas of mortgage fraud—fraud for profit and fraud for housing.
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<ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li><strong>Fraud for profit:</strong> Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.</li><li><strong>Fraud for housing:</strong> This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.</li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> To understand the implications for the housing and real estate industries, and for financial institutions, simply refer to the headlines and literature on the 2008 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime_mortgage.asp">subprime mortgage</a> crisis. Much of that speculative lending was based on mortgage fraud.
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<span class="heading-toc" id="toc-why-commit-mortgage-fraud"></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"> Why Commit Mortgage Fraud? </span> </h2>
<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/articles/investing/092315/7-best-peertopeer-lending-websites.asp" rel="noopener noreferrer">Borrowers</a> and professionals are motivated to commit mortgage fraud for many reasons. We can describe most of those reasons by defining two primary types—fraud for housing and fraud for profit. Fraud for housing is committed by borrowers who, often with the assistance of loan officers or other personnel, misrepresent or omit relevant details about employment and income, debt and credit, or property value and condition with the goal of obtaining or maintaining real estate ownership. Fraud for profit is committed by industry professionals who misstate, misrepresent, or omit relevant details about their personal or their clients' employment and income, debt, and credit, or property value and condition with the goal of maximizing profits on a loan transaction.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> It is important to note here that fraud for profit can be committed by any professional in the loan transaction chain, including the builder, real estate sales agent, loan officer, mortgage broker, credit/debt counselor, real estate appraiser, property inspector, insurance agent, title company, attorney, and escrow agent. Industry professionals can also work in concert, as a network, to defraud underwriters, lenders, and borrowers, and maximize fees and share profits on all mortgage-related services. These actions are motivated either by the desire to gain extra sales commissions or simply increase an investment position.
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<span class="heading-toc" id="toc-common-mortgage-fraud-schemes-and-scams"></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"> Common Mortgage Fraud Schemes and Scams </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The most common investor mortgage fraud schemes are different types of property <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flipping.asp">flipping</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/occupancyfraud.asp">occupancy fraud</a>, and the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/straw-buyer.asp">straw buyer</a> scam.<span class="ql-inline-citation" data-cite="4"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Property flipping is generally not illegal when associated with purchasing a house, holding/fixing it, and then reselling it for a profit. On the other hand, when a property is bought below market and immediately sold at profit with the help of a corrupt appraiser who "verifies" that the value of the property is actually double the initial purchase amount, mortgage fraud is indicated.<span class="ql-inline-citation" data-cite="6"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> In the case of the same-day close property flipping scheme, the chain of title and the appraisal are often fraudulent and include three parties—the seller, the flipper, and the unsuspecting end buyer. The seller makes a contract with the flipper to purchase the property at below market value. The flipper provides the end buyer with a fraudulent title insurance commitment, showing the flipper as the owner (though that's not the case) and an appraisal is made at the inflated price the flipper and end buyer have agreed on.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Occupancy fraud is a scheme used by investors to qualify for higher loan-to-value ratios and lower out-of-pocket costs on purchases, in addition to lower mortgage rates. Occupancy fraud occurs when a borrower claims that the home will be owner-occupied to obtain favorable bank status when the property will actually remain vacant. The straw buyer uses or allows someone to use their identity, credit score, and income to obtain property for another buyer who may not qualify for a mortgage (or qualify for the best rates). Straw buyers are often used by investors, either willingly or unknowingly, to cover up other forms and multiple layers of fraud.<span class="ql-inline-citation" data-cite="4"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The most common individual mortgage fraud scams are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/identitytheft.asp">identity theft</a> and income/asset falsification.<span class="ql-inline-citation" data-cite="5"></span> Identity theft occurs when the real buyer fraudulently obtains financing using an unwilling and unaware victim's information, including Social Security numbers, birth dates, and addresses. Identity theft for mortgage purposes may also include stolen pay stubs, bank records, tax returns, W-2s, and falsified employment verification letters. Even property ownership records can be falsified, and borrowers can obtain a fraudulent mortgage on a property that they neither own nor occupy.
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<span class="heading-toc" id="toc-air-loan-vs-appraisal-fraud"></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"> Air Loan vs. Appraisal Fraud </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> The most common industry professional mortgage fraud scams are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/air-loan.asp">air loan</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appraisalfraud.asp">appraisal fraud</a>.<span class="ql-inline-citation" data-cite="6"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> An air loan is a loan obtained on a nonexistent property or for a nonexistent borrower. A group of professionals will often work together to create a fake borrower and a fake chain of title and to get a title and property insurance binder. Additionally, the fraud chain may include phone banks and mailboxes to create fake employment verifications, home addresses, and borrower telephone numbers. The air loan scam simply puts cash into the hands of the perpetrators, and no property is ever bought or sold.<span class="ql-inline-citation" data-cite="6"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Appraisal fraud often involves a real estate agent, builder, appraiser, and loan officer working together to maximize a purchase price and loan amount in order to increase their commissions. On the other hand, corrupt appraisers will often undervalue a property to ensure that a fellow investor will be able to purchase the asset.<span class="ql-inline-citation" data-cite="6"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Some forms of predatory lending activities, foreclosure rescue, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/040115/top-10-common-mortgage-scams-avoid.asp">mortgage reduction scams</a> depend heavily on the aforementioned mortgage fraud practices. Predatory lending typically involves falsifying lenders' income figures to inaccurately reflect their ability to assume additional debt. Such activities heavily contributed to the Great Recession.<span class="ql-inline-citation" data-cite="7"></span>
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<span class="heading-toc" id="toc-combating-mortgage-fraud"></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"> Combating Mortgage Fraud </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> There is no shortage of legislation at the local, state, or federal level designed to reduce mortgage fraud. States have taken a big step recently by requiring loan officer licensing and continuing education. Additionally, real estate, title, and insurance agencies are licensed and monitored by government agencies. Many states also require periodic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/audit.asp">auditing</a> of mortgage-lending companies' activities and transactions to monitor compliance.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Professional organizations such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgagebankersassociation.asp">Mortgage Bankers Associations (MBA)</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/namb.asp">National Association of Mortgage Brokers (NAMB)</a> have a code of conduct and best practices that are peer-monitored.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="9"></span>The FBI's white-collar crime program also monitors complaints and suspicious activity in the mortgage industry.<span class="ql-inline-citation" data-cite="10"></span>
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<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"> The good news is we can improve the markets by reducing mortgage fraud. Individuals must set realistic expectations for borrowing and homeownership experience. Investors should set realistic goals for profit. Industry professionals must pursue higher personal standards and submit to peer organization accountability. Governments need to make the legislation more uniform and reconcile law enforcement with active investigations.
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Ethical violations and criminal activities in various industries have affected our [economy](https://www.investopedia.com/terms/e/economy.asp) over the past few decades, particularly in the banking, financial, and housing sectors. When it comes to financial crimes, mortgages provide ample opportunity for bad actors to steal, defraud, or cut corners. Let's examine the complex ethical and criminal issues surrounding [mortgage fraud](https://www.investopedia.com/terms/m/mortgage-fraud.asp).
### Key Takeaways
* Common individual mortgage fraud scams are identity theft and income/asset falsification, while industry professionals may use appraisal frauds and air loans to dupe the system.
* Predatory lending activities, foreclosure rescue, and mortgage reduction scams all contributed to the Great Recession in 2007.
* Mortgage fraud continues to be a problem in America. According to CoreLogic’s data in September 2022, one in every 131 mortgage applications shows indications of fraud.
* There are professional organizations that monitor and investigate mortgage fraud, along with the FBI.
## What Is Mortgage Fraud?
Fraud in its simplest form is deliberate misrepresentation and deception: One party deceives another by misrepresenting information, facts, and figures. So, mortgage fraud is not just predatory lending practices that target certain borrowers.
###
Housing or mortgage fraud can be committed by individuals who intend to occupy a property as a primary residence or by groups of investors who defraud via rental properties or commit appraisal fraud when flipping homes.
According to the Federal Bureau of Investigation (FBI), it is any sort of "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan." With this working definition, we see that mortgage fraud can be committed by both individual borrowers and industry professionals. And the sums involved are high. For example, in Sacramento, Calif., seven people were convicted in a $10 million mortgage scam in early 2019.
There are two distinct areas of mortgage fraud—fraud for profit and fraud for housing.
1. **Fraud for profit:** Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.
2. **Fraud for housing:** This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.
To understand the implications for the housing and real estate industries, and for financial institutions, simply refer to the headlines and literature on the 2008 [subprime mortgage](https://www.investopedia.com/terms/s/subprime_mortgage.asp) crisis. Much of that speculative lending was based on mortgage fraud.
## Why Commit Mortgage Fraud?
[Borrowers](https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp) and professionals are motivated to commit mortgage fraud for many reasons. We can describe most of those reasons by defining two primary types—fraud for housing and fraud for profit. Fraud for housing is committed by borrowers who, often with the assistance of loan officers or other personnel, misrepresent or omit relevant details about employment and income, debt and credit, or property value and condition with the goal of obtaining or maintaining real estate ownership. Fraud for profit is committed by industry professionals who misstate, misrepresent, or omit relevant details about their personal or their clients' employment and income, debt, and credit, or property value and condition with the goal of maximizing profits on a loan transaction.
It is important to note here that fraud for profit can be committed by any professional in the loan transaction chain, including the builder, real estate sales agent, loan officer, mortgage broker, credit/debt counselor, real estate appraiser, property inspector, insurance agent, title company, attorney, and escrow agent. Industry professionals can also work in concert, as a network, to defraud underwriters, lenders, and borrowers, and maximize fees and share profits on all mortgage-related services. These actions are motivated either by the desire to gain extra sales commissions or simply increase an investment position.
## Common Mortgage Fraud Schemes and Scams
The most common investor mortgage fraud schemes are different types of property [flipping](https://www.investopedia.com/terms/f/flipping.asp), [occupancy fraud](https://www.investopedia.com/terms/o/occupancyfraud.asp), and the [straw buyer](https://www.investopedia.com/terms/s/straw-buyer.asp) scam.
Property flipping is generally not illegal when associated with purchasing a house, holding/fixing it, and then reselling it for a profit. On the other hand, when a property is bought below market and immediately sold at profit with the help of a corrupt appraiser who "verifies" that the value of the property is actually double the initial purchase amount, mortgage fraud is indicated.
In the case of the same-day close property flipping scheme, the chain of title and the appraisal are often fraudulent and include three parties—the seller, the flipper, and the unsuspecting end buyer. The seller makes a contract with the flipper to purchase the property at below market value. The flipper provides the end buyer with a fraudulent title insurance commitment, showing the flipper as the owner (though that's not the case) and an appraisal is made at the inflated price the flipper and end buyer have agreed on.
Occupancy fraud is a scheme used by investors to qualify for higher loan-to-value ratios and lower out-of-pocket costs on purchases, in addition to lower mortgage rates. Occupancy fraud occurs when a borrower claims that the home will be owner-occupied to obtain favorable bank status when the property will actually remain vacant. The straw buyer uses or allows someone to use their identity, credit score, and income to obtain property for another buyer who may not qualify for a mortgage (or qualify for the best rates). Straw buyers are often used by investors, either willingly or unknowingly, to cover up other forms and multiple layers of fraud.
The most common individual mortgage fraud scams are [identity theft](https://www.investopedia.com/terms/i/identitytheft.asp) and income/asset falsification. Identity theft occurs when the real buyer fraudulently obtains financing using an unwilling and unaware victim's information, including Social Security numbers, birth dates, and addresses. Identity theft for mortgage purposes may also include stolen pay stubs, bank records, tax returns, W-2s, and falsified employment verification letters. Even property ownership records can be falsified, and borrowers can obtain a fraudulent mortgage on a property that they neither own nor occupy.
## Air Loan vs. Appraisal Fraud
The most common industry professional mortgage fraud scams are [air loan](https://www.investopedia.com/terms/a/air-loan.asp) and [appraisal fraud](https://www.investopedia.com/terms/a/appraisalfraud.asp).
An air loan is a loan obtained on a nonexistent property or for a nonexistent borrower. A group of professionals will often work together to create a fake borrower and a fake chain of title and to get a title and property insurance binder. Additionally, the fraud chain may include phone banks and mailboxes to create fake employment verifications, home addresses, and borrower telephone numbers. The air loan scam simply puts cash into the hands of the perpetrators, and no property is ever bought or sold.
Appraisal fraud often involves a real estate agent, builder, appraiser, and loan officer working together to maximize a purchase price and loan amount in order to increase their commissions. On the other hand, corrupt appraisers will often undervalue a property to ensure that a fellow investor will be able to purchase the asset.
Some forms of predatory lending activities, foreclosure rescue, and [mortgage reduction scams](https://www.investopedia.com/articles/personal-finance/040115/top-10-common-mortgage-scams-avoid.asp) depend heavily on the aforementioned mortgage fraud practices. Predatory lending typically involves falsifying lenders' income figures to inaccurately reflect their ability to assume additional debt. Such activities heavily contributed to the Great Recession.
## Combating Mortgage Fraud
There is no shortage of legislation at the local, state, or federal level designed to reduce mortgage fraud. States have taken a big step recently by requiring loan officer licensing and continuing education. Additionally, real estate, title, and insurance agencies are licensed and monitored by government agencies. Many states also require periodic [auditing](https://www.investopedia.com/terms/a/audit.asp) of mortgage-lending companies' activities and transactions to monitor compliance.
Professional organizations such as the [Mortgage Bankers Associations (MBA)](https://www.investopedia.com/terms/m/mortgagebankersassociation.asp) and [National Association of Mortgage Brokers (NAMB)](https://www.investopedia.com/terms/n/namb.asp) have a code of conduct and best practices that are peer-monitored.The FBI's white-collar crime program also monitors complaints and suspicious activity in the mortgage industry.
## The Bottom Line
The good news is we can improve the markets by reducing mortgage fraud. Individuals must set realistic expectations for borrowing and homeownership experience. Investors should set realistic goals for profit. Industry professionals must pursue higher personal standards and submit to peer organization accountability. Governments need to make the legislation more uniform and reconcile law enforcement with active investigations.
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Ethical violations and criminal activities in various industries have affected our economy over the past few decades, particularly in the banking, financial, and housing sectors. When it comes to financial crimes, mortgages provide ample opportunity for bad actors to steal, defraud, or cut corners. Let's examine the complex ethical and criminal issues surrounding mortgage fraud.
Key Takeaways
Common individual mortgage fraud scams are identity theft and income/asset falsification, while industry professionals may use appraisal frauds and air loans to dupe the system.Predatory lending activities, foreclosure rescue, and mortgage reduction scams all contributed to the Great Recession in 2007. Mortgage fraud continues to be a problem in America. According to CoreLogic’s data in September 2022, one in every 131 mortgage applications shows indications of fraud.There are professional organizations that monitor and investigate mortgage fraud, along with the FBI.
What Is Mortgage Fraud?
Fraud in its simplest form is deliberate misrepresentation and deception: One party deceives another by misrepresenting information, facts, and figures. So, mortgage fraud is not just predatory lending practices that target certain borrowers.
Housing or mortgage fraud can be committed by individuals who intend to occupy a property as a primary residence or by groups of investors who defraud via rental properties or commit appraisal fraud when flipping homes.
According to the Federal Bureau of Investigation (FBI), it is any sort of "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan." With this working definition, we see that mortgage fraud can be committed by both individual borrowers and industry professionals. And the sums involved are high. For example, in Sacramento, Calif., seven people were convicted in a $10 million mortgage scam in early 2019.
There are two distinct areas of mortgage fraud—fraud for profit and fraud for housing.
Fraud for profit: Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.Fraud for housing: This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.
To understand the implications for the housing and real estate industries, and for financial institutions, simply refer to the headlines and literature on the 2008 subprime mortgage crisis. Much of that speculative lending was based on mortgage fraud.
Why Commit Mortgage Fraud?
Borrowers and professionals are motivated to commit mortgage fraud for many reasons. We can describe most of those reasons by defining two primary types—fraud for housing and fraud for profit. Fraud for housing is committed by borrowers who, often with the assistance of loan officers or other personnel, misrepresent or omit relevant details about employment and income, debt and credit, or property value and condition with the goal of obtaining or maintaining real estate ownership. Fraud for profit is committed by industry professionals who misstate, misrepresent, or omit relevant details about their personal or their clients' employment and income, debt, and credit, or property value and condition with the goal of maximizing profits on a loan transaction.
It is important to note here that fraud for profit can be committed by any professional in the loan transaction chain, including the builder, real estate sales agent, loan officer, mortgage broker, credit/debt counselor, real estate appraiser, property inspector, insurance agent, title company, attorney, and escrow agent. Industry professionals can also work in concert, as a network, to defraud underwriters, lenders, and borrowers, and maximize fees and share profits on all mortgage-related services. These actions are motivated either by the desire to gain extra sales commissions or simply increase an investment position.
Common Mortgage Fraud Schemes and Scams
The most common investor mortgage fraud schemes are different types of property flipping, occupancy fraud, and the straw buyer scam.
Property flipping is generally not illegal when associated with purchasing a house, holding/fixing it, and then reselling it for a profit. On the other hand, when a property is bought below market and immediately sold at profit with the help of a corrupt appraiser who "verifies" that the value of the property is actually double the initial purchase amount, mortgage fraud is indicated.
In the case of the same-day close property flipping scheme, the chain of title and the appraisal are often fraudulent and include three parties—the seller, the flipper, and the unsuspecting end buyer. The seller makes a contract with the flipper to purchase the property at below market value. The flipper provides the end buyer with a fraudulent title insurance commitment, showing the flipper as the owner (though that's not the case) and an appraisal is made at the inflated price the flipper and end buyer have agreed on.
Occupancy fraud is a scheme used by investors to qualify for higher loan-to-value ratios and lower out-of-pocket costs on purchases, in addition to lower mortgage rates. Occupancy fraud occurs when a borrower claims that the home will be owner-occupied to obtain favorable bank status when the property will actually remain vacant. The straw buyer uses or allows someone to use their identity, credit score, and income to obtain property for another buyer who may not qualify for a mortgage (or qualify for the best rates). Straw buyers are often used by investors, either willingly or unknowingly, to cover up other forms and multiple layers of fraud.
The most common individual mortgage fraud scams are identity theft and income/asset falsification. Identity theft occurs when the real buyer fraudulently obtains financing using an unwilling and unaware victim's information, including Social Security numbers, birth dates, and addresses. Identity theft for mortgage purposes may also include stolen pay stubs, bank records, tax returns, W-2s, and falsified employment verification letters. Even property ownership records can be falsified, and borrowers can obtain a fraudulent mortgage on a property that they neither own nor occupy.
Air Loan vs. Appraisal Fraud
The most common industry professional mortgage fraud scams are air loan and appraisal fraud.
An air loan is a loan obtained on a nonexistent property or for a nonexistent borrower. A group of professionals will often work together to create a fake borrower and a fake chain of title and to get a title and property insurance binder. Additionally, the fraud chain may include phone banks and mailboxes to create fake employment verifications, home addresses, and borrower telephone numbers. The air loan scam simply puts cash into the hands of the perpetrators, and no property is ever bought or sold.
Appraisal fraud often involves a real estate agent, builder, appraiser, and loan officer working together to maximize a purchase price and loan amount in order to increase their commissions. On the other hand, corrupt appraisers will often undervalue a property to ensure that a fellow investor will be able to purchase the asset.
Some forms of predatory lending activities, foreclosure rescue, and mortgage reduction scams depend heavily on the aforementioned mortgage fraud practices. Predatory lending typically involves falsifying lenders' income figures to inaccurately reflect their ability to assume additional debt. Such activities heavily contributed to the Great Recession.
Combating Mortgage Fraud
There is no shortage of legislation at the local, state, or federal level designed to reduce mortgage fraud. States have taken a big step recently by requiring loan officer licensing and continuing education. Additionally, real estate, title, and insurance agencies are licensed and monitored by government agencies. Many states also require periodic auditing of mortgage-lending companies' activities and transactions to monitor compliance.
Professional organizations such as the Mortgage Bankers Associations (MBA) and National Association of Mortgage Brokers (NAMB) have a code of conduct and best practices that are peer-monitored.The FBI's white-collar crime program also monitors complaints and suspicious activity in the mortgage industry.
The Bottom Line
The good news is we can improve the markets by reducing mortgage fraud. Individuals must set realistic expectations for borrowing and homeownership experience. Investors should set realistic goals for profit. Industry professionals must pursue higher personal standards and submit to peer organization accountability. Governments need to make the legislation more uniform and reconcile law enforcement with active investigations.
|
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https://www.investopedia.com/personal-finance/8-lesser-known-benefits-amazon-prime/
|
7 Lesser-Known Benefits of Amazon Prime
|
<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"> 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>), runs one of the most successful retail membership programs: Amazon Prime. It has attracted millions of customers who pay to receive a number of benefits you already know about. But there are other, lesser-known offers available for members that might give you a reason to sign up for the service.
</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>Amazon Prime's well-known benefits include free two-day shipping with various delivery options, and the ability to stream Prime media content.</li><li>Lesser-known benefits include discounts on orders with a slower delivery and a subscription shopping service called Prime Wardrobe.</li><li>Members using these benefits have the potential to harness substantial savings on household items, college essentials, food, and clothing. </li></ul></div></div></div>
<span class="heading-toc" id="toc-get-paid-for-no-rush-delivery"></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"> Get Paid for No-Rush Delivery </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> While Prime members are entitled to free two-day guaranteed delivery with many flexible delivery options, they can capitalize on their available time by opting for no-rush delivery. At checkout, if members select the free no-rush shipping option, they receive a discount that is applied to their current order immediately or a promotional reward that is automatically applied to the customer’s account toward a future purchase once the no-rush package ships.<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"> However, canceling the no-rush shipping order or changing the delivery option will cancel the discount or reward.
</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-prime-try-before-you-buy"></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"> Prime Try Before You Buy </span> </h2>
<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/articles/investing/060415/10-facts-you-didnt-know-about-amazon.asp">Amazon</a> offers Prime Try Before You Buy (formerly Amazon Wardrobe), which allows Prime members to try on fashion items at home as well as free returns of unwanted items. Prime members can pick up to six items of clothing, shoes, or accessories that are then shipped to them. The customer then has seven days to try on the merchandise and they keep only the stuff they want.<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_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-note" 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 with-title" id="mntl-sc-block-callout-heading_2-0">Feb. 20, 2023</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The date AmazonSmile—the retail giant's philanthropic arm that allowed members to donate to charity through their purchases—was shuttered.<span class="ql-inline-citation" data-cite="8"></span></p></div></div></div>
<span class="heading-toc" id="toc-amazon-subscribe--save"></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"> Amazon Subscribe & Save </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Amazon Prime members can receive up to a 15% discount on regular subscriptions of five or more products like diapers and baby food, and a 15% baby registry completion discount that offers a free welcome box for parents-to-be and their offspring. Other categories you can choose from include household products, groceries, pet supplies, health and wellness, and beauty and personal care items.<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_17-0"></div>
<span class="heading-toc" id="toc-amazon-household"></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"> Amazon Household </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Prime membership allows sharing through its Household program. Prime members can connect and share <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/012815/how-amazoncom-credit-card-works.asp">Amazon</a> benefits with the whole family—two adults (above 18 years) and up to four teens (between 13 and 17 years) and four children (up to 12 years, but they can't shop on Amazon) can be connected in a household. It allows sharing of Prime delivery benefits, streaming access to Prime Video, free books with Prime Reading, Prime Photos, and album sharing, free books with Amazon First Reads, unlimited listening on Audible Channels, and early access to Amazon Lightning Deals. Certain content may be shared only with other adults.<span class="ql-inline-citation" data-cite="15"></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_20-0"></div>
<span class="heading-toc" id="toc-prime-student"></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"> Prime Student </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Students can enjoy Prime benefits at half the cost, which come with a six-month trial and include free one-day shipping or free same-day shipping on eligible purchases. Qualifying students receive all Prime benefits for four years, or until they graduate, whichever comes first. Prime Student makes it easy to get college essentials like dorm furnishings, textbooks, study supplies, backpacks, PCs, tablets, and other accessories.<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-subscription-boxes"></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"> Subscription Boxes </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Amazon offers subscription boxes for a wide variety of products across clothing, pet supplies, lifestyle products and toys. Its similar to subscription boxes offered by Lovevery, BarkBox, or even Allure Beauty but from Amazon. All you need to do is select a subscription box and you'll receive a package full of products curated for you. You could search by product type or even price range.<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>
<span class="heading-toc" id="toc-amazon-primes-big-ticket-benefits"></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"> Amazon Prime's Big Ticket Benefits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The primary driver/reasons for most people to sign up for Amazon Prime include such features as:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0">
<li>Free one-day shipping with flexible delivery options, and free same-day delivery in eligible zip codes</li>
<li>Access to Prime media content that covers thousands of movies, songs, TV programs, games, and audio broadcasts</li>
<li>Shopping benefits and rewards, including 5% back for members with an Amazon Prime Rewards Visa Card<span class="ql-inline-citation" data-cite="10"></span></li>
<li>Alexa-assisted shopping with early access to exclusive brands and deals</li>
<li>Free subscription to some Kindle books and magazines</li>
<li>Free grocery delivery through the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/052015/how-amazon-fresh-works.asp">Amazon Fresh</a> service, and exclusive savings at Whole Foods Market</li>
<li>Unlimited photo storage through Amazon Photos</li>
<li>A one-year Grubhub+ membership trial (normally $9.99 per month) that comes with $0 delivery fees on orders over $12 in more than 4,000 U.S. cities.<span class="ql-inline-citation" data-cite="14"></span></li>
</ul>
<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-does-amazon-prime-video-have-advertisements"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Amazon Prime Video Have Advertisements?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>In Sept. 2023 Amazon announced that starting in 2024 Amazon Prime Video would include "limited advertisements," aiming to "have meaningfully fewer ads than linear TV and other streaming TV providers."<span class="ql-inline-citation" data-cite="12"></span> Prime Video members were emailed in late December that the start date would be Jan. 29, 2024. Members who want to avoid the ads can sign up for a new ad-free option for an extra $2.99 per month.<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_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-what-is-the-cost-of-an-amazon-prime-subscription"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Cost of an Amazon Prime Subscription?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>An Amazon Prime subscription costs $139 annually or $14.99 if you pay on a monthly basis. A Prime Student subscription costs $7.49 by the month or $69 per year. A Prime Video subscription costs $8.99 per month. Those who are on a government assistance program including SNAP, EBT, and Medicaid may qualify for a lower-cost Amazon Prime Access membership that's $6.99 a month.<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_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-how-can-i-save-on-an-amazon-prime-subscription"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Save on an Amazon Prime Subscription?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It's possible to share benefits with another adult via Amazon Household as long as they live in the same country or region; Amazon provides instructions for setting up a sharing arrangement. Or you could consider applying for an Amazon Prime credit card, which all come with Amazon bonus gift cards that can help offset the price of a membership and which also may earn you rewards on purchases.<span class="ql-inline-citation" data-cite="16"></span></p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Amazon offers a ton of well-known benefits, but others may surprise you. If you're considering shelling out $14.99 per month or $139 per year for an Amazon Prime membership you get access to more than just free shipping.<span class="ql-inline-citation" data-cite="11"></span>
</p></div>
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Amazon.com Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)), runs one of the most successful retail membership programs: Amazon Prime. It has attracted millions of customers who pay to receive a number of benefits you already know about. But there are other, lesser-known offers available for members that might give you a reason to sign up for the service.
### Key Takeaways
* Amazon Prime's well-known benefits include free two-day shipping with various delivery options, and the ability to stream Prime media content.
* Lesser-known benefits include discounts on orders with a slower delivery and a subscription shopping service called Prime Wardrobe.
* Members using these benefits have the potential to harness substantial savings on household items, college essentials, food, and clothing.
## Get Paid for No-Rush Delivery
While Prime members are entitled to free two-day guaranteed delivery with many flexible delivery options, they can capitalize on their available time by opting for no-rush delivery. At checkout, if members select the free no-rush shipping option, they receive a discount that is applied to their current order immediately or a promotional reward that is automatically applied to the customer’s account toward a future purchase once the no-rush package ships.
However, canceling the no-rush shipping order or changing the delivery option will cancel the discount or reward.
## Prime Try Before You Buy
[Amazon](https://www.investopedia.com/articles/investing/060415/10-facts-you-didnt-know-about-amazon.asp) offers Prime Try Before You Buy (formerly Amazon Wardrobe), which allows Prime members to try on fashion items at home as well as free returns of unwanted items. Prime members can pick up to six items of clothing, shoes, or accessories that are then shipped to them. The customer then has seven days to try on the merchandise and they keep only the stuff they want.
### Feb. 20, 2023
The date AmazonSmile—the retail giant's philanthropic arm that allowed members to donate to charity through their purchases—was shuttered.
## Amazon Subscribe & Save
Amazon Prime members can receive up to a 15% discount on regular subscriptions of five or more products like diapers and baby food, and a 15% baby registry completion discount that offers a free welcome box for parents-to-be and their offspring. Other categories you can choose from include household products, groceries, pet supplies, health and wellness, and beauty and personal care items.
## Amazon Household
Prime membership allows sharing through its Household program. Prime members can connect and share [Amazon](https://www.investopedia.com/articles/personal-finance/012815/how-amazoncom-credit-card-works.asp) benefits with the whole family—two adults (above 18 years) and up to four teens (between 13 and 17 years) and four children (up to 12 years, but they can't shop on Amazon) can be connected in a household. It allows sharing of Prime delivery benefits, streaming access to Prime Video, free books with Prime Reading, Prime Photos, and album sharing, free books with Amazon First Reads, unlimited listening on Audible Channels, and early access to Amazon Lightning Deals. Certain content may be shared only with other adults.
## Prime Student
Students can enjoy Prime benefits at half the cost, which come with a six-month trial and include free one-day shipping or free same-day shipping on eligible purchases. Qualifying students receive all Prime benefits for four years, or until they graduate, whichever comes first. Prime Student makes it easy to get college essentials like dorm furnishings, textbooks, study supplies, backpacks, PCs, tablets, and other accessories.
## Subscription Boxes
Amazon offers subscription boxes for a wide variety of products across clothing, pet supplies, lifestyle products and toys. Its similar to subscription boxes offered by Lovevery, BarkBox, or even Allure Beauty but from Amazon. All you need to do is select a subscription box and you'll receive a package full of products curated for you. You could search by product type or even price range.
## Amazon Prime's Big Ticket Benefits
The primary driver/reasons for most people to sign up for Amazon Prime include such features as:
* Free one-day shipping with flexible delivery options, and free same-day delivery in eligible zip codes
* Access to Prime media content that covers thousands of movies, songs, TV programs, games, and audio broadcasts
* Shopping benefits and rewards, including 5% back for members with an Amazon Prime Rewards Visa Card
* Alexa-assisted shopping with early access to exclusive brands and deals
* Free subscription to some Kindle books and magazines
* Free grocery delivery through the [Amazon Fresh](https://www.investopedia.com/articles/personal-finance/052015/how-amazon-fresh-works.asp) service, and exclusive savings at Whole Foods Market
* Unlimited photo storage through Amazon Photos
* A one-year Grubhub+ membership trial (normally $9.99 per month) that comes with $0 delivery fees on orders over $12 in more than 4,000 U.S. cities.
## Does Amazon Prime Video Have Advertisements?
In Sept. 2023 Amazon announced that starting in 2024 Amazon Prime Video would include "limited advertisements," aiming to "have meaningfully fewer ads than linear TV and other streaming TV providers." Prime Video members were emailed in late December that the start date would be Jan. 29, 2024. Members who want to avoid the ads can sign up for a new ad-free option for an extra $2.99 per month.
## What Is the Cost of an Amazon Prime Subscription?
An Amazon Prime subscription costs $139 annually or $14.99 if you pay on a monthly basis. A Prime Student subscription costs $7.49 by the month or $69 per year. A Prime Video subscription costs $8.99 per month. Those who are on a government assistance program including SNAP, EBT, and Medicaid may qualify for a lower-cost Amazon Prime Access membership that's $6.99 a month.
## How Can I Save on an Amazon Prime Subscription?
It's possible to share benefits with another adult via Amazon Household as long as they live in the same country or region; Amazon provides instructions for setting up a sharing arrangement. Or you could consider applying for an Amazon Prime credit card, which all come with Amazon bonus gift cards that can help offset the price of a membership and which also may earn you rewards on purchases.
## The Bottom Line
Amazon offers a ton of well-known benefits, but others may surprise you. If you're considering shelling out $14.99 per month or $139 per year for an Amazon Prime membership you get access to more than just free shipping.
|
Amazon.com Inc. (AMZN), runs one of the most successful retail membership programs: Amazon Prime. It has attracted millions of customers who pay to receive a number of benefits you already know about. But there are other, lesser-known offers available for members that might give you a reason to sign up for the service.
Key Takeaways
Amazon Prime's well-known benefits include free two-day shipping with various delivery options, and the ability to stream Prime media content.Lesser-known benefits include discounts on orders with a slower delivery and a subscription shopping service called Prime Wardrobe.Members using these benefits have the potential to harness substantial savings on household items, college essentials, food, and clothing.
Get Paid for No-Rush Delivery
While Prime members are entitled to free two-day guaranteed delivery with many flexible delivery options, they can capitalize on their available time by opting for no-rush delivery. At checkout, if members select the free no-rush shipping option, they receive a discount that is applied to their current order immediately or a promotional reward that is automatically applied to the customer’s account toward a future purchase once the no-rush package ships.
However, canceling the no-rush shipping order or changing the delivery option will cancel the discount or reward.
Prime Try Before You Buy
Amazon offers Prime Try Before You Buy (formerly Amazon Wardrobe), which allows Prime members to try on fashion items at home as well as free returns of unwanted items. Prime members can pick up to six items of clothing, shoes, or accessories that are then shipped to them. The customer then has seven days to try on the merchandise and they keep only the stuff they want.
Feb. 20, 2023
The date AmazonSmile—the retail giant's philanthropic arm that allowed members to donate to charity through their purchases—was shuttered.
Amazon Subscribe & Save
Amazon Prime members can receive up to a 15% discount on regular subscriptions of five or more products like diapers and baby food, and a 15% baby registry completion discount that offers a free welcome box for parents-to-be and their offspring. Other categories you can choose from include household products, groceries, pet supplies, health and wellness, and beauty and personal care items.
Amazon Household
Prime membership allows sharing through its Household program. Prime members can connect and share Amazon benefits with the whole family—two adults (above 18 years) and up to four teens (between 13 and 17 years) and four children (up to 12 years, but they can't shop on Amazon) can be connected in a household. It allows sharing of Prime delivery benefits, streaming access to Prime Video, free books with Prime Reading, Prime Photos, and album sharing, free books with Amazon First Reads, unlimited listening on Audible Channels, and early access to Amazon Lightning Deals. Certain content may be shared only with other adults.
Prime Student
Students can enjoy Prime benefits at half the cost, which come with a six-month trial and include free one-day shipping or free same-day shipping on eligible purchases. Qualifying students receive all Prime benefits for four years, or until they graduate, whichever comes first. Prime Student makes it easy to get college essentials like dorm furnishings, textbooks, study supplies, backpacks, PCs, tablets, and other accessories.
Subscription Boxes
Amazon offers subscription boxes for a wide variety of products across clothing, pet supplies, lifestyle products and toys. Its similar to subscription boxes offered by Lovevery, BarkBox, or even Allure Beauty but from Amazon. All you need to do is select a subscription box and you'll receive a package full of products curated for you. You could search by product type or even price range.
Amazon Prime's Big Ticket Benefits
The primary driver/reasons for most people to sign up for Amazon Prime include such features as:
Free one-day shipping with flexible delivery options, and free same-day delivery in eligible zip codes
Access to Prime media content that covers thousands of movies, songs, TV programs, games, and audio broadcasts
Shopping benefits and rewards, including 5% back for members with an Amazon Prime Rewards Visa Card
Alexa-assisted shopping with early access to exclusive brands and deals
Free subscription to some Kindle books and magazines
Free grocery delivery through the Amazon Fresh service, and exclusive savings at Whole Foods Market
Unlimited photo storage through Amazon Photos
A one-year Grubhub+ membership trial (normally $9.99 per month) that comes with $0 delivery fees on orders over $12 in more than 4,000 U.S. cities.
Does Amazon Prime Video Have Advertisements?
In Sept. 2023 Amazon announced that starting in 2024 Amazon Prime Video would include "limited advertisements," aiming to "have meaningfully fewer ads than linear TV and other streaming TV providers." Prime Video members were emailed in late December that the start date would be Jan. 29, 2024. Members who want to avoid the ads can sign up for a new ad-free option for an extra $2.99 per month.
What Is the Cost of an Amazon Prime Subscription?
An Amazon Prime subscription costs $139 annually or $14.99 if you pay on a monthly basis. A Prime Student subscription costs $7.49 by the month or $69 per year. A Prime Video subscription costs $8.99 per month. Those who are on a government assistance program including SNAP, EBT, and Medicaid may qualify for a lower-cost Amazon Prime Access membership that's $6.99 a month.
How Can I Save on an Amazon Prime Subscription?
It's possible to share benefits with another adult via Amazon Household as long as they live in the same country or region; Amazon provides instructions for setting up a sharing arrangement. Or you could consider applying for an Amazon Prime credit card, which all come with Amazon bonus gift cards that can help offset the price of a membership and which also may earn you rewards on purchases.
The Bottom Line
Amazon offers a ton of well-known benefits, but others may surprise you. If you're considering shelling out $14.99 per month or $139 per year for an Amazon Prime membership you get access to more than just free shipping.
|
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https://www.investopedia.com/financial-edge/0510/the-6-phases-of-a-foreclosure.aspx
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The 6 Phases of Foreclosure
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<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"> Foreclosure is the process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property. Although the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosure</a> process varies by state, there are six common phases of a foreclosure procedure.
</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>Foreclosure occurs when a lender seeks to seize the property used as collateral for a loan due to failure to pay.</li><li>There are typically six phases in the foreclosure process and the exact steps vary state by state. </li><li>Before a home is foreclosed on, owners are given 30 days to fulfill their mortgage obligations. </li></ul></div></div></div>
<span class="heading-toc" id="toc-phase-1-payment-default"></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"> Phase 1: Payment Default </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Payment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> occurs when a borrower has missed at least one mortgage payment—although the technical definition can vary by lender. After missing the first payment, the lender will reach out via a letter or telephone.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th of the month. After that, the lender may charge a late payment fee and send the missed payment notice.<span class="ql-inline-citation" data-cite="2"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> After the second month of missed payments, the lender will likely follow up via telephone. However, at this point, the lender may be still willing to work with the borrower to make arrangements for catching up on payments, which may include making just one payment to prevent falling further behind.
</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"> Once a borrower goes three months without making a payment, the lender generally sends a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/demand-letter.asp">demand letter</a> (or notice to accelerate) stating the amount in delinquency and that the borrower has 30 days to bring the mortgage current.<span class="ql-inline-citation" data-cite="3"></span><br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> A mortgage in default can have three outcomes—return to good standing, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan_modification.asp">be modified</a>, or the property is repossessed or sold via foreclosure or voluntary surrender.<span class="ql-inline-citation" data-cite="12"></span>
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<span class="heading-toc" id="toc-phase-2-notice-of-default"></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"> Phase 2: Notice of Default </span> </h2>
<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/n/notice-of-default.asp">notice of default (NOD)</a> is sent after the fourth month of missed payments (90 days past due). This public notice gives the borrower 30 days to remedy past due payments before formally starting the foreclosure process.<span class="ql-inline-citation" data-cite="3"></span><br/>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Most lenders will not send a notice of default until the borrower is 90 days past due (three consecutive missed payments). Thus, many times a borrower can fall behind a month or two without facing foreclosure.<span class="ql-inline-citation" data-cite="12"></span><br>
</br></p>
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<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>Generally, federal law prohibits a lender from starting foreclosure until the borrower is more than 120 days past due.</p></div></div></div>
<span class="heading-toc" id="toc-phase-3-notice-of-trustees-sale"></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"> Phase 3: Notice of Trustee’s Sale </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Depending on the state, the process for initiating foreclosure is different. In some states, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure-filing.asp">nonjudicial foreclosures</a> can be done that only requires filing paperwork with the necessary court to start the process. With this, the foreclosure e process can move rather quickly. Other states have judicial foreclosures, which require court approval for each step—meaning the process takes a bit longer.<span class="ql-inline-citation" data-cite="7"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Once forms are filed with the court or necessary approval is met, the lender's attorney or foreclosure trustee will schedule a sale of the property. A notice of trustee's sale (also known as a notice of sale) is then recorded in the county where the property is located—stating the specific time and location for the sale, as well as the minimum opening bid for the property.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The lender must also generally advertise the property (newspaper ads, signs, etc.) in the weeks before the auction indicating that the property will be available at public auction.<span class="ql-inline-citation" data-cite="11"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The time from the notice of demand to the auction date varies by state, but can be as quick as 2-3 months. Up until the date of the auction the borrower can still make payment arrangements or pay the amount due, including attorney fees incurred by the lender to start the process.<span class="ql-inline-citation" data-cite="3"></span>
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<span class="heading-toc" id="toc-phase-4-trustees-sale"></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"> Phase 4: Trustee’s Sale </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The property is now placed for public auction and will be awarded to the highest bidder who meets all of the requirements. The lender (or firm representing the lender) will calculate an opening bid based on the value of the outstanding loan and any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lien.asp">liens</a>, unpaid taxes, and costs associated with the sale.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_35-0"><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_36-0"><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 a foreclosed property is purchased, it is up to the buyer to say how long the previous owners may stay in their former home.</p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Once the highest bidder has been confirmed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/buying-foreclosed-home/">and the sale is completed</a>, a trustee’s deed upon sale will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.<span class="ql-inline-citation" data-cite="8"></span>
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<span class="heading-toc" id="toc-phase-5-real-estate-owned-reo"></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"> Phase 5: Real Estate Owned (REO) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The lender will set a minimum bid, which takes into account the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appraisal.asp">appraised value of the property</a>, the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realestateowned.asp">real estate-owned (REO)</a> asset manager.<span class="ql-inline-citation" data-cite="10"></span> These properties are often referred to as “bank-owned,” and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
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<span class="heading-toc" id="toc-phase-6-eviction"></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"> Phase 6: Eviction </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> As soon as the auction ends and a new owner is named—either the auction winner or the bank if the property is not sold—the borrowers are issued an order to evacuate if they are still living in the property. This eviction notice demands that any persons living in the house vacate the premises immediately.<span class="ql-inline-citation" data-cite="12"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Several days may be provided to allow the occupants sufficient time to leave and remove any personal belongings. Then, typically, the local sheriff or law enforcement will visit the property and remove them and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/writ-of-attachment.asp">impound any remaining belongings</a>.
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<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-warning" 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>Mortgage lending discrimination is illegal. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/housing-discrimination-what-can-you-do-5074478">If you think you've been discriminated against</a> based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.consumerfinance.gov/complaint/">Consumer Financial Protection Bureau</a> or with the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.hud.gov/faqs/complaints">U.S. Department of Housing and Urban Development (HUD)</a>.</p></div></div></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-pre-foreclosure"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Pre Foreclosure?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Pre foreclosure is the period before the foreclosure process starts. This is when you have fallen behind on payments and the lender issues a notice of default (NOD).</p></div>
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<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-is-reo-foreclosure"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is REO Foreclosure?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Real estate owned (REO) is a property that a lender or bank has foreclosed on but failed to sell at the foreclosure auction. Therefore, the lender owns the foreclosed property. After this point, the bank-owned property is known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/other-real-estate-owned-oreo.asp">Other Real Estate Owned (OREO)</a><br/></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-a-deed-in-lieu-of-foreclosure"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Deed in Lieu of Foreclosure?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A deed in lieu of foreclosure is an instrument where a property owner voluntarily relinquishes ownership to avoid foreclosure. This is typically less damaging than going through foreclosure. <br/></p><p><br/></p><p><br/></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"> Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid foreclosure. If there is a chance the borrower can catch up on payments—for instance, they just started a new job following a period of unemployment—it is worth speaking to the lender in hopes of making arrangements or modifying the current loan.
</p></div>
|
Foreclosure is the process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property. Although the [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp) process varies by state, there are six common phases of a foreclosure procedure.
### Key Takeaways
* Foreclosure occurs when a lender seeks to seize the property used as collateral for a loan due to failure to pay.
* There are typically six phases in the foreclosure process and the exact steps vary state by state.
* Before a home is foreclosed on, owners are given 30 days to fulfill their mortgage obligations.
## Phase 1: Payment Default
Payment [default](https://www.investopedia.com/terms/d/default2.asp) occurs when a borrower has missed at least one mortgage payment—although the technical definition can vary by lender. After missing the first payment, the lender will reach out via a letter or telephone.
Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th of the month. After that, the lender may charge a late payment fee and send the missed payment notice.
After the second month of missed payments, the lender will likely follow up via telephone. However, at this point, the lender may be still willing to work with the borrower to make arrangements for catching up on payments, which may include making just one payment to prevent falling further behind.
Once a borrower goes three months without making a payment, the lender generally sends a [demand letter](https://www.investopedia.com/terms/d/demand-letter.asp) (or notice to accelerate) stating the amount in delinquency and that the borrower has 30 days to bring the mortgage current.
A mortgage in default can have three outcomes—return to good standing, [be modified](https://www.investopedia.com/terms/l/loan_modification.asp), or the property is repossessed or sold via foreclosure or voluntary surrender.
## Phase 2: Notice of Default
A [notice of default (NOD)](https://www.investopedia.com/terms/n/notice-of-default.asp) is sent after the fourth month of missed payments (90 days past due). This public notice gives the borrower 30 days to remedy past due payments before formally starting the foreclosure process.
Most lenders will not send a notice of default until the borrower is 90 days past due (three consecutive missed payments). Thus, many times a borrower can fall behind a month or two without facing foreclosure.
###
Generally, federal law prohibits a lender from starting foreclosure until the borrower is more than 120 days past due.
## Phase 3: Notice of Trustee’s Sale
Depending on the state, the process for initiating foreclosure is different. In some states, [nonjudicial foreclosures](https://www.investopedia.com/terms/f/foreclosure-filing.asp) can be done that only requires filing paperwork with the necessary court to start the process. With this, the foreclosure e process can move rather quickly. Other states have judicial foreclosures, which require court approval for each step—meaning the process takes a bit longer.
Once forms are filed with the court or necessary approval is met, the lender's attorney or foreclosure trustee will schedule a sale of the property. A notice of trustee's sale (also known as a notice of sale) is then recorded in the county where the property is located—stating the specific time and location for the sale, as well as the minimum opening bid for the property.
The lender must also generally advertise the property (newspaper ads, signs, etc.) in the weeks before the auction indicating that the property will be available at public auction.
The time from the notice of demand to the auction date varies by state, but can be as quick as 2-3 months. Up until the date of the auction the borrower can still make payment arrangements or pay the amount due, including attorney fees incurred by the lender to start the process.
## Phase 4: Trustee’s Sale
The property is now placed for public auction and will be awarded to the highest bidder who meets all of the requirements. The lender (or firm representing the lender) will calculate an opening bid based on the value of the outstanding loan and any [liens](https://www.investopedia.com/terms/l/lien.asp), unpaid taxes, and costs associated with the sale.
###
When a foreclosed property is purchased, it is up to the buyer to say how long the previous owners may stay in their former home.
Once the highest bidder has been confirmed [and the sale is completed](https://www.investopedia.com/investing/buying-foreclosed-home/), a trustee’s deed upon sale will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.
## Phase 5: Real Estate Owned (REO)
The lender will set a minimum bid, which takes into account the [appraised value of the property](https://www.investopedia.com/terms/a/appraisal.asp), the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a [real estate-owned (REO)](https://www.investopedia.com/terms/r/realestateowned.asp) asset manager. These properties are often referred to as “bank-owned,” and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
## Phase 6: Eviction
As soon as the auction ends and a new owner is named—either the auction winner or the bank if the property is not sold—the borrowers are issued an order to evacuate if they are still living in the property. This eviction notice demands that any persons living in the house vacate the premises immediately.
Several days may be provided to allow the occupants sufficient time to leave and remove any personal belongings. Then, typically, the local sheriff or law enforcement will visit the property and remove them and [impound any remaining belongings](https://www.investopedia.com/terms/w/writ-of-attachment.asp).
###
Mortgage lending discrimination is illegal. [If you think you've been discriminated against](https://www.investopedia.com/housing-discrimination-what-can-you-do-5074478) based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the [Consumer Financial Protection Bureau](https://www.consumerfinance.gov/complaint/) or with the [U.S. Department of Housing and Urban Development (HUD)](https://www.hud.gov/faqs/complaints).
## What Is Pre Foreclosure?
Pre foreclosure is the period before the foreclosure process starts. This is when you have fallen behind on payments and the lender issues a notice of default (NOD).
## What Is REO Foreclosure?
Real estate owned (REO) is a property that a lender or bank has foreclosed on but failed to sell at the foreclosure auction. Therefore, the lender owns the foreclosed property. After this point, the bank-owned property is known as [Other Real Estate Owned (OREO)](https://www.investopedia.com/terms/o/other-real-estate-owned-oreo.asp)
## What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is an instrument where a property owner voluntarily relinquishes ownership to avoid foreclosure. This is typically less damaging than going through foreclosure.
## The Bottom Line
Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid foreclosure. If there is a chance the borrower can catch up on payments—for instance, they just started a new job following a period of unemployment—it is worth speaking to the lender in hopes of making arrangements or modifying the current loan.
|
Foreclosure is the process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership of the property. Although the foreclosure process varies by state, there are six common phases of a foreclosure procedure.
Key Takeaways
Foreclosure occurs when a lender seeks to seize the property used as collateral for a loan due to failure to pay.There are typically six phases in the foreclosure process and the exact steps vary state by state. Before a home is foreclosed on, owners are given 30 days to fulfill their mortgage obligations.
Phase 1: Payment Default
Payment default occurs when a borrower has missed at least one mortgage payment—although the technical definition can vary by lender. After missing the first payment, the lender will reach out via a letter or telephone.
Typically, mortgage payments are due on the first day of each month, and many lenders offer a grace period until the 15th of the month. After that, the lender may charge a late payment fee and send the missed payment notice.
After the second month of missed payments, the lender will likely follow up via telephone. However, at this point, the lender may be still willing to work with the borrower to make arrangements for catching up on payments, which may include making just one payment to prevent falling further behind.
Once a borrower goes three months without making a payment, the lender generally sends a demand letter (or notice to accelerate) stating the amount in delinquency and that the borrower has 30 days to bring the mortgage current.
A mortgage in default can have three outcomes—return to good standing, be modified, or the property is repossessed or sold via foreclosure or voluntary surrender.
Phase 2: Notice of Default
A notice of default (NOD) is sent after the fourth month of missed payments (90 days past due). This public notice gives the borrower 30 days to remedy past due payments before formally starting the foreclosure process.
Most lenders will not send a notice of default until the borrower is 90 days past due (three consecutive missed payments). Thus, many times a borrower can fall behind a month or two without facing foreclosure.
Generally, federal law prohibits a lender from starting foreclosure until the borrower is more than 120 days past due.
Phase 3: Notice of Trustee’s Sale
Depending on the state, the process for initiating foreclosure is different. In some states, nonjudicial foreclosures can be done that only requires filing paperwork with the necessary court to start the process. With this, the foreclosure e process can move rather quickly. Other states have judicial foreclosures, which require court approval for each step—meaning the process takes a bit longer.
Once forms are filed with the court or necessary approval is met, the lender's attorney or foreclosure trustee will schedule a sale of the property. A notice of trustee's sale (also known as a notice of sale) is then recorded in the county where the property is located—stating the specific time and location for the sale, as well as the minimum opening bid for the property.
The lender must also generally advertise the property (newspaper ads, signs, etc.) in the weeks before the auction indicating that the property will be available at public auction.
The time from the notice of demand to the auction date varies by state, but can be as quick as 2-3 months. Up until the date of the auction the borrower can still make payment arrangements or pay the amount due, including attorney fees incurred by the lender to start the process.
Phase 4: Trustee’s Sale
The property is now placed for public auction and will be awarded to the highest bidder who meets all of the requirements. The lender (or firm representing the lender) will calculate an opening bid based on the value of the outstanding loan and any liens, unpaid taxes, and costs associated with the sale.
When a foreclosed property is purchased, it is up to the buyer to say how long the previous owners may stay in their former home.
Once the highest bidder has been confirmed and the sale is completed, a trustee’s deed upon sale will be provided to the winning bidder. The property is then owned by the purchaser, who is entitled to immediate possession.
Phase 5: Real Estate Owned (REO)
The lender will set a minimum bid, which takes into account the appraised value of the property, the remaining amount due on the mortgage, any other liens, and attorney fees. If the property is not sold during the public auction, the lender will become the owner and attempt to sell the property through a broker or with the assistance of a real estate-owned (REO) asset manager. These properties are often referred to as “bank-owned,” and the lender may remove some of the liens and other expenses in an attempt to make the property more attractive.
Phase 6: Eviction
As soon as the auction ends and a new owner is named—either the auction winner or the bank if the property is not sold—the borrowers are issued an order to evacuate if they are still living in the property. This eviction notice demands that any persons living in the house vacate the premises immediately.
Several days may be provided to allow the occupants sufficient time to leave and remove any personal belongings. Then, typically, the local sheriff or law enforcement will visit the property and remove them and impound any remaining belongings.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
What Is Pre Foreclosure?
Pre foreclosure is the period before the foreclosure process starts. This is when you have fallen behind on payments and the lender issues a notice of default (NOD).
What Is REO Foreclosure?
Real estate owned (REO) is a property that a lender or bank has foreclosed on but failed to sell at the foreclosure auction. Therefore, the lender owns the foreclosed property. After this point, the bank-owned property is known as Other Real Estate Owned (OREO)
What Is a Deed in Lieu of Foreclosure?
A deed in lieu of foreclosure is an instrument where a property owner voluntarily relinquishes ownership to avoid foreclosure. This is typically less damaging than going through foreclosure.
The Bottom Line
Throughout the foreclosure process, many lenders will attempt to make arrangements for the borrower to get caught up on the loan and avoid foreclosure. If there is a chance the borrower can catch up on payments—for instance, they just started a new job following a period of unemployment—it is worth speaking to the lender in hopes of making arrangements or modifying the current loan.
|
[
[
"foreclosure",
"https://www.investopedia.com/terms/f/foreclosure.asp"
],
[
"default",
"https://www.investopedia.com/terms/d/default2.asp"
],
[
"demand letter",
"https://www.investopedia.com/terms/d/demand-letter.asp"
],
[
"be modified",
"https://www.investopedia.com/terms/l/loan_modification.asp"
],
[
"notice of default (NOD)",
"https://www.investopedia.com/terms/n/notice-of-default.asp"
],
[
"nonjudicial foreclosures",
"https://www.investopedia.com/terms/f/foreclosure-filing.asp"
],
[
"liens",
"https://www.investopedia.com/terms/l/lien.asp"
],
[
"and the sale is completed",
"https://www.investopedia.com/investing/buying-foreclosed-home/"
],
[
"appraised value of the property",
"https://www.investopedia.com/terms/a/appraisal.asp"
],
[
"real estate-owned (REO)",
"https://www.investopedia.com/terms/r/realestateowned.asp"
],
[
"impound any remaining belongings",
"https://www.investopedia.com/terms/w/writ-of-attachment.asp"
],
[
"If you think you've been discriminated against",
"https://www.investopedia.com/housing-discrimination-what-can-you-do-5074478"
],
[
"Consumer Financial Protection Bureau",
"https://www.consumerfinance.gov/complaint/"
],
[
"U.S. Department of Housing and Urban Development (HUD)",
"https://www.hud.gov/faqs/complaints"
],
[
"Other Real Estate Owned (OREO)",
"https://www.investopedia.com/terms/o/other-real-estate-owned-oreo.asp"
]
] |
https://www.investopedia.com/articles/05/taxlots.asp
|
How to Use Tax Lots to Pay Less Tax
|
<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 series of tax bills in recent years, culminating in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/" rel="noopener noreferrer">Tax Cuts and Jobs Act</a> (TCJA) of 2017, has given investors a tremendous opportunity for savings on long-term capital gains and dividends. But the way to take full advantage of these changes is to use tax lots in managing your investment purchases and sales, and reporting that income to the Internal Revenue Service (IRS).
</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"> Securities purchased in a single transaction are referred to as "a lot" for tax purposes.<span class="ql-inline-citation" data-cite="6"></span> In other words, a tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio. Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when, making a big difference in the taxes owed on those investments.
</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 tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio.</li><li>Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when in a tax year.</li><li>In particular, your choice of cost basis method can have a significant effect on the computation of capital gains and losses and significantly impact the taxes owed on those investments.</li></ul></div></div></div>
<span class="heading-toc" id="toc-the-current-tax-rates"></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"> The Current Tax Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The current rates, instituted by the Tax Cuts and Jobs Act, are intended to stay in place through 2025.<span class="ql-inline-citation" data-cite="1"></span> However, as of the date of this article, there are significant changes being proposed by Congress that could increase these rates. If passed in its current form, some tax increases could be made retroactively. It's important to keep abreast of these proposals for tax planning purposes. You can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://taxfoundation.org/research/federal-tax/biden-administration-tax-proposals/">visit the Tax Foundation website</a> to access the latest information.
</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 tax rate on long-term capital gains tops out at 20% for single filers who report over $492,300 or more in income in 2023; for married folks filing jointly, it's $553,850. The rate drops to 15% for those who make between $44,625 and $492,300 ($89,250 to $553,850 for couples) and it's 0% for those whose income is under those respective minimums. To get these rates, the filer must have owned the investment for at least one year.<span class="ql-inline-citation" data-cite="12"></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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Short-term capital gains are taxed as ordinary income. The Act established seven income tax brackets ranging from 10% for low-income earners to 37% for top earners.<span class="ql-inline-citation" data-cite="3"></span> Below is a quick look at how your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a>, short-term capital gains, and long-term capital gains will be taxed on your stocks, bonds, and mutual funds, depending on your tax bracket.<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_13-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_14-0"> <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>Stocks, Bonds, Mutual Funds</b></th>
<th><b>Tax Rate: Single Filers</b></th>
<th> </th>
<th> </th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td> </td>
<td><b>Income $0-$44,625</b></td>
<td><b>Income $44,626-$492,300</b></td>
<td><b>Income</b> <b>$492,301 and higher</b></td>
</tr>
<tr>
<td><em>Qualified Dividends</em></td>
<td>0%</td>
<td>15%</td>
<td>20%</td>
</tr>
<tr>
<td><em>Short-Term Capital Gains</em></td>
<td>ordinary tax bracket</td>
<td>ordinary tax bracket</td>
<td>ordinary tax bracket</td>
</tr>
<tr>
<td><em>Long-Term Capital Gains</em></td>
<td>0%</td>
<td>15%</td>
<td>20%</td>
</tr>
<tr>
<th> </th>
<th><b>Tax Rate: </b>Married Filing Jointly</th>
<th> </th>
<th> </th>
</tr>
<tr>
<td> </td>
<td><b>Income $0-$89,250</b></td>
<td><b>Income $89,251-$553,850</b></td>
<td><b>Income</b> <b>$553,851 and higher</b></td>
</tr>
<tr>
<td><em>Qualified Dividends</em></td>
<td>0%</td>
<td>15%</td>
<td>20%</td>
</tr>
<tr>
<td><em>Short-Term Capital Gains</em></td>
<td>ordinary tax bracket</td>
<td>ordinary tax bracket</td>
<td>ordinary tax bracket</td>
</tr>
<tr>
<td><em>Long-Term Capital Gains</em></td>
<td>0%</td>
<td>15%</td>
<td>20%</td>
</tr>
</tbody>
</table>
</div></figure>
<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 addition to the rates listed in the table, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.<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_17-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> As you can see from the chart, short-term capital gains receive the least-favorable tax treatment and should be avoided in most cases. It is important to note that the reduced tax rate for dividends applies only to qualified dividends. That is, the reduced rate does not apply unless the dividend is received on a security held for at least 61 days during the 121-day period beginning 60 days before the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ex-date.asp">ex-dividend date</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_19-0"></div>
<span class="heading-toc" id="toc-how-to-report-gains-and-losses"></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 to Report Gains and Losses </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/form1099div.asp">Form 1099-DIV</a> breaks down ordinary and qualified dividends for you for tax purposes. You need to keep track of your original <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> on securities that you purchased in order to report short-term and long-term gains for the year, which is done on the form called Schedule D-Capital Gains and Losses.<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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> When computing your capital gains, the short-term gains and losses are first netted, and then long-term gains and losses are netted. You can then net the two results together to compute your overall result. Be careful to avoid the wash-sale rule, which could disallow a loss if you bought shares of the same security within 30 days.<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_24-0"></div>
<span class="heading-toc" id="toc-using-tax-lots-to-your-advantage"></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"> Using Tax Lots to Your Advantage </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares.<span class="ql-inline-citation" data-cite="6"></span> For <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> shares, there are three common ways to identify the cost basis of the shares that you are selling:<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_27-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> <li>FIFO (first-in, first-out)</li><li>The average-cost method</li><li>The specific-share method</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"> For individual stocks and bonds, you can use:
</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>FIFO</li>
<li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifo.asp">LIFO</a> (last in, first out)</li>
<li>The specific-shares method</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"> Most people choose the FIFO method because it is the default in most software packages, and it's convenient for tracking cost basis. But take a look at how the specific-shares method can help you minimize your gains compared to those standard FIFO or LIFO methods. This is what is meant by selecting specific tax lots.
</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"> Suppose, for example, that you are in the 32% tax bracket and you made the following purchases of XYZ stock over a two-year period.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_38-0"> <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>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th><b>Tax Lot #</b></th>
<th><b>Cost Per Share</b></th>
<th><b>Shares</b></th>
<th><b>Purchased</b></th>
<th><b>Current Price Per Shares</b></th>
<th><b>Gain</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>1</td>
<td>$50</td>
<td>800</td>
<td>two years ago</td>
<td>$75</td>
<td>$25</td>
</tr>
<tr>
<td>2</td>
<td>$58</td>
<td>500</td>
<td>nine months ago</td>
<td>$75</td>
<td>$17</td>
</tr>
<tr>
<td>3</td>
<td>$70</td>
<td>400</td>
<td>six months ago</td>
<td>$75</td>
<td>$5</td>
</tr>
</tbody>
</table>
</div></figure>
<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"> Now, suppose that you need to sell 800 shares of XYZ and you want to minimize your tax consequence:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_42-0"> <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><b>Under the FIFO Method</b></th>
<th><b>Tax Result</b></th>
<th><b>Taxes Due</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Sell 800 shares of tax lot #1</td>
<td>long-term gain of $20,000</td>
<td><b>$3,000 ($20,000 x 15%</b>)</td>
</tr>
</tbody>
</table>
</div></figure>
<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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_44-0"> <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><b>User Specific-Shares Method</b></th>
<th><b>Tax Result</b></th>
<th><b>Taxes Due</b></th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Sell 400 shares of tax lot #3</td>
<td>short-term gain of $2,000</td>
<td>$640 ($2,000 x 32%)</td>
</tr>
<tr>
<td>Sell 400 shares of tax lot #1</td>
<td>long-term gain of $10,000</td>
<td>$1,500 ($10,000 x 15%)</td>
</tr>
</tbody>
</table>
</div></figure>
<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"> <strong> </strong> <strong> Total $2,140</strong>
</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"> Under the FIFO method, you would sell the first 800 shares that you purchased two years ago, resulting in a long-term gain of $20,000, with a tax bill of $3,000. If you choose to sell a specific tax lot instead, you can sell your most expensive shares first, even though they were held short-term, and still have a lower tax bill of $2,140.
</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-strategies-for-tax-minimization"></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"> Strategies for Tax Minimization </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Tracking securities by tax lot is a great way to minimize the taxes you owe on your gains. Keep in mind that it requires you to keep accurate records and always sell your highest-cost positions first.
</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"> Other ways to minimize taxes:
</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>Avoid short-term gains.</strong> This is a good general rule of thumb. That said, it occasionally makes sense to sell a newer position first, if it means a much lower capital gain.</li>
<li><strong>Avoid high-turnover funds and stocks.</strong><em> </em>They<em> </em>generate commissions, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transactioncosts.asp" rel="noopener noreferrer">transaction costs</a>, and higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxliability.asp" rel="noopener noreferrer">tax liabilities</a>. If you're going to do a lot of trading, make sure that every decision is worth it from a tax perspective.</li>
<li><strong>Use tax-managed funds. </strong>These mutual funds are structured to reduce tax liability. Their managers invest in the same stocks as other funds, but seek to minimize the year-end distributions of capital gains by less buying and selling within the fund.</li>
<li><strong>Sell your losers. </strong>Harvest your losses and use them to offset gains. Don't be afraid to generate losses that carry forward for future years.</li>
</ul>
<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"> There are a number of methods of determining your gain or loss on the sale of a security. You must determine the method that works best for you and stick with it. Although the first-in, first-out method might be the easiest to calculate and track, it might not always be the most advantageous.
</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"> If you do take advantage of the specific-shares method, make sure you receive a written confirmation from your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">broker</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/custodian.asp">custodian</a> acknowledging your selling instructions.
</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"> <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. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.</em>
</p></div>
|
A series of tax bills in recent years, culminating in the [Tax Cuts and Jobs Act](https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/) (TCJA) of 2017, has given investors a tremendous opportunity for savings on long-term capital gains and dividends. But the way to take full advantage of these changes is to use tax lots in managing your investment purchases and sales, and reporting that income to the Internal Revenue Service (IRS).
Securities purchased in a single transaction are referred to as "a lot" for tax purposes. In other words, a tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio. Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when, making a big difference in the taxes owed on those investments.
### key takeaways
* A tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio.
* Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when in a tax year.
* In particular, your choice of cost basis method can have a significant effect on the computation of capital gains and losses and significantly impact the taxes owed on those investments.
## The Current Tax Rates
The current rates, instituted by the Tax Cuts and Jobs Act, are intended to stay in place through 2025. However, as of the date of this article, there are significant changes being proposed by Congress that could increase these rates. If passed in its current form, some tax increases could be made retroactively. It's important to keep abreast of these proposals for tax planning purposes. You can [visit the Tax Foundation website](https://taxfoundation.org/research/federal-tax/biden-administration-tax-proposals/) to access the latest information.
The tax rate on long-term capital gains tops out at 20% for single filers who report over $492,300 or more in income in 2023; for married folks filing jointly, it's $553,850. The rate drops to 15% for those who make between $44,625 and $492,300 ($89,250 to $553,850 for couples) and it's 0% for those whose income is under those respective minimums. To get these rates, the filer must have owned the investment for at least one year.
Short-term capital gains are taxed as ordinary income. The Act established seven income tax brackets ranging from 10% for low-income earners to 37% for top earners. Below is a quick look at how your [dividends](https://www.investopedia.com/terms/d/dividend.asp), short-term capital gains, and long-term capital gains will be taxed on your stocks, bonds, and mutual funds, depending on your tax bracket.
| **Stocks, Bonds, Mutual Funds** | **Tax Rate: Single Filers** | | |
| --- | --- | --- | --- |
| | **Income $0-$44,625** | **Income $44,626-$492,300** | **Income** **$492,301 and higher** |
| *Qualified Dividends* | 0% | 15% | 20% |
| *Short-Term Capital Gains* | ordinary tax bracket | ordinary tax bracket | ordinary tax bracket |
| *Long-Term Capital Gains* | 0% | 15% | 20% |
| | **Tax Rate:** Married Filing Jointly | | |
| | **Income $0-$89,250** | **Income $89,251-$553,850** | **Income** **$553,851 and higher** |
| *Qualified Dividends* | 0% | 15% | 20% |
| *Short-Term Capital Gains* | ordinary tax bracket | ordinary tax bracket | ordinary tax bracket |
| *Long-Term Capital Gains* | 0% | 15% | 20% |
In addition to the rates listed in the table, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.
As you can see from the chart, short-term capital gains receive the least-favorable tax treatment and should be avoided in most cases. It is important to note that the reduced tax rate for dividends applies only to qualified dividends. That is, the reduced rate does not apply unless the dividend is received on a security held for at least 61 days during the 121-day period beginning 60 days before the [ex-dividend date](https://www.investopedia.com/terms/e/ex-date.asp).
## How to Report Gains and Losses
[Form 1099-DIV](https://www.investopedia.com/terms/f/form1099div.asp) breaks down ordinary and qualified dividends for you for tax purposes. You need to keep track of your original [cost basis](https://www.investopedia.com/terms/c/costbasis.asp) on securities that you purchased in order to report short-term and long-term gains for the year, which is done on the form called Schedule D-Capital Gains and Losses.
When computing your capital gains, the short-term gains and losses are first netted, and then long-term gains and losses are netted. You can then net the two results together to compute your overall result. Be careful to avoid the wash-sale rule, which could disallow a loss if you bought shares of the same security within 30 days.
## Using Tax Lots to Your Advantage
Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares. For [mutual fund](https://www.investopedia.com/terms/m/mutualfund.asp) shares, there are three common ways to identify the cost basis of the shares that you are selling:
* FIFO (first-in, first-out)
* The average-cost method
* The specific-share method
For individual stocks and bonds, you can use:
* FIFO
* [LIFO](https://www.investopedia.com/terms/l/lifo.asp) (last in, first out)
* The specific-shares method
Most people choose the FIFO method because it is the default in most software packages, and it's convenient for tracking cost basis. But take a look at how the specific-shares method can help you minimize your gains compared to those standard FIFO or LIFO methods. This is what is meant by selecting specific tax lots.
Suppose, for example, that you are in the 32% tax bracket and you made the following purchases of XYZ stock over a two-year period.
| **Tax Lot #** | **Cost Per Share** | **Shares** | **Purchased** | **Current Price Per Shares** | **Gain** |
| --- | --- | --- | --- | --- | --- |
| 1 | $50 | 800 | two years ago | $75 | $25 |
| 2 | $58 | 500 | nine months ago | $75 | $17 |
| 3 | $70 | 400 | six months ago | $75 | $5 |
Now, suppose that you need to sell 800 shares of XYZ and you want to minimize your tax consequence:
| **Under the FIFO Method** | **Tax Result** | **Taxes Due** |
| --- | --- | --- |
| Sell 800 shares of tax lot #1 | long-term gain of $20,000 | **$3,000 ($20,000 x 15%**) |
| **User Specific-Shares Method** | **Tax Result** | **Taxes Due** |
| --- | --- | --- |
| Sell 400 shares of tax lot #3 | short-term gain of $2,000 | $640 ($2,000 x 32%) |
| Sell 400 shares of tax lot #1 | long-term gain of $10,000 | $1,500 ($10,000 x 15%) |
**Total $2,140**
Under the FIFO method, you would sell the first 800 shares that you purchased two years ago, resulting in a long-term gain of $20,000, with a tax bill of $3,000. If you choose to sell a specific tax lot instead, you can sell your most expensive shares first, even though they were held short-term, and still have a lower tax bill of $2,140.
## Strategies for Tax Minimization
Tracking securities by tax lot is a great way to minimize the taxes you owe on your gains. Keep in mind that it requires you to keep accurate records and always sell your highest-cost positions first.
Other ways to minimize taxes:
* **Avoid short-term gains.** This is a good general rule of thumb. That said, it occasionally makes sense to sell a newer position first, if it means a much lower capital gain.
* **Avoid high-turnover funds and stocks.**Theygenerate commissions, [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp), and higher [tax liabilities](https://www.investopedia.com/terms/t/taxliability.asp). If you're going to do a lot of trading, make sure that every decision is worth it from a tax perspective.
* **Use tax-managed funds.** These mutual funds are structured to reduce tax liability. Their managers invest in the same stocks as other funds, but seek to minimize the year-end distributions of capital gains by less buying and selling within the fund.
* **Sell your losers.** Harvest your losses and use them to offset gains. Don't be afraid to generate losses that carry forward for future years.
## The Bottom Line
There are a number of methods of determining your gain or loss on the sale of a security. You must determine the method that works best for you and stick with it. Although the first-in, first-out method might be the easiest to calculate and track, it might not always be the most advantageous.
If you do take advantage of the specific-shares method, make sure you receive a written confirmation from your [broker](https://www.investopedia.com/terms/b/broker.asp) or [custodian](https://www.investopedia.com/terms/c/custodian.asp) acknowledging your selling instructions.
*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. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.*
|
A series of tax bills in recent years, culminating in the Tax Cuts and Jobs Act (TCJA) of 2017, has given investors a tremendous opportunity for savings on long-term capital gains and dividends. But the way to take full advantage of these changes is to use tax lots in managing your investment purchases and sales, and reporting that income to the Internal Revenue Service (IRS).
Securities purchased in a single transaction are referred to as "a lot" for tax purposes. In other words, a tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio. Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when, making a big difference in the taxes owed on those investments.
key takeaways
A tax lot is a record of all transactions and their tax implications (dates of purchase and sale, cost basis, sale price) involving a particular security in a portfolio.Thinking in terms of tax lots can help an investor make strategic decisions about which assets to sell and when in a tax year.In particular, your choice of cost basis method can have a significant effect on the computation of capital gains and losses and significantly impact the taxes owed on those investments.
The Current Tax Rates
The current rates, instituted by the Tax Cuts and Jobs Act, are intended to stay in place through 2025. However, as of the date of this article, there are significant changes being proposed by Congress that could increase these rates. If passed in its current form, some tax increases could be made retroactively. It's important to keep abreast of these proposals for tax planning purposes. You can visit the Tax Foundation website to access the latest information.
The tax rate on long-term capital gains tops out at 20% for single filers who report over $492,300 or more in income in 2023; for married folks filing jointly, it's $553,850. The rate drops to 15% for those who make between $44,625 and $492,300 ($89,250 to $553,850 for couples) and it's 0% for those whose income is under those respective minimums. To get these rates, the filer must have owned the investment for at least one year.
Short-term capital gains are taxed as ordinary income. The Act established seven income tax brackets ranging from 10% for low-income earners to 37% for top earners. Below is a quick look at how your dividends, short-term capital gains, and long-term capital gains will be taxed on your stocks, bonds, and mutual funds, depending on your tax bracket.
Stocks, Bonds, Mutual Funds
Tax Rate: Single Filers
Income $0-$44,625
Income $44,626-$492,300
Income $492,301 and higher
Qualified Dividends
0%
15%
20%
Short-Term Capital Gains
ordinary tax bracket
ordinary tax bracket
ordinary tax bracket
Long-Term Capital Gains
0%
15%
20%
Tax Rate: Married Filing Jointly
Income $0-$89,250
Income $89,251-$553,850
Income $553,851 and higher
Qualified Dividends
0%
15%
20%
Short-Term Capital Gains
ordinary tax bracket
ordinary tax bracket
ordinary tax bracket
Long-Term Capital Gains
0%
15%
20%
In addition to the rates listed in the table, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.
As you can see from the chart, short-term capital gains receive the least-favorable tax treatment and should be avoided in most cases. It is important to note that the reduced tax rate for dividends applies only to qualified dividends. That is, the reduced rate does not apply unless the dividend is received on a security held for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.
How to Report Gains and Losses
Form 1099-DIV breaks down ordinary and qualified dividends for you for tax purposes. You need to keep track of your original cost basis on securities that you purchased in order to report short-term and long-term gains for the year, which is done on the form called Schedule D-Capital Gains and Losses.
When computing your capital gains, the short-term gains and losses are first netted, and then long-term gains and losses are netted. You can then net the two results together to compute your overall result. Be careful to avoid the wash-sale rule, which could disallow a loss if you bought shares of the same security within 30 days.
Using Tax Lots to Your Advantage
Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares. For mutual fund shares, there are three common ways to identify the cost basis of the shares that you are selling:
FIFO (first-in, first-out)The average-cost methodThe specific-share method
For individual stocks and bonds, you can use:
FIFO
LIFO (last in, first out)
The specific-shares method
Most people choose the FIFO method because it is the default in most software packages, and it's convenient for tracking cost basis. But take a look at how the specific-shares method can help you minimize your gains compared to those standard FIFO or LIFO methods. This is what is meant by selecting specific tax lots.
Suppose, for example, that you are in the 32% tax bracket and you made the following purchases of XYZ stock over a two-year period.
Tax Lot #
Cost Per Share
Shares
Purchased
Current Price Per Shares
Gain
1
$50
800
two years ago
$75
$25
2
$58
500
nine months ago
$75
$17
3
$70
400
six months ago
$75
$5
Now, suppose that you need to sell 800 shares of XYZ and you want to minimize your tax consequence:
Under the FIFO Method
Tax Result
Taxes Due
Sell 800 shares of tax lot #1
long-term gain of $20,000
$3,000 ($20,000 x 15%)
User Specific-Shares Method
Tax Result
Taxes Due
Sell 400 shares of tax lot #3
short-term gain of $2,000
$640 ($2,000 x 32%)
Sell 400 shares of tax lot #1
long-term gain of $10,000
$1,500 ($10,000 x 15%)
Total $2,140
Under the FIFO method, you would sell the first 800 shares that you purchased two years ago, resulting in a long-term gain of $20,000, with a tax bill of $3,000. If you choose to sell a specific tax lot instead, you can sell your most expensive shares first, even though they were held short-term, and still have a lower tax bill of $2,140.
Strategies for Tax Minimization
Tracking securities by tax lot is a great way to minimize the taxes you owe on your gains. Keep in mind that it requires you to keep accurate records and always sell your highest-cost positions first.
Other ways to minimize taxes:
Avoid short-term gains. This is a good general rule of thumb. That said, it occasionally makes sense to sell a newer position first, if it means a much lower capital gain.
Avoid high-turnover funds and stocks. They generate commissions, transaction costs, and higher tax liabilities. If you're going to do a lot of trading, make sure that every decision is worth it from a tax perspective.
Use tax-managed funds. These mutual funds are structured to reduce tax liability. Their managers invest in the same stocks as other funds, but seek to minimize the year-end distributions of capital gains by less buying and selling within the fund.
Sell your losers. Harvest your losses and use them to offset gains. Don't be afraid to generate losses that carry forward for future years.
The Bottom Line
There are a number of methods of determining your gain or loss on the sale of a security. You must determine the method that works best for you and stick with it. Although the first-in, first-out method might be the easiest to calculate and track, it might not always be the most advantageous.
If you do take advantage of the specific-shares method, make sure you receive a written confirmation from your broker or custodian acknowledging your selling instructions.
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. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.
|
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https://www.investopedia.com/life-insurance-policy-sales-post-dramatic-gains-not-seen-in-nearly-four-decades-5187167
|
Life Insurance Sales Post Dramatic Gains Not Seen in Nearly Four Decades
|
<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"> Life insurance policy sales in the U.S. have hit a record-busting pace, logging the highest quarterly growth since 1983, according to the industry research group LIMRA. Sales rose 11% in the first quarter of 2021, compared to the same period in 2020, and new premium growth also saw a double-digit boost, up 15% from a year ago.<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>Individual life insurance policy sales have soared to their highest levels in decades, a new LIMRA analysis shows.</li><li>Lifted in part by pandemic demand, eight of the top 10 carriers recorded double-digit growth in policy sales in this year’s first quarter.</li><li>Indicators point to the pace of growth continuing through 2021 and beyond.</li></ul></div></div></div>
<span class="heading-toc" id="toc-whats-driving-the-trend"></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 Driving the Trend? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Unlike in 1983, when double-digit policy count growth was driven by universal<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fa-profession/091116/life-insurance-replacement-rules-laws-regulations.asp"> life insurance replacement</a>, this year's policy sales represent organic growth, says David Levenson, president and CEO, LL Global, LIMRA and LOMA.
</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"> As with many financial trends in the past year, COVID-19 had a major impact. More people recognized the need for life insurance, Levenson says, and companies also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/life-insurance-underwriting-amid-a-pandemic-5101719">took steps during the pandemic</a> to make it simpler for people to buy coverage.
</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 latest results follow LIMRA's 2021 Insurance Barometer Study, which noted a spike in people's intentions to buy life insurance. More than a third of consumers (36%) in that study said they planned to buy coverage within the next 12 months—the highest purchase intent in the annual survey's history.<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_11-0"></div>
<span class="heading-toc" id="toc-whole-life-and-term-led-the-way"></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"> Whole Life and Term Led the Way </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/w/wholelife.asp">Whole life</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termlife.asp">term life</a> led the significant first-quarter growth, making up 88% of policies sold. Policy counts in the first quarter rose 6% for <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/universallife.asp">universal life</a>, while <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/variableuniversallife.asp">variable universal life</a> jumped 31%, compared with first quarter 2020 results.
</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"> Seven in 10 life insurers—including nine of the top 10—reported increases in new annualized premiums in the first three months of 2021. Six in 10 issued more policies in the first quarter, and eight of the top 10 carriers recorded double-digit growth in policy sales. LIMRA's data represents about 80% of the U.S. individual life insurance market.
</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"> According to additional details provided by LIMRA, here are the nation's top 10 life insurance carriers based on policy sales in Q1 2021 (listed alphabetically; LIMRA does not disclose specific sales rankings):
</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>Colonial Penn</li><li>CUNA Mutual</li><li>Gerber Life Insurance Company</li><li>Mutual of Omaha Companies</li><li>New York Life</li><li>Northwestern Mutual</li><li>Primerica Life Insurance</li><li>State Farm Life</li><li>Transamerica</li><li>Unum</li>
</ul>
<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-will-the-boom-continue"></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"> Will the Boom Continue? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Can the life insurance industry sustain the current high-growth pace? While intent to buy doesn’t always produce a sale, Levenson’s forecast is bullish.
</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"> "We expect this growth to continue through 2021 based on both life insurance applications—perhaps the best leading indicator of future sales—and increased consumer demand that history tells us will likely persist for at least several years following the pandemic," he told Investopedia.
</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-much-life-insurance-is-enough"></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 Much Life Insurance Is Enough? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> How much life insurance to buy is a common question for consumers trying to balance their family's needs with the cost of a policy.
</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"> For a ballpark estimate, the industry-supported nonprofit LifeHappens.org advises adding up the current and future expenses your family is likely to face if you were to die—including mortgage payments and college tuition. Then, tally any income or other financial resources they’ll continue to receive or be able to tap. The difference between these two numbers is the amount of life insurance to consider, as a way to fill any gap.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> You can get a general idea of the amount of life insurance that might make sense for you and your family by using LifeHappens.org’s<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://lifehappens.org/life-insurance-needs-calculator/"> life insurance needs calculator</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"> As to the right type of life insurance for you, and other considerations, Investopedia has this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp">Life Insurance Guide to Policies & Companies</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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
Life insurance policy sales in the U.S. have hit a record-busting pace, logging the highest quarterly growth since 1983, according to the industry research group LIMRA. Sales rose 11% in the first quarter of 2021, compared to the same period in 2020, and new premium growth also saw a double-digit boost, up 15% from a year ago.
### Key Takeaways
* Individual life insurance policy sales have soared to their highest levels in decades, a new LIMRA analysis shows.
* Lifted in part by pandemic demand, eight of the top 10 carriers recorded double-digit growth in policy sales in this year’s first quarter.
* Indicators point to the pace of growth continuing through 2021 and beyond.
## What's Driving the Trend?
Unlike in 1983, when double-digit policy count growth was driven by universal [life insurance replacement](https://www.investopedia.com/articles/fa-profession/091116/life-insurance-replacement-rules-laws-regulations.asp), this year's policy sales represent organic growth, says David Levenson, president and CEO, LL Global, LIMRA and LOMA.
As with many financial trends in the past year, COVID-19 had a major impact. More people recognized the need for life insurance, Levenson says, and companies also [took steps during the pandemic](https://www.investopedia.com/life-insurance-underwriting-amid-a-pandemic-5101719) to make it simpler for people to buy coverage.
The latest results follow LIMRA's 2021 Insurance Barometer Study, which noted a spike in people's intentions to buy life insurance. More than a third of consumers (36%) in that study said they planned to buy coverage within the next 12 months—the highest purchase intent in the annual survey's history.
## Whole Life and Term Led the Way
[Whole life](https://www.investopedia.com/terms/w/wholelife.asp) and [term life](https://www.investopedia.com/terms/t/termlife.asp) led the significant first-quarter growth, making up 88% of policies sold. Policy counts in the first quarter rose 6% for [universal life](https://www.investopedia.com/terms/u/universallife.asp), while [variable universal life](https://www.investopedia.com/terms/v/variableuniversallife.asp) jumped 31%, compared with first quarter 2020 results.
Seven in 10 life insurers—including nine of the top 10—reported increases in new annualized premiums in the first three months of 2021. Six in 10 issued more policies in the first quarter, and eight of the top 10 carriers recorded double-digit growth in policy sales. LIMRA's data represents about 80% of the U.S. individual life insurance market.
According to additional details provided by LIMRA, here are the nation's top 10 life insurance carriers based on policy sales in Q1 2021 (listed alphabetically; LIMRA does not disclose specific sales rankings):
* Colonial Penn
* CUNA Mutual
* Gerber Life Insurance Company
* Mutual of Omaha Companies
* New York Life
* Northwestern Mutual
* Primerica Life Insurance
* State Farm Life
* Transamerica
* Unum
## Will the Boom Continue?
Can the life insurance industry sustain the current high-growth pace? While intent to buy doesn’t always produce a sale, Levenson’s forecast is bullish.
"We expect this growth to continue through 2021 based on both life insurance applications—perhaps the best leading indicator of future sales—and increased consumer demand that history tells us will likely persist for at least several years following the pandemic," he told Investopedia.
## How Much Life Insurance Is Enough?
How much life insurance to buy is a common question for consumers trying to balance their family's needs with the cost of a policy.
For a ballpark estimate, the industry-supported nonprofit LifeHappens.org advises adding up the current and future expenses your family is likely to face if you were to die—including mortgage payments and college tuition. Then, tally any income or other financial resources they’ll continue to receive or be able to tap. The difference between these two numbers is the amount of life insurance to consider, as a way to fill any gap.
You can get a general idea of the amount of life insurance that might make sense for you and your family by using LifeHappens.org’s [life insurance needs calculator](https://lifehappens.org/life-insurance-needs-calculator/).
As to the right type of life insurance for you, and other considerations, Investopedia has this [Life Insurance Guide to Policies & Companies](https://www.investopedia.com/terms/l/lifeinsurance.asp).
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Life insurance policy sales in the U.S. have hit a record-busting pace, logging the highest quarterly growth since 1983, according to the industry research group LIMRA. Sales rose 11% in the first quarter of 2021, compared to the same period in 2020, and new premium growth also saw a double-digit boost, up 15% from a year ago.
Key Takeaways
Individual life insurance policy sales have soared to their highest levels in decades, a new LIMRA analysis shows.Lifted in part by pandemic demand, eight of the top 10 carriers recorded double-digit growth in policy sales in this year’s first quarter.Indicators point to the pace of growth continuing through 2021 and beyond.
What's Driving the Trend?
Unlike in 1983, when double-digit policy count growth was driven by universal life insurance replacement, this year's policy sales represent organic growth, says David Levenson, president and CEO, LL Global, LIMRA and LOMA.
As with many financial trends in the past year, COVID-19 had a major impact. More people recognized the need for life insurance, Levenson says, and companies also took steps during the pandemic to make it simpler for people to buy coverage.
The latest results follow LIMRA's 2021 Insurance Barometer Study, which noted a spike in people's intentions to buy life insurance. More than a third of consumers (36%) in that study said they planned to buy coverage within the next 12 months—the highest purchase intent in the annual survey's history.
Whole Life and Term Led the Way
Whole life and term life led the significant first-quarter growth, making up 88% of policies sold. Policy counts in the first quarter rose 6% for universal life, while variable universal life jumped 31%, compared with first quarter 2020 results.
Seven in 10 life insurers—including nine of the top 10—reported increases in new annualized premiums in the first three months of 2021. Six in 10 issued more policies in the first quarter, and eight of the top 10 carriers recorded double-digit growth in policy sales. LIMRA's data represents about 80% of the U.S. individual life insurance market.
According to additional details provided by LIMRA, here are the nation's top 10 life insurance carriers based on policy sales in Q1 2021 (listed alphabetically; LIMRA does not disclose specific sales rankings):
Colonial PennCUNA MutualGerber Life Insurance CompanyMutual of Omaha CompaniesNew York LifeNorthwestern MutualPrimerica Life InsuranceState Farm LifeTransamericaUnum
Will the Boom Continue?
Can the life insurance industry sustain the current high-growth pace? While intent to buy doesn’t always produce a sale, Levenson’s forecast is bullish.
"We expect this growth to continue through 2021 based on both life insurance applications—perhaps the best leading indicator of future sales—and increased consumer demand that history tells us will likely persist for at least several years following the pandemic," he told Investopedia.
How Much Life Insurance Is Enough?
How much life insurance to buy is a common question for consumers trying to balance their family's needs with the cost of a policy.
For a ballpark estimate, the industry-supported nonprofit LifeHappens.org advises adding up the current and future expenses your family is likely to face if you were to die—including mortgage payments and college tuition. Then, tally any income or other financial resources they’ll continue to receive or be able to tap. The difference between these two numbers is the amount of life insurance to consider, as a way to fill any gap.
You can get a general idea of the amount of life insurance that might make sense for you and your family by using LifeHappens.org’s life insurance needs calculator.
As to the right type of life insurance for you, and other considerations, Investopedia has this Life Insurance Guide to Policies & Companies.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/regional-fed-presidents-step-aside-amid-trading-backlash-5203208
|
Regional Fed Presidents Step Aside Amid Trading Backlash
|
<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"> Two leading regional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/061515/what-do-federal-reserve-banks-do.asp" rel="noopener noreferrer">Federal Reserve</a> officials announced their resignation in September 2021, following scrutiny over their trading activity. Both resignations came hot on the heels of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/082415/what-are-federal-reserve-chairmans-responsibilities.asp" rel="noopener noreferrer">Fed Chair</a> Jerome Powell pledging to launch an ethics review at the U.S. central bank. Federal Reserve Bank of Dallas President Robert Kaplan, 64, submitted his resignation on Sept. 27, just hours after Eric Rosengren called time on his 35-year stint at the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-reserve-bank-of-boston.asp" rel="noopener noreferrer">Boston Fed</a> branch, including the last 14 years as president.
</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>The Boston and Dallas Federal Reserve Bank presidents announced their resignation following mounting scrutiny over their trading activity.</li><li>Records reveal that the policy makers' trading activity met regulatory requirements but raised possible conflict of interest concerns.</li><li>Boston Fed President Eric Rosengren retired on Sept. 30, nine months earlier than planned, due to health concerns.</li><li>Robert Kaplan departed the Dallas branch on Oct. 8, citing the recent scrutiny over his stock transactions.</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"> Rosengren and Kaplan, who were both members of the bank's interest-rate setting committee, came under fire for making several trades in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp" rel="noopener noreferrer">real estate investment trusts</a> (REITs) at the same time the Fed purchased billions of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp" rel="noopener noreferrer">Treasurys</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mbs.asp" rel="noopener noreferrer">mortgage-backed securities</a> to shore up the financial system at the height of the pandemic in 2020.
</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"> Records reveal that the pair's trading activity met regulatory requirements but raised possible <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/conflict-of-interest.asp" rel="noopener noreferrer">conflict of interest</a> concerns. As a result, both officials said that they would sell the stock holdings in question and agreed not to make any more purchases during their time as president.
</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-tip" 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_2-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A <strong>conflict of interest</strong> occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vestedinterest.asp" rel="noopener noreferrer">vested interest</a>—such as money, status, knowledge, relationships, or reputation—which puts into question whether their actions, judgment, and/or decision-making can be unbiased.</p></div></div></div>
<span class="heading-toc" id="toc-rosengren-cites-health-reasons"></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"> Rosengren Cites Health Reasons </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Rosengren's departure on Sept. 30, 2021, came nine months earlier than planned due to health concerns, according to a Boston Federal Reserve press release. "In a message to the Bank's staff, Dr. Rosengren revealed for the first time that he qualified for the kidney transplant list in June of 2020, during the pandemic, upon the worsening of a kidney condition he has had for many years," said the release. "Delaying the need for dialysis might be improved if he makes lifestyle changes now to lessen the risks of his condition."
</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"> Under Rosengren's watch, the Boston Fed has collaborated with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/031915/what-does-mit-cost.asp" rel="noopener noreferrer">Massachusetts Institute of Technology</a> (MIT) in recent years to develop technology that supports a potential <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp" rel="noopener noreferrer">central bank-backed digital currency</a> (CBDC). Rosengren also oversaw the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/main-street-lending-program-4802310" rel="noopener noreferrer">Main Street Lending Program</a> implemented during the pandemic.
</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"> Vice President Kenneth C. Montgomery became interim president of the Boston branch on Oct. 1, 2021, until it finds a permanent replacement.
</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-kaplan-calls-time"></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"> Kaplan Calls Time </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Meanwhile, Kaplan departed on Oct. 8, 2021, citing scrutiny over his stock transactions for his resignation. "The Federal Reserve is approaching a critical point in our economic recovery as it deliberates the future path of <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>. Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve's execution of that vital work," Kaplan said in a statement. "For that reason, I have decided to retire as president and CEO of the Federal Reserve Bank of Dallas," he stated.
</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"> Although the economic recovery from the pandemic has slowed in recent months, Kaplan has supported raising <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp" rel="noopener noreferrer">interest rates</a> quicker than other Fed committee members, arguing that the economy could be nearing full employment sooner than expected. Currently, Fed chiefs project at least three rate hikes by the end of 2023.
</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"> First Vice President and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coo.asp" rel="noopener noreferrer">Chief Operating Officer</a> (COO) Meredith Black assumed the role of interim president of the Dallas branch on Oct. 9, 2021.
</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-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><strong>Monetary policy</strong> is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.</p></div></div></div>
<span class="heading-toc" id="toc-powell-heaps-praise"></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"> Powell Heaps Praise </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Fed Chair Jerome Powell thanked both regional presidents and acknowledged their contributions to the central bank. "Eric has distinguished himself time and again during more than three decades of dedicated public service in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservesystem.asp#:~:text=The%20Federal%20Reserve%20System%20%28FRS%29%2C%20also%20known%20as%20the,regulating%20banks%2C%20among%20other%20things.&text=The%20Federal%20Open%20Market%20Committee,manages%20the%20country's%20money%20supply." rel="noopener noreferrer">Federal Reserve System</a> (FRS). In addition to his monetary policy insights, Eric brought a relentless focus on how best to ensure the stability of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-system.asp" rel="noopener noreferrer">financial system</a>. My colleagues and I will miss him," Powell said of Rosengren in a statement.
</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"> Likewise, the Fed chief praised Kaplan as a valued colleague and thanked him for his six years of service to the Dallas Fed. "He has been a passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy," Powell said of Kaplan.
</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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
Two leading regional [Federal Reserve](https://www.investopedia.com/articles/investing/061515/what-do-federal-reserve-banks-do.asp) officials announced their resignation in September 2021, following scrutiny over their trading activity. Both resignations came hot on the heels of [Fed Chair](https://www.investopedia.com/articles/investing/082415/what-are-federal-reserve-chairmans-responsibilities.asp) Jerome Powell pledging to launch an ethics review at the U.S. central bank. Federal Reserve Bank of Dallas President Robert Kaplan, 64, submitted his resignation on Sept. 27, just hours after Eric Rosengren called time on his 35-year stint at the [Boston Fed](https://www.investopedia.com/terms/f/federal-reserve-bank-of-boston.asp) branch, including the last 14 years as president.
### Key Takeaways
* The Boston and Dallas Federal Reserve Bank presidents announced their resignation following mounting scrutiny over their trading activity.
* Records reveal that the policy makers' trading activity met regulatory requirements but raised possible conflict of interest concerns.
* Boston Fed President Eric Rosengren retired on Sept. 30, nine months earlier than planned, due to health concerns.
* Robert Kaplan departed the Dallas branch on Oct. 8, citing the recent scrutiny over his stock transactions.
Rosengren and Kaplan, who were both members of the bank's interest-rate setting committee, came under fire for making several trades in [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) (REITs) at the same time the Fed purchased billions of [Treasurys](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp) and [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp) to shore up the financial system at the height of the pandemic in 2020.
Records reveal that the pair's trading activity met regulatory requirements but raised possible [conflict of interest](https://www.investopedia.com/terms/c/conflict-of-interest.asp) concerns. As a result, both officials said that they would sell the stock holdings in question and agreed not to make any more purchases during their time as president.
###
A **conflict of interest** occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a [vested interest](https://www.investopedia.com/terms/v/vestedinterest.asp)—such as money, status, knowledge, relationships, or reputation—which puts into question whether their actions, judgment, and/or decision-making can be unbiased.
## Rosengren Cites Health Reasons
Rosengren's departure on Sept. 30, 2021, came nine months earlier than planned due to health concerns, according to a Boston Federal Reserve press release. "In a message to the Bank's staff, Dr. Rosengren revealed for the first time that he qualified for the kidney transplant list in June of 2020, during the pandemic, upon the worsening of a kidney condition he has had for many years," said the release. "Delaying the need for dialysis might be improved if he makes lifestyle changes now to lessen the risks of his condition."
Under Rosengren's watch, the Boston Fed has collaborated with the [Massachusetts Institute of Technology](https://www.investopedia.com/articles/personal-finance/031915/what-does-mit-cost.asp) (MIT) in recent years to develop technology that supports a potential [central bank-backed digital currency](https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp) (CBDC). Rosengren also oversaw the [Main Street Lending Program](https://www.investopedia.com/main-street-lending-program-4802310) implemented during the pandemic.
Vice President Kenneth C. Montgomery became interim president of the Boston branch on Oct. 1, 2021, until it finds a permanent replacement.
## Kaplan Calls Time
Meanwhile, Kaplan departed on Oct. 8, 2021, citing scrutiny over his stock transactions for his resignation. "The Federal Reserve is approaching a critical point in our economic recovery as it deliberates the future path of [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp). Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve's execution of that vital work," Kaplan said in a statement. "For that reason, I have decided to retire as president and CEO of the Federal Reserve Bank of Dallas," he stated.
Although the economic recovery from the pandemic has slowed in recent months, Kaplan has supported raising [interest rates](https://www.investopedia.com/ask/answers/031115/how-do-central-banks-impact-interest-rates-economy.asp) quicker than other Fed committee members, arguing that the economy could be nearing full employment sooner than expected. Currently, Fed chiefs project at least three rate hikes by the end of 2023.
First Vice President and [Chief Operating Officer](https://www.investopedia.com/terms/c/coo.asp) (COO) Meredith Black assumed the role of interim president of the Dallas branch on Oct. 9, 2021.
###
**Monetary policy** is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
## Powell Heaps Praise
Fed Chair Jerome Powell thanked both regional presidents and acknowledged their contributions to the central bank. "Eric has distinguished himself time and again during more than three decades of dedicated public service in the [Federal Reserve System](https://www.investopedia.com/terms/f/federalreservesystem.asp#:~:text=The%20Federal%20Reserve%20System%20%28FRS%29%2C%20also%20known%20as%20the,regulating%20banks%2C%20among%20other%20things.&text=The%20Federal%20Open%20Market%20Committee,manages%20the%20country's%20money%20supply.) (FRS). In addition to his monetary policy insights, Eric brought a relentless focus on how best to ensure the stability of the [financial system](https://www.investopedia.com/terms/f/financial-system.asp). My colleagues and I will miss him," Powell said of Rosengren in a statement.
Likewise, the Fed chief praised Kaplan as a valued colleague and thanked him for his six years of service to the Dallas Fed. "He has been a passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy," Powell said of Kaplan.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Two leading regional Federal Reserve officials announced their resignation in September 2021, following scrutiny over their trading activity. Both resignations came hot on the heels of Fed Chair Jerome Powell pledging to launch an ethics review at the U.S. central bank. Federal Reserve Bank of Dallas President Robert Kaplan, 64, submitted his resignation on Sept. 27, just hours after Eric Rosengren called time on his 35-year stint at the Boston Fed branch, including the last 14 years as president.
Key Takeaways
The Boston and Dallas Federal Reserve Bank presidents announced their resignation following mounting scrutiny over their trading activity.Records reveal that the policy makers' trading activity met regulatory requirements but raised possible conflict of interest concerns.Boston Fed President Eric Rosengren retired on Sept. 30, nine months earlier than planned, due to health concerns.Robert Kaplan departed the Dallas branch on Oct. 8, citing the recent scrutiny over his stock transactions.
Rosengren and Kaplan, who were both members of the bank's interest-rate setting committee, came under fire for making several trades in real estate investment trusts (REITs) at the same time the Fed purchased billions of Treasurys and mortgage-backed securities to shore up the financial system at the height of the pandemic in 2020.
Records reveal that the pair's trading activity met regulatory requirements but raised possible conflict of interest concerns. As a result, both officials said that they would sell the stock holdings in question and agreed not to make any more purchases during their time as president.
A conflict of interest occurs when an entity or individual becomes unreliable because of a clash between personal (or self-serving) interests and professional duties or responsibilities. Such a conflict occurs when a company or person has a vested interest—such as money, status, knowledge, relationships, or reputation—which puts into question whether their actions, judgment, and/or decision-making can be unbiased.
Rosengren Cites Health Reasons
Rosengren's departure on Sept. 30, 2021, came nine months earlier than planned due to health concerns, according to a Boston Federal Reserve press release. "In a message to the Bank's staff, Dr. Rosengren revealed for the first time that he qualified for the kidney transplant list in June of 2020, during the pandemic, upon the worsening of a kidney condition he has had for many years," said the release. "Delaying the need for dialysis might be improved if he makes lifestyle changes now to lessen the risks of his condition."
Under Rosengren's watch, the Boston Fed has collaborated with the Massachusetts Institute of Technology (MIT) in recent years to develop technology that supports a potential central bank-backed digital currency (CBDC). Rosengren also oversaw the Main Street Lending Program implemented during the pandemic.
Vice President Kenneth C. Montgomery became interim president of the Boston branch on Oct. 1, 2021, until it finds a permanent replacement.
Kaplan Calls Time
Meanwhile, Kaplan departed on Oct. 8, 2021, citing scrutiny over his stock transactions for his resignation. "The Federal Reserve is approaching a critical point in our economic recovery as it deliberates the future path of monetary policy. Unfortunately, the recent focus on my financial disclosure risks becoming a distraction to the Federal Reserve's execution of that vital work," Kaplan said in a statement. "For that reason, I have decided to retire as president and CEO of the Federal Reserve Bank of Dallas," he stated.
Although the economic recovery from the pandemic has slowed in recent months, Kaplan has supported raising interest rates quicker than other Fed committee members, arguing that the economy could be nearing full employment sooner than expected. Currently, Fed chiefs project at least three rate hikes by the end of 2023.
First Vice President and Chief Operating Officer (COO) Meredith Black assumed the role of interim president of the Dallas branch on Oct. 9, 2021.
Monetary policy is a set of tools that a nation's central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation's banks, its consumers, and its businesses.
Powell Heaps Praise
Fed Chair Jerome Powell thanked both regional presidents and acknowledged their contributions to the central bank. "Eric has distinguished himself time and again during more than three decades of dedicated public service in the Federal Reserve System (FRS). In addition to his monetary policy insights, Eric brought a relentless focus on how best to ensure the stability of the financial system. My colleagues and I will miss him," Powell said of Rosengren in a statement.
Likewise, the Fed chief praised Kaplan as a valued colleague and thanked him for his six years of service to the Dallas Fed. "He has been a passionate and forceful public voice on a wide range of issues, including the critical value of early childhood education and literacy," Powell said of Kaplan.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/the-express-podcast-episode-155-7974435
|
The Taming of Wall Street Amid its Darkest Days
|
<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=MERE3880098337" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="The Taming of Wall Street Amid its Darkest Days"></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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://dianabhenriques.com/" rel="nofollow">Diana Henriques</a>, author of the new book, <em>Taming the Street: The Old Guard, The New Deal, and FDR's Fight to Save American Capitalism</em>, joins the show to talk about how President Franklin Delano Roosevelt and a small group of men revolutionized Wall Street after <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blackthursday.asp">Black Thursday</a> with the establishment of the SEC and other agencies.
</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"> Plus, how today's financial regulators are under pressure, and the risks that poses to all investors. And, investors are finally coming around to the Fed's "higher for longer" mantra, and that's keeping stocks under pressure.
</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>
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**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)
[Diana Henriques](http://dianabhenriques.com/), author of the new book, *Taming the Street: The Old Guard, The New Deal, and FDR's Fight to Save American Capitalism*, joins the show to talk about how President Franklin Delano Roosevelt and a small group of men revolutionized Wall Street after [Black Thursday](https://www.investopedia.com/terms/b/blackthursday.asp) with the establishment of the SEC and other agencies.
Plus, how today's financial regulators are under pressure, and the risks that poses to all investors. And, investors are finally coming around to the Fed's "higher for longer" mantra, and that's keeping stocks under pressure.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
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Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM
Diana Henriques, author of the new book, Taming the Street: The Old Guard, The New Deal, and FDR's Fight to Save American Capitalism, joins the show to talk about how President Franklin Delano Roosevelt and a small group of men revolutionized Wall Street after Black Thursday with the establishment of the SEC and other agencies.
Plus, how today's financial regulators are under pressure, and the risks that poses to all investors. And, investors are finally coming around to the Fed's "higher for longer" mantra, and that's keeping stocks under pressure.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
[
[
"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"
],
[
"Diana Henriques",
"http://dianabhenriques.com/"
],
[
"Black Thursday",
"https://www.investopedia.com/terms/b/blackthursday.asp"
],
[
"[email protected]",
"mailto:[email protected]"
]
] |
https://www.investopedia.com/terms/t/timedecay.asp
|
What Is Time Decay? How It Works, Impact, 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-time-decay"></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 Time Decay? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expirationdate.asp">option's time to expiration</a> draws closer since there's less time to realize a profit from the trade.
</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>Time decay is the rate of change in value to an option's price as it nears expiration.</li><li>Depending on whether an option is in-the-money (ITM), time decay accelerates in the last month before expiration.</li><li>The more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases. </li></ul></div></div></div>
<span class="heading-toc" id="toc-how-time-decay-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 Time Decay Works </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Time decay is the reduction in the value of an option as the time to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expirationdate.asp">expiration date</a> approaches. An option's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/timevalue.asp">time value</a> is how much time plays into the value—or the premium—for the option. The time value declines or time decay accelerates as the expiration date gets closer because there's less time for an investor to earn a profit from the option.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></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_9-0"> <div class="figure-media">
<div class="img-placeholder" style="padding-bottom:86.3%;">
<img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/ZD2xKgQMA_ETZRVLDFL36FhBT8o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Time_Decay_Apr_2020-01-a2824c7ac5ad47ed9082ea52f9ace031.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/ZD2xKgQMA_ETZRVLDFL36FhBT8o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Time_Decay_Apr_2020-01-a2824c7ac5ad47ed9082ea52f9ace031.jpg" data-srcset="https://www.investopedia.com/thmb/UGB-WHFBZ2C8GoFpwNjFsOzu6oA=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Time_Decay_Apr_2020-01-a2824c7ac5ad47ed9082ea52f9ace031.jpg 750w" data-tracking-container="true" height="3959" id="mntl-sc-block-image_1-0" width="4584"/>
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</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 Sabrina Jiang © Investopedia 2020</span>
</figcaption></figure>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> This figure, when calculated, will always be negative, as time only moves in one direction. The countdown for time decay begins as soon as the option is initially bought and continues until expiration.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><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_13-0"><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>Time decay is also called theta and is known as one of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/getting-to-know-the-greeks/">options Greeks</a>. Other Greeks include delta, gamma, vega, and rho, and these formulas help you assess the risks inherent with an options trade.</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_14-0"> <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_15-0"> To understand how <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042215/what-does-positive-theta-mean-credit-spreads.asp">time decay impacts an option</a>, we must first review what makes up the value of an option. Options contracts give investors the right to buy or sell securities, such as stocks, at a specific price and time. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/strikeprice.asp">strike price</a> is the price at which the options contract changes to shares of the underlying security if the option is exercised.
</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"> Each option has a <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> attached to it, which is the value and often the cost of purchasing the option. However, there are a few other components that also drive the value of the premium. These factors include intrinsic value, extrinsic value, interest rate changes, and the volatility the underlying asset may exhibit.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> Intrinsic Value </span> </h3>
<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/i/intrinsicvalue.asp">Intrinsic value</a> is the difference between the market price of the underlying security—such as a stock—and the strike price of the option. A call option with a strike price of $20, while the underlying stock is trading at $20, would have no intrinsic value since there's no profit.
</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"> However, a call option with a strike price of $20, while the underlying stock is trading at $30, would have a $10 intrinsic value. In other words, the intrinsic value is the minimum profit that's built into the option given the prevailing market price and the strike. Of course, the intrinsic value can change as the stock's price fluctuates, but the strike price remains fixed throughout the contract.
</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"> Extrinsic Value </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/extrinsicvalue.asp">extrinsic value</a> is more abstract than the intrinsic value, and it's more difficult to measure. The extrinsic value of options factors in the amount of time left before expiration and the rate of time decay leading up to the expiry. If an investor buys a call option with a few months until expiry, the option will have a greater value than an option that expires in a few days.
</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"> The time value of an option with little time left until expiry is less since there's a lower probability of an investor making money by buying the option. As a result, the option's price or premium declines.
</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 option with a few months until expiry will have an increased amount of time value and slow time decay since there's a reasonable probability that an option buyer could earn a profit. However, as time passes and the option isn't yet profitable, time decay accelerates, particularly in the last 30 days before expiration. As a result, the option's value declines as the expiry approaches, and more so if it's not yet profitable.
</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-time-decay-vs-moneyness"></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"> Time Decay vs. Moneyness </span> </h2>
<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/m/moneyness.asp">Moneyness</a> is the level of profitability of an option as measured by its intrinsic value. If the option is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inthemoney.asp">in-the-money</a> (ITM) or profitable, it will retain some of its value as the expiration approaches since the profit is already built-in and time is less of a factor.
</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"> The option would have intrinsic value, while time decay would increase at a slower rate. However, time decay and the time value of an option are extremely important for investors to consider because they are key factors in determining the likelihood that the option will be profitable.
</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"> Time decay is prevalent with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atthemoney.asp">at-the-money</a> (ATM) options since there's no intrinsic value. In other words, the premium for an ATM option mostly consists of time value. If the option is out-of-the-money (OTM)—or not profitable—time decay increases at a faster rate. This acceleration is because as more time passes, the option becomes less and less likely to become in the money.
</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 loss of time value happens even if the value of the underlying asset has not changed during the same period. Another way to look at options contracts is that they are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wastingasset.asp">wasting assets</a> meaning their value declines or depreciates over time.
</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"> Essentially, investors are buying options that have the greatest probability of making a profit by expiry and how much time is left determines the price investors are willing to pay for the option. In short, the more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.
</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-advantages-and-disadvantages-of-time-decay"></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"> Advantages and Disadvantages of Time Decay </span> </h2>
<div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_43-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_44-0"> <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>Time decay is slow early in an option's life, adding to its value or premium.</p></li>
<li><p>When time decay is slow, investors can sell the option while it still has value.</p></li>
<li><p>Time decay's impact on an option's premium helps investors determine whether it's worth pursuing.</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>Time decay accelerates as an option's time to expiration draws closer.</p></li>
<li><p>Measuring the rate of change in time decay of an option can be difficult.</p></li>
<li><p>Time decay occurs regardless of whether the underlying asset's price has risen or fallen.</p></li>
</ul>
</div>
</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-example-of-time-decay"></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"> Example of Time Decay </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> An investor is looking to buy a call option with a strike price of $20 and a premium of $2 per contract. The investor expects the stock to be at $22 or higher at expiration in two months.
</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"> However, a contract with the same strike of $20 that's has only a week left until expiration has a premium of 50 cents per contract. The contract costs far less than the $2 contract since it's unlikely the stock will move higher by 10% or more in a few days.
</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"> In other words, the extrinsic value of the second option is lower than the first option with two months left until expiration.
</p></div>
|
## What Is Time Decay?
Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an [option's time to expiration](https://www.investopedia.com/terms/e/expirationdate.asp) draws closer since there's less time to realize a profit from the trade.
### Key Takeaways
* Time decay is the rate of change in value to an option's price as it nears expiration.
* Depending on whether an option is in-the-money (ITM), time decay accelerates in the last month before expiration.
* The more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.
## How Time Decay Works
Time decay is the reduction in the value of an option as the time to the [expiration date](https://www.investopedia.com/terms/e/expirationdate.asp) approaches. An option's [time value](https://www.investopedia.com/terms/t/timevalue.asp) is how much time plays into the value—or the premium—for the option. The time value declines or time decay accelerates as the expiration date gets closer because there's less time for an investor to earn a profit from the option.
![Image]()
:max_bytes(150000):strip_icc()/dotdash_Final_Time_Decay_Apr_2020-01-a2824c7ac5ad47ed9082ea52f9ace031.jpg)
Image by Sabrina Jiang © Investopedia 2020
This figure, when calculated, will always be negative, as time only moves in one direction. The countdown for time decay begins as soon as the option is initially bought and continues until expiration.
###
Time decay is also called theta and is known as one of the [options Greeks](https://www.investopedia.com/trading/getting-to-know-the-greeks/). Other Greeks include delta, gamma, vega, and rho, and these formulas help you assess the risks inherent with an options trade.
## Special Considerations
To understand how [time decay impacts an option](https://www.investopedia.com/ask/answers/042215/what-does-positive-theta-mean-credit-spreads.asp), we must first review what makes up the value of an option. Options contracts give investors the right to buy or sell securities, such as stocks, at a specific price and time. The [strike price](https://www.investopedia.com/terms/s/strikeprice.asp) is the price at which the options contract changes to shares of the underlying security if the option is exercised.
Each option has a [premium](https://www.investopedia.com/terms/o/option-premium.asp) attached to it, which is the value and often the cost of purchasing the option. However, there are a few other components that also drive the value of the premium. These factors include intrinsic value, extrinsic value, interest rate changes, and the volatility the underlying asset may exhibit.
### Intrinsic Value
[Intrinsic value](https://www.investopedia.com/terms/i/intrinsicvalue.asp) is the difference between the market price of the underlying security—such as a stock—and the strike price of the option. A call option with a strike price of $20, while the underlying stock is trading at $20, would have no intrinsic value since there's no profit.
However, a call option with a strike price of $20, while the underlying stock is trading at $30, would have a $10 intrinsic value. In other words, the intrinsic value is the minimum profit that's built into the option given the prevailing market price and the strike. Of course, the intrinsic value can change as the stock's price fluctuates, but the strike price remains fixed throughout the contract.
### Extrinsic Value
The [extrinsic value](https://www.investopedia.com/terms/e/extrinsicvalue.asp) is more abstract than the intrinsic value, and it's more difficult to measure. The extrinsic value of options factors in the amount of time left before expiration and the rate of time decay leading up to the expiry. If an investor buys a call option with a few months until expiry, the option will have a greater value than an option that expires in a few days.
The time value of an option with little time left until expiry is less since there's a lower probability of an investor making money by buying the option. As a result, the option's price or premium declines.
The option with a few months until expiry will have an increased amount of time value and slow time decay since there's a reasonable probability that an option buyer could earn a profit. However, as time passes and the option isn't yet profitable, time decay accelerates, particularly in the last 30 days before expiration. As a result, the option's value declines as the expiry approaches, and more so if it's not yet profitable.
## Time Decay vs. Moneyness
[Moneyness](https://www.investopedia.com/terms/m/moneyness.asp) is the level of profitability of an option as measured by its intrinsic value. If the option is [in-the-money](https://www.investopedia.com/terms/i/inthemoney.asp) (ITM) or profitable, it will retain some of its value as the expiration approaches since the profit is already built-in and time is less of a factor.
The option would have intrinsic value, while time decay would increase at a slower rate. However, time decay and the time value of an option are extremely important for investors to consider because they are key factors in determining the likelihood that the option will be profitable.
Time decay is prevalent with [at-the-money](https://www.investopedia.com/terms/a/atthemoney.asp) (ATM) options since there's no intrinsic value. In other words, the premium for an ATM option mostly consists of time value. If the option is out-of-the-money (OTM)—or not profitable—time decay increases at a faster rate. This acceleration is because as more time passes, the option becomes less and less likely to become in the money.
The loss of time value happens even if the value of the underlying asset has not changed during the same period. Another way to look at options contracts is that they are [wasting assets](https://www.investopedia.com/terms/w/wastingasset.asp) meaning their value declines or depreciates over time.
Essentially, investors are buying options that have the greatest probability of making a profit by expiry and how much time is left determines the price investors are willing to pay for the option. In short, the more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.
## Advantages and Disadvantages of Time Decay
Pros
* Time decay is slow early in an option's life, adding to its value or premium.
* When time decay is slow, investors can sell the option while it still has value.
* Time decay's impact on an option's premium helps investors determine whether it's worth pursuing.
Cons
* Time decay accelerates as an option's time to expiration draws closer.
* Measuring the rate of change in time decay of an option can be difficult.
* Time decay occurs regardless of whether the underlying asset's price has risen or fallen.
## Example of Time Decay
An investor is looking to buy a call option with a strike price of $20 and a premium of $2 per contract. The investor expects the stock to be at $22 or higher at expiration in two months.
However, a contract with the same strike of $20 that's has only a week left until expiration has a premium of 50 cents per contract. The contract costs far less than the $2 contract since it's unlikely the stock will move higher by 10% or more in a few days.
In other words, the extrinsic value of the second option is lower than the first option with two months left until expiration.
|
What Is Time Decay?
Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option's time to expiration draws closer since there's less time to realize a profit from the trade.
Key Takeaways
Time decay is the rate of change in value to an option's price as it nears expiration.Depending on whether an option is in-the-money (ITM), time decay accelerates in the last month before expiration.The more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.
How Time Decay Works
Time decay is the reduction in the value of an option as the time to the expiration date approaches. An option's time value is how much time plays into the value—or the premium—for the option. The time value declines or time decay accelerates as the expiration date gets closer because there's less time for an investor to earn a profit from the option.
Image by Sabrina Jiang © Investopedia 2020
This figure, when calculated, will always be negative, as time only moves in one direction. The countdown for time decay begins as soon as the option is initially bought and continues until expiration.
Time decay is also called theta and is known as one of the options Greeks. Other Greeks include delta, gamma, vega, and rho, and these formulas help you assess the risks inherent with an options trade.
Special Considerations
To understand how time decay impacts an option, we must first review what makes up the value of an option. Options contracts give investors the right to buy or sell securities, such as stocks, at a specific price and time. The strike price is the price at which the options contract changes to shares of the underlying security if the option is exercised.
Each option has a premium attached to it, which is the value and often the cost of purchasing the option. However, there are a few other components that also drive the value of the premium. These factors include intrinsic value, extrinsic value, interest rate changes, and the volatility the underlying asset may exhibit.
Intrinsic Value
Intrinsic value is the difference between the market price of the underlying security—such as a stock—and the strike price of the option. A call option with a strike price of $20, while the underlying stock is trading at $20, would have no intrinsic value since there's no profit.
However, a call option with a strike price of $20, while the underlying stock is trading at $30, would have a $10 intrinsic value. In other words, the intrinsic value is the minimum profit that's built into the option given the prevailing market price and the strike. Of course, the intrinsic value can change as the stock's price fluctuates, but the strike price remains fixed throughout the contract.
Extrinsic Value
The extrinsic value is more abstract than the intrinsic value, and it's more difficult to measure. The extrinsic value of options factors in the amount of time left before expiration and the rate of time decay leading up to the expiry. If an investor buys a call option with a few months until expiry, the option will have a greater value than an option that expires in a few days.
The time value of an option with little time left until expiry is less since there's a lower probability of an investor making money by buying the option. As a result, the option's price or premium declines.
The option with a few months until expiry will have an increased amount of time value and slow time decay since there's a reasonable probability that an option buyer could earn a profit. However, as time passes and the option isn't yet profitable, time decay accelerates, particularly in the last 30 days before expiration. As a result, the option's value declines as the expiry approaches, and more so if it's not yet profitable.
Time Decay vs. Moneyness
Moneyness is the level of profitability of an option as measured by its intrinsic value. If the option is in-the-money (ITM) or profitable, it will retain some of its value as the expiration approaches since the profit is already built-in and time is less of a factor.
The option would have intrinsic value, while time decay would increase at a slower rate. However, time decay and the time value of an option are extremely important for investors to consider because they are key factors in determining the likelihood that the option will be profitable.
Time decay is prevalent with at-the-money (ATM) options since there's no intrinsic value. In other words, the premium for an ATM option mostly consists of time value. If the option is out-of-the-money (OTM)—or not profitable—time decay increases at a faster rate. This acceleration is because as more time passes, the option becomes less and less likely to become in the money.
The loss of time value happens even if the value of the underlying asset has not changed during the same period. Another way to look at options contracts is that they are wasting assets meaning their value declines or depreciates over time.
Essentially, investors are buying options that have the greatest probability of making a profit by expiry and how much time is left determines the price investors are willing to pay for the option. In short, the more time left until expiry, the slower the time decay while the closer to expiry, the more time decay increases.
Advantages and Disadvantages of Time Decay
Pros
Time decay is slow early in an option's life, adding to its value or premium.
When time decay is slow, investors can sell the option while it still has value.
Time decay's impact on an option's premium helps investors determine whether it's worth pursuing.
Cons
Time decay accelerates as an option's time to expiration draws closer.
Measuring the rate of change in time decay of an option can be difficult.
Time decay occurs regardless of whether the underlying asset's price has risen or fallen.
Example of Time Decay
An investor is looking to buy a call option with a strike price of $20 and a premium of $2 per contract. The investor expects the stock to be at $22 or higher at expiration in two months.
However, a contract with the same strike of $20 that's has only a week left until expiration has a premium of 50 cents per contract. The contract costs far less than the $2 contract since it's unlikely the stock will move higher by 10% or more in a few days.
In other words, the extrinsic value of the second option is lower than the first option with two months left until expiration.
|
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https://www.investopedia.com/articles/optioninvestor/09/get-started-with-futures.asp
|
The Investor’s Guide to 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"><span class="heading-toc" id="toc-what-are-futures"></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 Futures? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contract</a> allows its parties to buy or sell a specific underlying asset at a set future date. The underlying asset can be a commodity, a security, or some other financial instrument.
</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"> These agreements are best entered after you’ve learned some basics, and should not be invested in on a whim. Start by doing your homework and learning the basics.
</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>Futures are a kind of derivative, an agreement whose returns depend on the value of an underlying asset.</li><li>A futures contract commits the buyer to buy or a seller to sell an underlying asset at a preset price and date.</li><li>Investors use futures to speculate on or hedge against changing prices for a security, commodity, or financial instrument.</li><li>Forward contracts are agreements between two parties, while futures are standardized contracts sold on an exchange.</li><li>You can trade futures in commodities, currencies, interest rate changes, livestock, oil and gas, securities, and much more. The most traded futures are for equities.</li></ul></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> For many investors, futures contracts, with their different terms and trading strategies, can be daunting. But the learning curve hasn’t stopped increasing numbers of investors from entering futures markets in recent years. According to the Futures Industry Association, futures trading worldwide more than doubled from 12.1 billion contracts in 2013 to 29.2 billion in 2023.<span class="ql-inline-citation" data-cite="5"></span> They are not new, though, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futures.asp">futures</a> have long been used as insurance for farmers and traders against devastating changes in nature and the market.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> For millennia, forward contracts have been employed to lock in future prices for financial stability no matter what happened to the harvest that year.<span class="ql-inline-citation" data-cite="17"></span> But many have also used them to speculate and profit from changing prices in the market. For example, the ancient Roman orator Cicero left evidence that the Romans used forward contracts, in a letter criticizing traders who raced to get ahead of spreading knowledge of a major grain shipment arriving to profit by locking others into higher prices with them.<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_11-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> While much has changed as forwards have become standardized as futures contracts and exchanges offer ever-more-sophisticated products, the basics remain the same. Below, we guide you through the kinds of futures, who trades them, and why, all while showing that you don’t need to get on horseback to beat news of a grain-filled ship arriving to gain from these investments.
</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-futures-basics"></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"> Futures Basics </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Futures commit you to buying or selling an underlying asset at a specific price on a preset date. We use “underlying asset” in the vaguest sense since investors trade futures for virtually all commodities, financial securities, and more. You can buy or sell futures related to weather events like temperature, rainfall, hurricanes, and even snow (useful for firms relying on it for tourists); shipping futures for freight rates and such; electricity and network telecommunication bandwidth; and real estate for volatility in property prices.<span class="ql-inline-citation" data-cite="8"></span><span class="ql-inline-citation" data-cite="7"></span> This only begins the list.
</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"> While the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cftc.asp">Commodity Futures Trading Commission (CFTC)</a> has banned futures trading in American elections, the University of Iowa’s Henry B. Tippie College of Business for decades has been running (for research purposes) an online futures market where contract payoffs are based on real-world events such as political elections, companies’ earnings per share, and stock price returns.<span class="ql-inline-citation" data-cite="9"></span> In 2022, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cme.asp">Chicago Mercantile Exchange</a> began offering event-based futures where you essentially bet yes or no for questions on the value of indexes, currencies, commodities, and so on, with terms ending daily. In 2024, the exchange added quarterly and yearly expirations.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> But let’s not get ahead of ourselves. First, we’ll set out some essential distinctions for forward and futures contracts before turning to who uses them and the kinds of underlying assets most often at play.
</p>
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<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"> Forward Contracts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A forward contract is the oldest type of these agreements, predating the trading in futures that formalized “to arrive” contracts in the latter half of the 19th century.<span class="ql-inline-citation" data-cite="11"></span> A forward is an agreement between two parties to transact in the future, with one party taking the long position and the second taking the short position; they are also called the long and short forwards.<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_23-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The long forward must buy an asset from the short forward at a future time. What’s being bought in the future is called the “underlying asset.” As we’ve seen, this can be many things, but grains and other farm products were the assets when the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cbot.asp">Chicago Board of Trade</a> opened in 1848.<span class="ql-inline-citation" data-cite="11"></span> Today, forwards are traded over the counter and customized for the parties involved. Despite variations, forwards include the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0">
<li><strong>Contract price</strong>: This is the agreed-upon “forward price” that the underlying asset will be bought or sold for in the future. It’s determined when the contract is entered into.</li>
<li><strong>Counterparties</strong>: The parties involved in the contract: a buyer (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/long.asp">long position</a>) and a seller <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">(short position</a>)</li>
<li><strong>Delivery date</strong>: This is the date when the underlying asset will be exchanged.</li>
<li><strong>Underlying asset</strong>: The commodity, financial instrument, or other asset bought or sold</li>
<li><strong>Quantity of the asset</strong>: The contract specifies the exact amount of the underlying asset to be delivered or received.</li>
<li><strong>Settlement method</strong>: Forwards are settled by physically delivering the underlying asset or through cash.</li>
<li><strong>Terms and conditions</strong>: Any extra terms about the execution of the contract, including how defaults are handled, the rights of the parties, and any conditions that, once met, mean the forward can be modified or voided</li>
</ul>
<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"> Forward Contract Example </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Let’s flesh this out with an example. Suppose a couple owns a farm and expects to harvest 5,000 bushels of wheat in six months. They’re worried about what a fall in the price of wheat would mean for covering their bills while getting ready for the next season. So, they look for a way to lock in a price today to ensure that they have enough income. They know that by locking the price in, they might not profit as much if wheat prices go up, but stability is more important right now.
</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"> Meanwhile, a local organic cereal producer needs a consistent supply of wheat but is concerned that prices might go up, which would raise production costs. So, the farmers and the cereal company sign a forward contract that would include the following:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li>Underlying asset: 5,000 bushels of wheat</li><li>Contract price: $5 per bushel. This price is agreed upon when the contract is signed.</li><li>Quantity: 5,000 bushels</li><li>Delivery date: Six months after the contract’s signing date</li><li>Settlement method: Physical delivery of the wheat to the cereal producer</li><li>Parties: The wheat farmer (seller) and the cereal manufacturer (buyer)</li>
</ul>
<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"> Under these terms, the farmers have to deliver 5,000 bushels of wheat to the cereal manufacturer in six months, and the cereal producer must pay the farmer $5 per bushel when that’s done, no matter what happens to the price of wheat in the meantime. If the price goes up to $7 a bushel, the farmers get less than they would have otherwise, but the cereal producer makes out. Alternatively, if the price goes down to $3 a bushel, the farmers still keep the stable income they need, and the cereal manufacturer is out more money than otherwise, but in the meantime, neither party had to stress over <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 the wheat market.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Futures contracts take this concept, standardize its elements, and make it tradable on exchanges.<br/>
</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"> Futures Contracts </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> A futures contract is like a forward, but it’s done through an organized exchange, committing traders to buy or sell an underlying asset at a preset price on a future date. Like forwards, some contracts require physical delivery. But others are settled in cash, the amount of which is the difference between the agreed-upon price and the market price when the future date arrives.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Futures are traded through open outcry in trading pits in an auction or through electronic screen-based systems with centralized exchanges like the Chicago Mercantile Exchange. There are also cryptocurrency exchanges like Binance that trade futures, including those with and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-are-perpetual-futures-7494870">without an expiration date</a>.<span class="ql-inline-citation" data-cite="12"></span> The role of the futures exchange is not to buy or sell the contracts but to enable trades, ensure that they are legally conducted, check that they follow the exchange’s rules, and publish the trading prices. This last element is crucial for price discovery, helping other buyers and sellers find a mutually agreeable price based on supply and demand.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Since a futures contract is an obligation in the future, a trader can sell contracts without buying contracts first. Traders who sell more contracts than they buy have a short futures position, while traders who buy more contracts than they sell have a long futures position.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-subheading__text"> Futures Contract Example </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Let’s make this concept concrete with an example. Suppose an airline wants to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> against the risk of rising fuel prices. To manage this risk, it enters into a futures contract to buy crude oil at a predetermined price. At the same time, an oil company is trying to lock in a price for its oil in case prices fall. These transactions take place on a regulated exchange, ensuring standardized terms and avoiding the need for the parties to know each other directly.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Under these futures contracts, the airline agrees to buy, and the oil producer agrees to sell 1,000 barrels of crude oil for $60 per barrel on a certain date. Here’s what the details might look like:
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<li>Contract months: Crude oil futures are available for several months ahead, providing flexibility for hedging strategies. The airline might choose a contract with a delivery month that aligns with its predicted fuel needs, such as “CLZ24” for December 2024 delivery.</li>
<li>Contract size: The standard contract size for crude oil futures is 1,000 barrels. This standardization makes it easy to calculate the contract’s total value, which, at a trading price of $60 per barrel, would be $60,000.</li>
<li>Deliverable grade: This notes the quality and grade of the product that can be delivered under the contract. For crude oil futures, this includes details like how heavy the oil is and its sulfur content.</li>
<li>Exchange: The contract is traded on a regulated exchange like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nymex.asp">New York Mercantile Exchange</a>, where many contracts for crude oil are sold.</li>
<li>Last trading day: The final day on which trading can occur for the contract is usually a few business days before the delivery month begins. For crude oil futures, this might be the last trading day in the month preceding the contract month, ensuring all obligations are settled before delivery.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li>Price quoted in: Prices for crude oil futures are quoted per barrel.</li>
<li>Settlement type: Futures contracts can be settled through physical delivery of the underlying asset or cash settlement. For crude oil futures like “CLZ24,” physical delivery is more standard, though many participants close their positions before the delivery date to avoid actual delivery.</li>
<li>Tick size: The contract specifies the minimum tick size, which could be $0.01 per barrel for crude oil, translating to a $10 change in the contract’s total value for each tick movement.</li>
<li>Ticker: The specific contract for crude oil can be identified by a ticker symbol such as “CL” for crude oil, followed by a suffix for the delivery month and year—for example, “CLZ24” for a contract expiring in December 2024.<br/></li>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> With forwards, there’s a risk that the other party won’t fulfill the contract. This is mitigated for futures by the exchange clearinghouse, which guarantees the contract. While each side is taking a risk that the price they pay now is close to the actual price at the settlement month, each party insures against the risk of a wide swing against them in oil prices.
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<span class="heading-toc" id="toc-who-uses-futures"></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"> Who Uses Futures? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Measured by volume, most futures are traded by commercial or institutional entities. Of these, most are hedgers looking to cut their risk of financial losses, as in our examples thus far. Buying futures for these traders is a form of insurance. Meanwhile, speculators trade futures contracts only to profit from price fluctuations. They don’t want the underlying assets but buy or sell futures based on their predictions about future prices.<span class="ql-inline-citation" data-cite="13"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Futures traders include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrageur.asp">arbitrageurs</a> and spread traders, investors who use price discrepancies between different markets or related instruments to profit. They are a kind of speculator, buying and selling futures or other financial instruments to profit from cross-market price differences. They use sophisticated software to search markets for price discrepancies and execute trades quickly before they disappear.
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<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"> Hedgers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Hedgers use futures contracts to mitigate the risk of price changes going too low when the time comes for them to sell an asset or increasing too much if they have to buy it later in the spot market. These traders include producers, consumers, or investors with exposure to the underlying asset who employ futures contracts to lock in prices, effectively insuring against price volatility.<span class="ql-inline-citation" data-cite="19"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Hedgers are not primarily motivated by profit but by the need to manage risk related to their business or investment <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>.
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<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"> Speculators </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> These are futures traders who aim to profit from price moves, betting that price will move in a direction favorable to their trades. Speculators do not intend to take delivery of the physical goods, if any are involved in the first place. Futures speculation adds greater liquidity to the market since more parties are buying and selling.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> While they don’t make up most futures traders, many protections in the market guard against speculators profiteering or causing volatility that would affect everyday consumers and other industries.<span class="ql-inline-citation" data-cite="13"></span> For example, speculation in futures markets for agricultural commodities like wheat, corn, and soybeans has been linked to significant price swings. The 2007–2008 global food crisis is a textbook example, given the dramatic increases in the prices of these staples at the time, with weather conditions and biofuel demand initially thought to be the cause. Ultimately, speculative trades took more of the blame for the price increases that hit consumers just as the financial crisis of that year was about to wreak widespread havoc.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> A look at how it happened shows that hedging can turn into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/speculation.asp">speculation</a>, which can cause a major jump in prices. In early 2007, wheat prices began to climb because of bad weather conditions in key producing regions (e.g., Australia had a drought) and increased <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/demand.asp">demand</a> for grain used for food and biofuel. These problems were worsened by the lowest global wheat stockpiles in decades. Soon, there was a sharp rise in wheat futures prices, reaching record highs.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> In February 2008, the price for wheat futures on the Chicago Board of Trade surged to over $13 per bushel from around $4 to $5 per bushel in the preceding years.<span class="ql-inline-citation" data-cite="14"></span> This spike in wheat prices had consequences worldwide: Traders bought up contracts, speculating on future price gains, and suppliers and manufacturers, anticipating higher future costs, raised prices preemptively, directly affecting consumer prices for wheat and related products. This increased the cost of bread and other wheat-based products, posing severe challenges to food security for billions around the globe.
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<span class="heading-toc" id="toc-types-of-futures-traders"></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"> Types of Futures Traders </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> The futures market has diverse participants, each with distinct strategies, objectives, and roles. Among these are hedge funds, individual traders, and market makers, who collectively contribute to the liquidity, depth, and efficiency of the market.
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<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"> Hedge Funds </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/articles/02/111302.asp">Hedge funds</a> are managed pools of capital with wide latitude in generating returns for their investors. In the futures market, they may participate as speculators, leveraging their substantial capital to bet on the direction of commodity prices, interest rates, indexes, and other assets. Hedge funds often employ sophisticated trading strategies, including long and short positions, to capitalize on predicted market moves. Their activities can significantly influence prices because of the large volumes of trades they execute.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_80-0"> <span class="mntl-sc-block-subheading__text"> Individual Traders </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Individual traders trade futures contracts for their own accounts. They might speculate on price moves to profit from short-term fluctuations or hedge personal investments in other markets. Individual traders have different strategies, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a>, and amounts 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> at stake. With the advent of electronic trading platforms, individual traders have easier access to futures markets, allowing them to participate alongside institutional investors.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-subheading__text"> Institutional Investors </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">Institutional investors</a> include professional asset managers, pension funds, insurance companies, mutual funds, and endowments. They invest large sums of money in financial instruments, including futures contracts, on behalf of their stakeholders or beneficiaries. In the futures market, institutional investors may engage in hedging to protect their portfolios from adverse market moves or speculate on future price directions to enhance returns. Given the large volume of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aum.asp">assets under management</a>, institutional investors can significantly affect market prices through their trading activities.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_86-0"> <span class="mntl-sc-block-subheading__text"> Market Makers </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp">Market makers</a> provide market liquidity by staying ready to buy and sell futures contracts at publicly quoted prices. They profit from the spread between the buying and selling prices. By continually offering to buy and sell contracts, market makers help ensure enough volume for trades to be executed promptly, reducing market volatility and making it easier for investors to enter and exit their positions.
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<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"> Proprietary Trading Firms </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> Proprietary trading firms trade their own capital, not that of clients. These firms are in the business of making speculative trades to benefit directly from market moves. Proprietary trading firms may employ <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/09/high-frequency-trading.asp">high-frequency trading</a>, arbitrage, and swing trading (entering trades at or near the end of a downward movement and exiting at a near-peak in an upward movement, or vice versa for short positions) to generate profits. They are significant players in the market because of their aggressive trading tactics, sophisticated technology, and ability to take on substantial risks. Unlike hedge funds, proprietary trading firms invest their own funds rather than manage external capital, which can lead to different risk management strategies.
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<span class="heading-toc" id="toc-whats-traded-in-the-futures-market"></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"> What’s Traded in the Futures Market? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> The range of assets underlying futures covers everything from agricultural products to financial indexes. As of early 2024, the most traded futures were in equities (65% of futures trading by volume), currencies (9%), interest rates (9%), energy (5%), agriculture (4%), and metals (4%).<span class="ql-inline-citation" data-cite="5"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_95-0"> <span class="mntl-sc-block-subheading__text"> Commodities </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> A commodity is a physical product whose value is determined primarily by the forces of supply and demand. This includes grains (corn, wheat, etc.), energy (such as natural gas or crude oil), and precious metals like gold or silver.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> A commodity futures contract is an agreement to buy or sell a predetermined amount of some commodity at a given price on a specific date. Like all futures contracts, commodity futures can be used to hedge or protect an investment position or to bet on the directional movement of the underlying asset.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Individuals can enter the commodities futures market through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managedfuturesaccount.asp">managed futures account</a>, available through specialized brokerage firms called Commodity Trading Advisors.<span class="ql-inline-citation" data-cite="13"></span>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_102-0"> <span class="mntl-sc-block-subheading__text"> Cryptocurrencies </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_103-0"> Although relatively new to the futures market, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> futures have quickly gained popularity, offering contracts on Bitcoin, Ethereum, and other digital currencies. These futures allow traders to speculate on future crypto price moves without having to hold the digital assets. Given the extreme volatility in cryptocurrency markets, futures allow investors to hedge their digital asset portfolios or speculate on price changes without the security issues and other hassles of holding crypto directly.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_105-0"> <span class="mntl-sc-block-subheading__text"> Currencies </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> Currency or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forex.asp">forex</a> trading involves making money or hedging risk in foreign exchange rate changes. A wide variety of currency futures contracts are available. Aside from popular contracts such as euro/U.S. dollar currency futures, there are also e-Micro Forex Futures contracts that trade at one-10th the size of regular currency futures contracts.<span class="ql-inline-citation" data-cite="1"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> One strategy that speculators use to trade currencies is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scalping.asp">scalping</a>, which tries to make short-term profits from incremental changes in the value of a currency. Doing this repeatedly means that your earnings could add up over time. In general, your time frame can be as short as one minute or may last several days. A scalping strategy requires strict discipline to continue making small, short-term profits while avoiding significant losses.
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<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_110-0"><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_111-0"><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>Currency futures should not be confused with spot forex trading, which is more prevalent among individual traders.</p></div></div></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_112-0"> <span class="mntl-sc-block-subheading__text"> Energy Prices </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Geopolitical events, supply disruptions, and changes in demand because of economic growth can significantly impact energy prices. As such, energy futures are among the most vital parts of the commodities market, including crude oil, natural gas, gasoline, and heating oil. These contracts are crucial for energy producers and consumers to hedge against the volatile nature of energy prices. Downstream, the use of them by utilities could mean more affordable prices for people heating their homes.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_115-0"> <span class="mntl-sc-block-subheading__text"> Indexes </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> Introduced in 1982 by the Chicago Mercantile Exchange with futures for the S&P 500, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfutures.asp">index futures</a>, such as the e-mini S&P 500 index futures contract, are among the most popular for individual investors, with event futures featuring wagering yes or no on specific occurrences often tied to indexes as well.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="10"></span> Index futures are a way to gain exposure to an entire index in a single contract. The Financial Industry Regulatory Authority requires a minimum of 25% of the total trade value as the minimum account balance.<span class="ql-inline-citation" data-cite="4"></span> However, some brokerages will demand greater than this 25% margin.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_118-0"> Index futures are available for the Dow Jones Industrial Average and the Nasdaq 100, as well as their respective fractional value versions, e-mini Dow and e-mini Nasdaq 100 contracts. Index futures are also available for foreign markets, including the Frankfurt Exchange and the Hang Seng Index in Hong Kong.<br>
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_120-0"> <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_121-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestratefuture.asp">Interest rate futures</a> are financial derivatives that allow investors to speculate on or hedge against future changes in interest rates. These futures include those for Treasury bills, notes, and bonds, as well as on interest rate benchmarks. Treasury futures allow investors to speculate on or hedge against changes in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a>, which affect the value of Treasury securities. For example, T-note futures are widely used to hedge against fluctuations in 10-year Treasury note yields, which are benchmarks for mortgage and other important financial rates.<span class="ql-inline-citation" data-cite="20"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_123-0"> More generally, bond futures are contracts to buy or sell a specific bond at a predetermined price on a future date. Investors use these to hedge against or speculate on changes in bond prices, which inversely correlate with interest rates. As interest rates rise, bond prices typically fall, and vice versa. Investors, fund managers, and financial institutions use bond futures to protect their portfolios against interest rate changes or to take positions based on their interest rate outlook.
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<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_125-0"> <span class="mntl-sc-block-subheading__text"> Metal Prices </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/11/how-to-invest-in-the-periodic-table.asp">Metals</a>, including gold, silver, copper, and platinum, have futures that trade extensively. These contracts are used by miners, manufacturers, and investors to hedge against price volatility. Precious metals like gold and silver are often considered <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/safe-haven.asp">safe havens</a> during times of economic uncertainty, while industrial metals like copper are sensitive to economic growth and industrial demand since they are essential in electronics and construction. Futures trading in metals enables price discovery and risk management, providing a way to lock in prices for future delivery or a cash substitute.<br/>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_128-0"><span class="heading-toc" id="toc-what-is-the-difference-between-futures-and-options-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between Futures and Options Trading?</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-options-and-futures/">Futures and options</a> are derivatives, financial instruments derived from the value of underlying assets like commodities, currencies, or indexes. The key difference lies in the obligations they impose on buyers and sellers.</p><p>A futures contract is an agreement to buy or sell the underlying asset at a predetermined price on a specific future date, committing both parties to fulfill the contract at maturity. By contrast, an option gives the buyer the right, but not the obligation, to buy (the call option) or sell (the put option) the underlying asset at a set price before the option expires.</p><p>This difference means that options offer a way to hedge against risk or speculate with a lower upfront investment compared with futures, where the potential for both gain and loss can be more significant because of the obligation to execute the contract.</p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_130-0"><span class="heading-toc" id="toc-what-are-event-futures"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Event Futures?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Unlike traditional futures contracts, which are based on the price changes of physical commodities or financial instruments, event futures are based on the occurrence of particular events.<span class="ql-inline-citation" data-cite="10"></span> These events can range from elections to changes in indexes and commodities prices. An event futures contract has a binary outcome: It settles at a predefined value if the event occurs (or a specific outcome is achieved) and settles at zero if the event doesn’t happen.<span class="ql-inline-citation" data-cite="10"></span></p></div>
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<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_132-0"><span class="heading-toc" id="toc-how-does-leverage-work-in-futures-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Leverage Work in Futures Trading?</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/l/leverage.asp">Leverage</a> allows traders to control a large amount of the underlying asset with a relatively small amount of capital, known as margin.<span class="ql-inline-citation" data-cite="18"></span></p><p>In futures contracts, leverage is used to amplify the potential returns from changes in the price of the underlying asset. It is a double-edged sword that can significantly increase potential profits and potential losses. When traders enter a futures contract, they must deposit a fraction of the contract’s total value, typically 5% to 15%, with their broker. This is known as the initial margin. Because traders only put down a fraction of the total value, they can gain exposure to a large position without committing the total amount of capital upfront.</p><p>However, leverage also increases <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk.asp">risk</a>. If the market moves against the position, traders could face <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/margincall.asp">margin calls</a>, requiring more funds to be deposited. If these margin requirements are not met, then the position may be closed at a loss. Therefore, while leverage can magnify gains, it can also magnify losses, sometimes exceeding the initial investment.<br/></p></div>
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<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_134-0"> <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_135-0"> Futures trading allows investors to lock in prices for commodities, currencies, and financial instruments months or even years in advance, providing a critical tool for managing price risk and speculation. While futures were limited to commodities when first introduced, they now cover a wide range of events and market moves, enabling investors to hedge against unfavorable market shifts or the chance to profit from price volatility without requiring the physical exchange of the underlying asset.
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_137-0"> Traders should carefully consider their risk tolerance and engage in futures judiciously, employing risk management strategies such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop-loss orders</a> to protect against significant losses.
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## What Are Futures?
A [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp) allows its parties to buy or sell a specific underlying asset at a set future date. The underlying asset can be a commodity, a security, or some other financial instrument.
These agreements are best entered after you’ve learned some basics, and should not be invested in on a whim. Start by doing your homework and learning the basics.
### Key Takeaways
* Futures are a kind of derivative, an agreement whose returns depend on the value of an underlying asset.
* A futures contract commits the buyer to buy or a seller to sell an underlying asset at a preset price and date.
* Investors use futures to speculate on or hedge against changing prices for a security, commodity, or financial instrument.
* Forward contracts are agreements between two parties, while futures are standardized contracts sold on an exchange.
* You can trade futures in commodities, currencies, interest rate changes, livestock, oil and gas, securities, and much more. The most traded futures are for equities.
For many investors, futures contracts, with their different terms and trading strategies, can be daunting. But the learning curve hasn’t stopped increasing numbers of investors from entering futures markets in recent years. According to the Futures Industry Association, futures trading worldwide more than doubled from 12.1 billion contracts in 2013 to 29.2 billion in 2023. They are not new, though, and [futures](https://www.investopedia.com/terms/f/futures.asp) have long been used as insurance for farmers and traders against devastating changes in nature and the market.
For millennia, forward contracts have been employed to lock in future prices for financial stability no matter what happened to the harvest that year. But many have also used them to speculate and profit from changing prices in the market. For example, the ancient Roman orator Cicero left evidence that the Romans used forward contracts, in a letter criticizing traders who raced to get ahead of spreading knowledge of a major grain shipment arriving to profit by locking others into higher prices with them.
While much has changed as forwards have become standardized as futures contracts and exchanges offer ever-more-sophisticated products, the basics remain the same. Below, we guide you through the kinds of futures, who trades them, and why, all while showing that you don’t need to get on horseback to beat news of a grain-filled ship arriving to gain from these investments.
## Futures Basics
Futures commit you to buying or selling an underlying asset at a specific price on a preset date. We use “underlying asset” in the vaguest sense since investors trade futures for virtually all commodities, financial securities, and more. You can buy or sell futures related to weather events like temperature, rainfall, hurricanes, and even snow (useful for firms relying on it for tourists); shipping futures for freight rates and such; electricity and network telecommunication bandwidth; and real estate for volatility in property prices. This only begins the list.
While the U.S. [Commodity Futures Trading Commission (CFTC)](https://www.investopedia.com/terms/c/cftc.asp) has banned futures trading in American elections, the University of Iowa’s Henry B. Tippie College of Business for decades has been running (for research purposes) an online futures market where contract payoffs are based on real-world events such as political elections, companies’ earnings per share, and stock price returns. In 2022, the [Chicago Mercantile Exchange](https://www.investopedia.com/terms/c/cme.asp) began offering event-based futures where you essentially bet yes or no for questions on the value of indexes, currencies, commodities, and so on, with terms ending daily. In 2024, the exchange added quarterly and yearly expirations.
But let’s not get ahead of ourselves. First, we’ll set out some essential distinctions for forward and futures contracts before turning to who uses them and the kinds of underlying assets most often at play.
### Forward Contracts
A forward contract is the oldest type of these agreements, predating the trading in futures that formalized “to arrive” contracts in the latter half of the 19th century. A forward is an agreement between two parties to transact in the future, with one party taking the long position and the second taking the short position; they are also called the long and short forwards.
The long forward must buy an asset from the short forward at a future time. What’s being bought in the future is called the “underlying asset.” As we’ve seen, this can be many things, but grains and other farm products were the assets when the [Chicago Board of Trade](https://www.investopedia.com/terms/c/cbot.asp) opened in 1848. Today, forwards are traded over the counter and customized for the parties involved. Despite variations, forwards include the following:
* **Contract price**: This is the agreed-upon “forward price” that the underlying asset will be bought or sold for in the future. It’s determined when the contract is entered into.
* **Counterparties**: The parties involved in the contract: a buyer ([long position](https://www.investopedia.com/terms/l/long.asp)) and a seller [(short position](https://www.investopedia.com/terms/s/short.asp))
* **Delivery date**: This is the date when the underlying asset will be exchanged.
* **Underlying asset**: The commodity, financial instrument, or other asset bought or sold
* **Quantity of the asset**: The contract specifies the exact amount of the underlying asset to be delivered or received.
* **Settlement method**: Forwards are settled by physically delivering the underlying asset or through cash.
* **Terms and conditions**: Any extra terms about the execution of the contract, including how defaults are handled, the rights of the parties, and any conditions that, once met, mean the forward can be modified or voided
### Forward Contract Example
Let’s flesh this out with an example. Suppose a couple owns a farm and expects to harvest 5,000 bushels of wheat in six months. They’re worried about what a fall in the price of wheat would mean for covering their bills while getting ready for the next season. So, they look for a way to lock in a price today to ensure that they have enough income. They know that by locking the price in, they might not profit as much if wheat prices go up, but stability is more important right now.
Meanwhile, a local organic cereal producer needs a consistent supply of wheat but is concerned that prices might go up, which would raise production costs. So, the farmers and the cereal company sign a forward contract that would include the following:
* Underlying asset: 5,000 bushels of wheat
* Contract price: $5 per bushel. This price is agreed upon when the contract is signed.
* Quantity: 5,000 bushels
* Delivery date: Six months after the contract’s signing date
* Settlement method: Physical delivery of the wheat to the cereal producer
* Parties: The wheat farmer (seller) and the cereal manufacturer (buyer)
Under these terms, the farmers have to deliver 5,000 bushels of wheat to the cereal manufacturer in six months, and the cereal producer must pay the farmer $5 per bushel when that’s done, no matter what happens to the price of wheat in the meantime. If the price goes up to $7 a bushel, the farmers get less than they would have otherwise, but the cereal producer makes out. Alternatively, if the price goes down to $3 a bushel, the farmers still keep the stable income they need, and the cereal manufacturer is out more money than otherwise, but in the meantime, neither party had to stress over [volatility](https://www.investopedia.com/terms/v/volatility.asp) in the wheat market.
Futures contracts take this concept, standardize its elements, and make it tradable on exchanges.
### Futures Contracts
A futures contract is like a forward, but it’s done through an organized exchange, committing traders to buy or sell an underlying asset at a preset price on a future date. Like forwards, some contracts require physical delivery. But others are settled in cash, the amount of which is the difference between the agreed-upon price and the market price when the future date arrives.
Futures are traded through open outcry in trading pits in an auction or through electronic screen-based systems with centralized exchanges like the Chicago Mercantile Exchange. There are also cryptocurrency exchanges like Binance that trade futures, including those with and [without an expiration date](https://www.investopedia.com/what-are-perpetual-futures-7494870). The role of the futures exchange is not to buy or sell the contracts but to enable trades, ensure that they are legally conducted, check that they follow the exchange’s rules, and publish the trading prices. This last element is crucial for price discovery, helping other buyers and sellers find a mutually agreeable price based on supply and demand.
Since a futures contract is an obligation in the future, a trader can sell contracts without buying contracts first. Traders who sell more contracts than they buy have a short futures position, while traders who buy more contracts than they sell have a long futures position.
### Futures Contract Example
Let’s make this concept concrete with an example. Suppose an airline wants to [hedge](https://www.investopedia.com/terms/h/hedge.asp) against the risk of rising fuel prices. To manage this risk, it enters into a futures contract to buy crude oil at a predetermined price. At the same time, an oil company is trying to lock in a price for its oil in case prices fall. These transactions take place on a regulated exchange, ensuring standardized terms and avoiding the need for the parties to know each other directly.
Under these futures contracts, the airline agrees to buy, and the oil producer agrees to sell 1,000 barrels of crude oil for $60 per barrel on a certain date. Here’s what the details might look like:
* Contract months: Crude oil futures are available for several months ahead, providing flexibility for hedging strategies. The airline might choose a contract with a delivery month that aligns with its predicted fuel needs, such as “CLZ24” for December 2024 delivery.
* Contract size: The standard contract size for crude oil futures is 1,000 barrels. This standardization makes it easy to calculate the contract’s total value, which, at a trading price of $60 per barrel, would be $60,000.
* Deliverable grade: This notes the quality and grade of the product that can be delivered under the contract. For crude oil futures, this includes details like how heavy the oil is and its sulfur content.
* Exchange: The contract is traded on a regulated exchange like the [New York Mercantile Exchange](https://www.investopedia.com/terms/n/nymex.asp), where many contracts for crude oil are sold.
* Last trading day: The final day on which trading can occur for the contract is usually a few business days before the delivery month begins. For crude oil futures, this might be the last trading day in the month preceding the contract month, ensuring all obligations are settled before delivery.
* Price quoted in: Prices for crude oil futures are quoted per barrel.
* Settlement type: Futures contracts can be settled through physical delivery of the underlying asset or cash settlement. For crude oil futures like “CLZ24,” physical delivery is more standard, though many participants close their positions before the delivery date to avoid actual delivery.
* Tick size: The contract specifies the minimum tick size, which could be $0.01 per barrel for crude oil, translating to a $10 change in the contract’s total value for each tick movement.
* Ticker: The specific contract for crude oil can be identified by a ticker symbol such as “CL” for crude oil, followed by a suffix for the delivery month and year—for example, “CLZ24” for a contract expiring in December 2024.
With forwards, there’s a risk that the other party won’t fulfill the contract. This is mitigated for futures by the exchange clearinghouse, which guarantees the contract. While each side is taking a risk that the price they pay now is close to the actual price at the settlement month, each party insures against the risk of a wide swing against them in oil prices.
## Who Uses Futures?
Measured by volume, most futures are traded by commercial or institutional entities. Of these, most are hedgers looking to cut their risk of financial losses, as in our examples thus far. Buying futures for these traders is a form of insurance. Meanwhile, speculators trade futures contracts only to profit from price fluctuations. They don’t want the underlying assets but buy or sell futures based on their predictions about future prices.
Futures traders include [arbitrageurs](https://www.investopedia.com/terms/a/arbitrageur.asp) and spread traders, investors who use price discrepancies between different markets or related instruments to profit. They are a kind of speculator, buying and selling futures or other financial instruments to profit from cross-market price differences. They use sophisticated software to search markets for price discrepancies and execute trades quickly before they disappear.
### Hedgers
Hedgers use futures contracts to mitigate the risk of price changes going too low when the time comes for them to sell an asset or increasing too much if they have to buy it later in the spot market. These traders include producers, consumers, or investors with exposure to the underlying asset who employ futures contracts to lock in prices, effectively insuring against price volatility.
Hedgers are not primarily motivated by profit but by the need to manage risk related to their business or investment [portfolio](https://www.investopedia.com/terms/p/portfolio.asp).
### Speculators
These are futures traders who aim to profit from price moves, betting that price will move in a direction favorable to their trades. Speculators do not intend to take delivery of the physical goods, if any are involved in the first place. Futures speculation adds greater liquidity to the market since more parties are buying and selling.
While they don’t make up most futures traders, many protections in the market guard against speculators profiteering or causing volatility that would affect everyday consumers and other industries. For example, speculation in futures markets for agricultural commodities like wheat, corn, and soybeans has been linked to significant price swings. The 2007–2008 global food crisis is a textbook example, given the dramatic increases in the prices of these staples at the time, with weather conditions and biofuel demand initially thought to be the cause. Ultimately, speculative trades took more of the blame for the price increases that hit consumers just as the financial crisis of that year was about to wreak widespread havoc.
A look at how it happened shows that hedging can turn into [speculation](https://www.investopedia.com/terms/s/speculation.asp), which can cause a major jump in prices. In early 2007, wheat prices began to climb because of bad weather conditions in key producing regions (e.g., Australia had a drought) and increased [demand](https://www.investopedia.com/terms/d/demand.asp) for grain used for food and biofuel. These problems were worsened by the lowest global wheat stockpiles in decades. Soon, there was a sharp rise in wheat futures prices, reaching record highs.
In February 2008, the price for wheat futures on the Chicago Board of Trade surged to over $13 per bushel from around $4 to $5 per bushel in the preceding years. This spike in wheat prices had consequences worldwide: Traders bought up contracts, speculating on future price gains, and suppliers and manufacturers, anticipating higher future costs, raised prices preemptively, directly affecting consumer prices for wheat and related products. This increased the cost of bread and other wheat-based products, posing severe challenges to food security for billions around the globe.
## Types of Futures Traders
The futures market has diverse participants, each with distinct strategies, objectives, and roles. Among these are hedge funds, individual traders, and market makers, who collectively contribute to the liquidity, depth, and efficiency of the market.
### Hedge Funds
[Hedge funds](https://www.investopedia.com/articles/02/111302.asp) are managed pools of capital with wide latitude in generating returns for their investors. In the futures market, they may participate as speculators, leveraging their substantial capital to bet on the direction of commodity prices, interest rates, indexes, and other assets. Hedge funds often employ sophisticated trading strategies, including long and short positions, to capitalize on predicted market moves. Their activities can significantly influence prices because of the large volumes of trades they execute.
### Individual Traders
Individual traders trade futures contracts for their own accounts. They might speculate on price moves to profit from short-term fluctuations or hedge personal investments in other markets. Individual traders have different strategies, [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp), and amounts of [capital](https://www.investopedia.com/terms/c/capital.asp) at stake. With the advent of electronic trading platforms, individual traders have easier access to futures markets, allowing them to participate alongside institutional investors.
### Institutional Investors
[Institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) include professional asset managers, pension funds, insurance companies, mutual funds, and endowments. They invest large sums of money in financial instruments, including futures contracts, on behalf of their stakeholders or beneficiaries. In the futures market, institutional investors may engage in hedging to protect their portfolios from adverse market moves or speculate on future price directions to enhance returns. Given the large volume of [assets under management](https://www.investopedia.com/terms/a/aum.asp), institutional investors can significantly affect market prices through their trading activities.
### Market Makers
[Market makers](https://www.investopedia.com/terms/m/marketmaker.asp) provide market liquidity by staying ready to buy and sell futures contracts at publicly quoted prices. They profit from the spread between the buying and selling prices. By continually offering to buy and sell contracts, market makers help ensure enough volume for trades to be executed promptly, reducing market volatility and making it easier for investors to enter and exit their positions.
### Proprietary Trading Firms
Proprietary trading firms trade their own capital, not that of clients. These firms are in the business of making speculative trades to benefit directly from market moves. Proprietary trading firms may employ [high-frequency trading](https://www.investopedia.com/ask/answers/09/high-frequency-trading.asp), arbitrage, and swing trading (entering trades at or near the end of a downward movement and exiting at a near-peak in an upward movement, or vice versa for short positions) to generate profits. They are significant players in the market because of their aggressive trading tactics, sophisticated technology, and ability to take on substantial risks. Unlike hedge funds, proprietary trading firms invest their own funds rather than manage external capital, which can lead to different risk management strategies.
## What’s Traded in the Futures Market?
The range of assets underlying futures covers everything from agricultural products to financial indexes. As of early 2024, the most traded futures were in equities (65% of futures trading by volume), currencies (9%), interest rates (9%), energy (5%), agriculture (4%), and metals (4%).
### Commodities
A commodity is a physical product whose value is determined primarily by the forces of supply and demand. This includes grains (corn, wheat, etc.), energy (such as natural gas or crude oil), and precious metals like gold or silver.
A commodity futures contract is an agreement to buy or sell a predetermined amount of some commodity at a given price on a specific date. Like all futures contracts, commodity futures can be used to hedge or protect an investment position or to bet on the directional movement of the underlying asset.
Individuals can enter the commodities futures market through a [managed futures account](https://www.investopedia.com/terms/m/managedfuturesaccount.asp), available through specialized brokerage firms called Commodity Trading Advisors.
### Cryptocurrencies
Although relatively new to the futures market, [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) futures have quickly gained popularity, offering contracts on Bitcoin, Ethereum, and other digital currencies. These futures allow traders to speculate on future crypto price moves without having to hold the digital assets. Given the extreme volatility in cryptocurrency markets, futures allow investors to hedge their digital asset portfolios or speculate on price changes without the security issues and other hassles of holding crypto directly.
### Currencies
Currency or [forex](https://www.investopedia.com/terms/f/forex.asp) trading involves making money or hedging risk in foreign exchange rate changes. A wide variety of currency futures contracts are available. Aside from popular contracts such as euro/U.S. dollar currency futures, there are also e-Micro Forex Futures contracts that trade at one-10th the size of regular currency futures contracts.
One strategy that speculators use to trade currencies is [scalping](https://www.investopedia.com/terms/s/scalping.asp), which tries to make short-term profits from incremental changes in the value of a currency. Doing this repeatedly means that your earnings could add up over time. In general, your time frame can be as short as one minute or may last several days. A scalping strategy requires strict discipline to continue making small, short-term profits while avoiding significant losses.
###
Currency futures should not be confused with spot forex trading, which is more prevalent among individual traders.
### Energy Prices
Geopolitical events, supply disruptions, and changes in demand because of economic growth can significantly impact energy prices. As such, energy futures are among the most vital parts of the commodities market, including crude oil, natural gas, gasoline, and heating oil. These contracts are crucial for energy producers and consumers to hedge against the volatile nature of energy prices. Downstream, the use of them by utilities could mean more affordable prices for people heating their homes.
### Indexes
Introduced in 1982 by the Chicago Mercantile Exchange with futures for the S&P 500, [index futures](https://www.investopedia.com/terms/i/indexfutures.asp), such as the e-mini S&P 500 index futures contract, are among the most popular for individual investors, with event futures featuring wagering yes or no on specific occurrences often tied to indexes as well. Index futures are a way to gain exposure to an entire index in a single contract. The Financial Industry Regulatory Authority requires a minimum of 25% of the total trade value as the minimum account balance. However, some brokerages will demand greater than this 25% margin.
Index futures are available for the Dow Jones Industrial Average and the Nasdaq 100, as well as their respective fractional value versions, e-mini Dow and e-mini Nasdaq 100 contracts. Index futures are also available for foreign markets, including the Frankfurt Exchange and the Hang Seng Index in Hong Kong.
### Interest Rates
[Interest rate futures](https://www.investopedia.com/terms/i/interestratefuture.asp) are financial derivatives that allow investors to speculate on or hedge against future changes in interest rates. These futures include those for Treasury bills, notes, and bonds, as well as on interest rate benchmarks. Treasury futures allow investors to speculate on or hedge against changes in [interest rates](https://www.investopedia.com/terms/i/interestrate.asp), which affect the value of Treasury securities. For example, T-note futures are widely used to hedge against fluctuations in 10-year Treasury note yields, which are benchmarks for mortgage and other important financial rates.
More generally, bond futures are contracts to buy or sell a specific bond at a predetermined price on a future date. Investors use these to hedge against or speculate on changes in bond prices, which inversely correlate with interest rates. As interest rates rise, bond prices typically fall, and vice versa. Investors, fund managers, and financial institutions use bond futures to protect their portfolios against interest rate changes or to take positions based on their interest rate outlook.
### Metal Prices
[Metals](https://www.investopedia.com/articles/stocks/11/how-to-invest-in-the-periodic-table.asp), including gold, silver, copper, and platinum, have futures that trade extensively. These contracts are used by miners, manufacturers, and investors to hedge against price volatility. Precious metals like gold and silver are often considered [safe havens](https://www.investopedia.com/terms/s/safe-haven.asp) during times of economic uncertainty, while industrial metals like copper are sensitive to economic growth and industrial demand since they are essential in electronics and construction. Futures trading in metals enables price discovery and risk management, providing a way to lock in prices for future delivery or a cash substitute.
## What Is the Difference Between Futures and Options Trading?
[Futures and options](https://www.investopedia.com/ask/answers/difference-between-options-and-futures/) are derivatives, financial instruments derived from the value of underlying assets like commodities, currencies, or indexes. The key difference lies in the obligations they impose on buyers and sellers.
A futures contract is an agreement to buy or sell the underlying asset at a predetermined price on a specific future date, committing both parties to fulfill the contract at maturity. By contrast, an option gives the buyer the right, but not the obligation, to buy (the call option) or sell (the put option) the underlying asset at a set price before the option expires.
This difference means that options offer a way to hedge against risk or speculate with a lower upfront investment compared with futures, where the potential for both gain and loss can be more significant because of the obligation to execute the contract.
## What Are Event Futures?
Unlike traditional futures contracts, which are based on the price changes of physical commodities or financial instruments, event futures are based on the occurrence of particular events. These events can range from elections to changes in indexes and commodities prices. An event futures contract has a binary outcome: It settles at a predefined value if the event occurs (or a specific outcome is achieved) and settles at zero if the event doesn’t happen.
## How Does Leverage Work in Futures Trading?
[Leverage](https://www.investopedia.com/terms/l/leverage.asp) allows traders to control a large amount of the underlying asset with a relatively small amount of capital, known as margin.
In futures contracts, leverage is used to amplify the potential returns from changes in the price of the underlying asset. It is a double-edged sword that can significantly increase potential profits and potential losses. When traders enter a futures contract, they must deposit a fraction of the contract’s total value, typically 5% to 15%, with their broker. This is known as the initial margin. Because traders only put down a fraction of the total value, they can gain exposure to a large position without committing the total amount of capital upfront.
However, leverage also increases [risk](https://www.investopedia.com/terms/r/risk.asp). If the market moves against the position, traders could face [margin calls](https://www.investopedia.com/terms/m/margincall.asp), requiring more funds to be deposited. If these margin requirements are not met, then the position may be closed at a loss. Therefore, while leverage can magnify gains, it can also magnify losses, sometimes exceeding the initial investment.
## The Bottom Line
Futures trading allows investors to lock in prices for commodities, currencies, and financial instruments months or even years in advance, providing a critical tool for managing price risk and speculation. While futures were limited to commodities when first introduced, they now cover a wide range of events and market moves, enabling investors to hedge against unfavorable market shifts or the chance to profit from price volatility without requiring the physical exchange of the underlying asset.
Traders should carefully consider their risk tolerance and engage in futures judiciously, employing risk management strategies such as [stop-loss orders](https://www.investopedia.com/terms/s/stop-lossorder.asp) to protect against significant losses.
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What Are Futures?
A futures contract allows its parties to buy or sell a specific underlying asset at a set future date. The underlying asset can be a commodity, a security, or some other financial instrument.
These agreements are best entered after you’ve learned some basics, and should not be invested in on a whim. Start by doing your homework and learning the basics.
Key Takeaways
Futures are a kind of derivative, an agreement whose returns depend on the value of an underlying asset.A futures contract commits the buyer to buy or a seller to sell an underlying asset at a preset price and date.Investors use futures to speculate on or hedge against changing prices for a security, commodity, or financial instrument.Forward contracts are agreements between two parties, while futures are standardized contracts sold on an exchange.You can trade futures in commodities, currencies, interest rate changes, livestock, oil and gas, securities, and much more. The most traded futures are for equities.
For many investors, futures contracts, with their different terms and trading strategies, can be daunting. But the learning curve hasn’t stopped increasing numbers of investors from entering futures markets in recent years. According to the Futures Industry Association, futures trading worldwide more than doubled from 12.1 billion contracts in 2013 to 29.2 billion in 2023. They are not new, though, and futures have long been used as insurance for farmers and traders against devastating changes in nature and the market.
For millennia, forward contracts have been employed to lock in future prices for financial stability no matter what happened to the harvest that year. But many have also used them to speculate and profit from changing prices in the market. For example, the ancient Roman orator Cicero left evidence that the Romans used forward contracts, in a letter criticizing traders who raced to get ahead of spreading knowledge of a major grain shipment arriving to profit by locking others into higher prices with them.
While much has changed as forwards have become standardized as futures contracts and exchanges offer ever-more-sophisticated products, the basics remain the same. Below, we guide you through the kinds of futures, who trades them, and why, all while showing that you don’t need to get on horseback to beat news of a grain-filled ship arriving to gain from these investments.
Futures Basics
Futures commit you to buying or selling an underlying asset at a specific price on a preset date. We use “underlying asset” in the vaguest sense since investors trade futures for virtually all commodities, financial securities, and more. You can buy or sell futures related to weather events like temperature, rainfall, hurricanes, and even snow (useful for firms relying on it for tourists); shipping futures for freight rates and such; electricity and network telecommunication bandwidth; and real estate for volatility in property prices. This only begins the list.
While the U.S. Commodity Futures Trading Commission (CFTC) has banned futures trading in American elections, the University of Iowa’s Henry B. Tippie College of Business for decades has been running (for research purposes) an online futures market where contract payoffs are based on real-world events such as political elections, companies’ earnings per share, and stock price returns. In 2022, the Chicago Mercantile Exchange began offering event-based futures where you essentially bet yes or no for questions on the value of indexes, currencies, commodities, and so on, with terms ending daily. In 2024, the exchange added quarterly and yearly expirations.
But let’s not get ahead of ourselves. First, we’ll set out some essential distinctions for forward and futures contracts before turning to who uses them and the kinds of underlying assets most often at play.
Forward Contracts
A forward contract is the oldest type of these agreements, predating the trading in futures that formalized “to arrive” contracts in the latter half of the 19th century. A forward is an agreement between two parties to transact in the future, with one party taking the long position and the second taking the short position; they are also called the long and short forwards.
The long forward must buy an asset from the short forward at a future time. What’s being bought in the future is called the “underlying asset.” As we’ve seen, this can be many things, but grains and other farm products were the assets when the Chicago Board of Trade opened in 1848. Today, forwards are traded over the counter and customized for the parties involved. Despite variations, forwards include the following:
Contract price: This is the agreed-upon “forward price” that the underlying asset will be bought or sold for in the future. It’s determined when the contract is entered into.
Counterparties: The parties involved in the contract: a buyer (long position) and a seller (short position)
Delivery date: This is the date when the underlying asset will be exchanged.
Underlying asset: The commodity, financial instrument, or other asset bought or sold
Quantity of the asset: The contract specifies the exact amount of the underlying asset to be delivered or received.
Settlement method: Forwards are settled by physically delivering the underlying asset or through cash.
Terms and conditions: Any extra terms about the execution of the contract, including how defaults are handled, the rights of the parties, and any conditions that, once met, mean the forward can be modified or voided
Forward Contract Example
Let’s flesh this out with an example. Suppose a couple owns a farm and expects to harvest 5,000 bushels of wheat in six months. They’re worried about what a fall in the price of wheat would mean for covering their bills while getting ready for the next season. So, they look for a way to lock in a price today to ensure that they have enough income. They know that by locking the price in, they might not profit as much if wheat prices go up, but stability is more important right now.
Meanwhile, a local organic cereal producer needs a consistent supply of wheat but is concerned that prices might go up, which would raise production costs. So, the farmers and the cereal company sign a forward contract that would include the following:
Underlying asset: 5,000 bushels of wheatContract price: $5 per bushel. This price is agreed upon when the contract is signed.Quantity: 5,000 bushelsDelivery date: Six months after the contract’s signing dateSettlement method: Physical delivery of the wheat to the cereal producerParties: The wheat farmer (seller) and the cereal manufacturer (buyer)
Under these terms, the farmers have to deliver 5,000 bushels of wheat to the cereal manufacturer in six months, and the cereal producer must pay the farmer $5 per bushel when that’s done, no matter what happens to the price of wheat in the meantime. If the price goes up to $7 a bushel, the farmers get less than they would have otherwise, but the cereal producer makes out. Alternatively, if the price goes down to $3 a bushel, the farmers still keep the stable income they need, and the cereal manufacturer is out more money than otherwise, but in the meantime, neither party had to stress over volatility in the wheat market.
Futures contracts take this concept, standardize its elements, and make it tradable on exchanges.
Futures Contracts
A futures contract is like a forward, but it’s done through an organized exchange, committing traders to buy or sell an underlying asset at a preset price on a future date. Like forwards, some contracts require physical delivery. But others are settled in cash, the amount of which is the difference between the agreed-upon price and the market price when the future date arrives.
Futures are traded through open outcry in trading pits in an auction or through electronic screen-based systems with centralized exchanges like the Chicago Mercantile Exchange. There are also cryptocurrency exchanges like Binance that trade futures, including those with and without an expiration date. The role of the futures exchange is not to buy or sell the contracts but to enable trades, ensure that they are legally conducted, check that they follow the exchange’s rules, and publish the trading prices. This last element is crucial for price discovery, helping other buyers and sellers find a mutually agreeable price based on supply and demand.
Since a futures contract is an obligation in the future, a trader can sell contracts without buying contracts first. Traders who sell more contracts than they buy have a short futures position, while traders who buy more contracts than they sell have a long futures position.
Futures Contract Example
Let’s make this concept concrete with an example. Suppose an airline wants to hedge against the risk of rising fuel prices. To manage this risk, it enters into a futures contract to buy crude oil at a predetermined price. At the same time, an oil company is trying to lock in a price for its oil in case prices fall. These transactions take place on a regulated exchange, ensuring standardized terms and avoiding the need for the parties to know each other directly.
Under these futures contracts, the airline agrees to buy, and the oil producer agrees to sell 1,000 barrels of crude oil for $60 per barrel on a certain date. Here’s what the details might look like:
Contract months: Crude oil futures are available for several months ahead, providing flexibility for hedging strategies. The airline might choose a contract with a delivery month that aligns with its predicted fuel needs, such as “CLZ24” for December 2024 delivery.
Contract size: The standard contract size for crude oil futures is 1,000 barrels. This standardization makes it easy to calculate the contract’s total value, which, at a trading price of $60 per barrel, would be $60,000.
Deliverable grade: This notes the quality and grade of the product that can be delivered under the contract. For crude oil futures, this includes details like how heavy the oil is and its sulfur content.
Exchange: The contract is traded on a regulated exchange like the New York Mercantile Exchange, where many contracts for crude oil are sold.
Last trading day: The final day on which trading can occur for the contract is usually a few business days before the delivery month begins. For crude oil futures, this might be the last trading day in the month preceding the contract month, ensuring all obligations are settled before delivery.
Price quoted in: Prices for crude oil futures are quoted per barrel.
Settlement type: Futures contracts can be settled through physical delivery of the underlying asset or cash settlement. For crude oil futures like “CLZ24,” physical delivery is more standard, though many participants close their positions before the delivery date to avoid actual delivery.
Tick size: The contract specifies the minimum tick size, which could be $0.01 per barrel for crude oil, translating to a $10 change in the contract’s total value for each tick movement.
Ticker: The specific contract for crude oil can be identified by a ticker symbol such as “CL” for crude oil, followed by a suffix for the delivery month and year—for example, “CLZ24” for a contract expiring in December 2024.
With forwards, there’s a risk that the other party won’t fulfill the contract. This is mitigated for futures by the exchange clearinghouse, which guarantees the contract. While each side is taking a risk that the price they pay now is close to the actual price at the settlement month, each party insures against the risk of a wide swing against them in oil prices.
Who Uses Futures?
Measured by volume, most futures are traded by commercial or institutional entities. Of these, most are hedgers looking to cut their risk of financial losses, as in our examples thus far. Buying futures for these traders is a form of insurance. Meanwhile, speculators trade futures contracts only to profit from price fluctuations. They don’t want the underlying assets but buy or sell futures based on their predictions about future prices.
Futures traders include arbitrageurs and spread traders, investors who use price discrepancies between different markets or related instruments to profit. They are a kind of speculator, buying and selling futures or other financial instruments to profit from cross-market price differences. They use sophisticated software to search markets for price discrepancies and execute trades quickly before they disappear.
Hedgers
Hedgers use futures contracts to mitigate the risk of price changes going too low when the time comes for them to sell an asset or increasing too much if they have to buy it later in the spot market. These traders include producers, consumers, or investors with exposure to the underlying asset who employ futures contracts to lock in prices, effectively insuring against price volatility.
Hedgers are not primarily motivated by profit but by the need to manage risk related to their business or investment portfolio.
Speculators
These are futures traders who aim to profit from price moves, betting that price will move in a direction favorable to their trades. Speculators do not intend to take delivery of the physical goods, if any are involved in the first place. Futures speculation adds greater liquidity to the market since more parties are buying and selling.
While they don’t make up most futures traders, many protections in the market guard against speculators profiteering or causing volatility that would affect everyday consumers and other industries. For example, speculation in futures markets for agricultural commodities like wheat, corn, and soybeans has been linked to significant price swings. The 2007–2008 global food crisis is a textbook example, given the dramatic increases in the prices of these staples at the time, with weather conditions and biofuel demand initially thought to be the cause. Ultimately, speculative trades took more of the blame for the price increases that hit consumers just as the financial crisis of that year was about to wreak widespread havoc.
A look at how it happened shows that hedging can turn into speculation, which can cause a major jump in prices. In early 2007, wheat prices began to climb because of bad weather conditions in key producing regions (e.g., Australia had a drought) and increased demand for grain used for food and biofuel. These problems were worsened by the lowest global wheat stockpiles in decades. Soon, there was a sharp rise in wheat futures prices, reaching record highs.
In February 2008, the price for wheat futures on the Chicago Board of Trade surged to over $13 per bushel from around $4 to $5 per bushel in the preceding years. This spike in wheat prices had consequences worldwide: Traders bought up contracts, speculating on future price gains, and suppliers and manufacturers, anticipating higher future costs, raised prices preemptively, directly affecting consumer prices for wheat and related products. This increased the cost of bread and other wheat-based products, posing severe challenges to food security for billions around the globe.
Types of Futures Traders
The futures market has diverse participants, each with distinct strategies, objectives, and roles. Among these are hedge funds, individual traders, and market makers, who collectively contribute to the liquidity, depth, and efficiency of the market.
Hedge Funds
Hedge funds are managed pools of capital with wide latitude in generating returns for their investors. In the futures market, they may participate as speculators, leveraging their substantial capital to bet on the direction of commodity prices, interest rates, indexes, and other assets. Hedge funds often employ sophisticated trading strategies, including long and short positions, to capitalize on predicted market moves. Their activities can significantly influence prices because of the large volumes of trades they execute.
Individual Traders
Individual traders trade futures contracts for their own accounts. They might speculate on price moves to profit from short-term fluctuations or hedge personal investments in other markets. Individual traders have different strategies, risk tolerance, and amounts of capital at stake. With the advent of electronic trading platforms, individual traders have easier access to futures markets, allowing them to participate alongside institutional investors.
Institutional Investors
Institutional investors include professional asset managers, pension funds, insurance companies, mutual funds, and endowments. They invest large sums of money in financial instruments, including futures contracts, on behalf of their stakeholders or beneficiaries. In the futures market, institutional investors may engage in hedging to protect their portfolios from adverse market moves or speculate on future price directions to enhance returns. Given the large volume of assets under management, institutional investors can significantly affect market prices through their trading activities.
Market Makers
Market makers provide market liquidity by staying ready to buy and sell futures contracts at publicly quoted prices. They profit from the spread between the buying and selling prices. By continually offering to buy and sell contracts, market makers help ensure enough volume for trades to be executed promptly, reducing market volatility and making it easier for investors to enter and exit their positions.
Proprietary Trading Firms
Proprietary trading firms trade their own capital, not that of clients. These firms are in the business of making speculative trades to benefit directly from market moves. Proprietary trading firms may employ high-frequency trading, arbitrage, and swing trading (entering trades at or near the end of a downward movement and exiting at a near-peak in an upward movement, or vice versa for short positions) to generate profits. They are significant players in the market because of their aggressive trading tactics, sophisticated technology, and ability to take on substantial risks. Unlike hedge funds, proprietary trading firms invest their own funds rather than manage external capital, which can lead to different risk management strategies.
What’s Traded in the Futures Market?
The range of assets underlying futures covers everything from agricultural products to financial indexes. As of early 2024, the most traded futures were in equities (65% of futures trading by volume), currencies (9%), interest rates (9%), energy (5%), agriculture (4%), and metals (4%).
Commodities
A commodity is a physical product whose value is determined primarily by the forces of supply and demand. This includes grains (corn, wheat, etc.), energy (such as natural gas or crude oil), and precious metals like gold or silver.
A commodity futures contract is an agreement to buy or sell a predetermined amount of some commodity at a given price on a specific date. Like all futures contracts, commodity futures can be used to hedge or protect an investment position or to bet on the directional movement of the underlying asset.
Individuals can enter the commodities futures market through a managed futures account, available through specialized brokerage firms called Commodity Trading Advisors.
Cryptocurrencies
Although relatively new to the futures market, cryptocurrency futures have quickly gained popularity, offering contracts on Bitcoin, Ethereum, and other digital currencies. These futures allow traders to speculate on future crypto price moves without having to hold the digital assets. Given the extreme volatility in cryptocurrency markets, futures allow investors to hedge their digital asset portfolios or speculate on price changes without the security issues and other hassles of holding crypto directly.
Currencies
Currency or forex trading involves making money or hedging risk in foreign exchange rate changes. A wide variety of currency futures contracts are available. Aside from popular contracts such as euro/U.S. dollar currency futures, there are also e-Micro Forex Futures contracts that trade at one-10th the size of regular currency futures contracts.
One strategy that speculators use to trade currencies is scalping, which tries to make short-term profits from incremental changes in the value of a currency. Doing this repeatedly means that your earnings could add up over time. In general, your time frame can be as short as one minute or may last several days. A scalping strategy requires strict discipline to continue making small, short-term profits while avoiding significant losses.
Currency futures should not be confused with spot forex trading, which is more prevalent among individual traders.
Energy Prices
Geopolitical events, supply disruptions, and changes in demand because of economic growth can significantly impact energy prices. As such, energy futures are among the most vital parts of the commodities market, including crude oil, natural gas, gasoline, and heating oil. These contracts are crucial for energy producers and consumers to hedge against the volatile nature of energy prices. Downstream, the use of them by utilities could mean more affordable prices for people heating their homes.
Indexes
Introduced in 1982 by the Chicago Mercantile Exchange with futures for the S&P 500, index futures, such as the e-mini S&P 500 index futures contract, are among the most popular for individual investors, with event futures featuring wagering yes or no on specific occurrences often tied to indexes as well. Index futures are a way to gain exposure to an entire index in a single contract. The Financial Industry Regulatory Authority requires a minimum of 25% of the total trade value as the minimum account balance. However, some brokerages will demand greater than this 25% margin.
Index futures are available for the Dow Jones Industrial Average and the Nasdaq 100, as well as their respective fractional value versions, e-mini Dow and e-mini Nasdaq 100 contracts. Index futures are also available for foreign markets, including the Frankfurt Exchange and the Hang Seng Index in Hong Kong.
Interest Rates
Interest rate futures are financial derivatives that allow investors to speculate on or hedge against future changes in interest rates. These futures include those for Treasury bills, notes, and bonds, as well as on interest rate benchmarks. Treasury futures allow investors to speculate on or hedge against changes in interest rates, which affect the value of Treasury securities. For example, T-note futures are widely used to hedge against fluctuations in 10-year Treasury note yields, which are benchmarks for mortgage and other important financial rates.
More generally, bond futures are contracts to buy or sell a specific bond at a predetermined price on a future date. Investors use these to hedge against or speculate on changes in bond prices, which inversely correlate with interest rates. As interest rates rise, bond prices typically fall, and vice versa. Investors, fund managers, and financial institutions use bond futures to protect their portfolios against interest rate changes or to take positions based on their interest rate outlook.
Metal Prices
Metals, including gold, silver, copper, and platinum, have futures that trade extensively. These contracts are used by miners, manufacturers, and investors to hedge against price volatility. Precious metals like gold and silver are often considered safe havens during times of economic uncertainty, while industrial metals like copper are sensitive to economic growth and industrial demand since they are essential in electronics and construction. Futures trading in metals enables price discovery and risk management, providing a way to lock in prices for future delivery or a cash substitute.
What Is the Difference Between Futures and Options Trading?
Futures and options are derivatives, financial instruments derived from the value of underlying assets like commodities, currencies, or indexes. The key difference lies in the obligations they impose on buyers and sellers.A futures contract is an agreement to buy or sell the underlying asset at a predetermined price on a specific future date, committing both parties to fulfill the contract at maturity. By contrast, an option gives the buyer the right, but not the obligation, to buy (the call option) or sell (the put option) the underlying asset at a set price before the option expires.This difference means that options offer a way to hedge against risk or speculate with a lower upfront investment compared with futures, where the potential for both gain and loss can be more significant because of the obligation to execute the contract.
What Are Event Futures?
Unlike traditional futures contracts, which are based on the price changes of physical commodities or financial instruments, event futures are based on the occurrence of particular events. These events can range from elections to changes in indexes and commodities prices. An event futures contract has a binary outcome: It settles at a predefined value if the event occurs (or a specific outcome is achieved) and settles at zero if the event doesn’t happen.
How Does Leverage Work in Futures Trading?
Leverage allows traders to control a large amount of the underlying asset with a relatively small amount of capital, known as margin.In futures contracts, leverage is used to amplify the potential returns from changes in the price of the underlying asset. It is a double-edged sword that can significantly increase potential profits and potential losses. When traders enter a futures contract, they must deposit a fraction of the contract’s total value, typically 5% to 15%, with their broker. This is known as the initial margin. Because traders only put down a fraction of the total value, they can gain exposure to a large position without committing the total amount of capital upfront.However, leverage also increases risk. If the market moves against the position, traders could face margin calls, requiring more funds to be deposited. If these margin requirements are not met, then the position may be closed at a loss. Therefore, while leverage can magnify gains, it can also magnify losses, sometimes exceeding the initial investment.
The Bottom Line
Futures trading allows investors to lock in prices for commodities, currencies, and financial instruments months or even years in advance, providing a critical tool for managing price risk and speculation. While futures were limited to commodities when first introduced, they now cover a wide range of events and market moves, enabling investors to hedge against unfavorable market shifts or the chance to profit from price volatility without requiring the physical exchange of the underlying asset.
Traders should carefully consider their risk tolerance and engage in futures judiciously, employing risk management strategies such as stop-loss orders to protect against significant losses.
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"https://www.investopedia.com/terms/m/margincall.asp"
],
[
"stop-loss orders",
"https://www.investopedia.com/terms/s/stop-lossorder.asp"
]
] |
https://www.investopedia.com/terms/o/officeaudit.asp
|
Office Audit: What It is, How it Works, Other Types
|
<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-office-audit"></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 Office Audit? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An office audit is an examination of a taxpayer's records by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irs.asp" rel="noopener noreferrer">Internal Revenue Service</a> (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws. Generally more comprehensive than a correspondence audit but less so than a field audit, an office audit is used when agents require some face-to-face investigation.
</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>An office audit is an examination of a taxpayer's records by the Internal Revenue Service (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws.</li><li>Office audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer and also identifies which records the audit will review.</li><li>The IRS may select a tax return for an office audit at random as part of routine compliance efforts.<span class="ql-inline-citation" data-cite="2"></span></li><li>Other types of audits include correspondence audits, which occur via U.S. mail, and field audits, which take place at a taxpayer or business owner's office or home.</li><li>IRS Publication 556 provides details on examination and office audit procedures.<span class="ql-inline-citation" data-cite="1"></span></li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-office-audits"></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 Office Audits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In an office audit, a representative from the Internal Revenue Service (IRS) interviews the taxpayer and inspects the taxpayer's records in-person, usually at an IRS office. The purpose of an office audit is to make sure the taxpayer is accurately reporting income and deductions and paying the lawful amount of tax.
</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"> These audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer. This notice also identifies which records the audit will review.
</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 IRS may select a tax return for an office audit at random as part of routine compliance efforts. A tax return may also be selected because of suspected errors based on mismatched documents or the examination of related taxpayers' returns.<span class="ql-inline-citation" data-cite="2"></span> IRS Publication 556 provides details on examination and audit procedures.<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>
<span class="heading-toc" id="toc-other-types-of-audits"></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"> Other Types of Audits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> The IRS generally conducts the business of an audit in one of three ways: a correspondence audit, an office audit, or a field audit. Of these, a correspondence audit is the most common (and generally considered to be the least serious form of audit). The field audit is the least common and is most often a sign of extensive issues that need to be resolved. An office audit is a middle ground between the two.
</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 or your business is audited—regardless of the audit type—contacting an attorney about the matter is advisable. </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"> Correspondence Audit </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/c/correspondence-audit.asp" rel="noopener noreferrer">Correspondence audits</a> are conducted via mail. These sorts of audits are generally used for less complex problems that involve smaller amounts of money. With correspondence audits, so long as the taxpayer has evidence, the audit is closed.
</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"> Field Audit </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/f/field-audit.asp" rel="noopener noreferrer">field audit</a> is the most comprehensive type of common tax audit. In a field audit, IRS agents come to the taxpayer's office, home, or accountant's office to investigate tax records, consider evidence, and verify that all taxes were paid and documented correctly.
</p></div>
|
## What Is an Office Audit?
An office audit is an examination of a taxpayer's records by the [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws. Generally more comprehensive than a correspondence audit but less so than a field audit, an office audit is used when agents require some face-to-face investigation.
### Key Takeaways
* An office audit is an examination of a taxpayer's records by the Internal Revenue Service (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws.
* Office audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer and also identifies which records the audit will review.
* The IRS may select a tax return for an office audit at random as part of routine compliance efforts.
* Other types of audits include correspondence audits, which occur via U.S. mail, and field audits, which take place at a taxpayer or business owner's office or home.
* IRS Publication 556 provides details on examination and office audit procedures.
## Understanding Office Audits
In an office audit, a representative from the Internal Revenue Service (IRS) interviews the taxpayer and inspects the taxpayer's records in-person, usually at an IRS office. The purpose of an office audit is to make sure the taxpayer is accurately reporting income and deductions and paying the lawful amount of tax.
These audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer. This notice also identifies which records the audit will review.
The IRS may select a tax return for an office audit at random as part of routine compliance efforts. A tax return may also be selected because of suspected errors based on mismatched documents or the examination of related taxpayers' returns. IRS Publication 556 provides details on examination and audit procedures.
## Other Types of Audits
The IRS generally conducts the business of an audit in one of three ways: a correspondence audit, an office audit, or a field audit. Of these, a correspondence audit is the most common (and generally considered to be the least serious form of audit). The field audit is the least common and is most often a sign of extensive issues that need to be resolved. An office audit is a middle ground between the two.
###
If you or your business is audited—regardless of the audit type—contacting an attorney about the matter is advisable.
### Correspondence Audit
[Correspondence audits](https://www.investopedia.com/terms/c/correspondence-audit.asp) are conducted via mail. These sorts of audits are generally used for less complex problems that involve smaller amounts of money. With correspondence audits, so long as the taxpayer has evidence, the audit is closed.
### Field Audit
A [field audit](https://www.investopedia.com/terms/f/field-audit.asp) is the most comprehensive type of common tax audit. In a field audit, IRS agents come to the taxpayer's office, home, or accountant's office to investigate tax records, consider evidence, and verify that all taxes were paid and documented correctly.
|
What Is an Office Audit?
An office audit is an examination of a taxpayer's records by the Internal Revenue Service (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws. Generally more comprehensive than a correspondence audit but less so than a field audit, an office audit is used when agents require some face-to-face investigation.
Key Takeaways
An office audit is an examination of a taxpayer's records by the Internal Revenue Service (IRS) from its offices, and not at the taxpayer's home or office, to ensure compliance with tax laws.Office audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer and also identifies which records the audit will review.The IRS may select a tax return for an office audit at random as part of routine compliance efforts.Other types of audits include correspondence audits, which occur via U.S. mail, and field audits, which take place at a taxpayer or business owner's office or home.IRS Publication 556 provides details on examination and office audit procedures.
Understanding Office Audits
In an office audit, a representative from the Internal Revenue Service (IRS) interviews the taxpayer and inspects the taxpayer's records in-person, usually at an IRS office. The purpose of an office audit is to make sure the taxpayer is accurately reporting income and deductions and paying the lawful amount of tax.
These audits often only cover a few specific issues identified by the IRS in a written notice to the taxpayer. This notice also identifies which records the audit will review.
The IRS may select a tax return for an office audit at random as part of routine compliance efforts. A tax return may also be selected because of suspected errors based on mismatched documents or the examination of related taxpayers' returns. IRS Publication 556 provides details on examination and audit procedures.
Other Types of Audits
The IRS generally conducts the business of an audit in one of three ways: a correspondence audit, an office audit, or a field audit. Of these, a correspondence audit is the most common (and generally considered to be the least serious form of audit). The field audit is the least common and is most often a sign of extensive issues that need to be resolved. An office audit is a middle ground between the two.
If you or your business is audited—regardless of the audit type—contacting an attorney about the matter is advisable.
Correspondence Audit
Correspondence audits are conducted via mail. These sorts of audits are generally used for less complex problems that involve smaller amounts of money. With correspondence audits, so long as the taxpayer has evidence, the audit is closed.
Field Audit
A field audit is the most comprehensive type of common tax audit. In a field audit, IRS agents come to the taxpayer's office, home, or accountant's office to investigate tax records, consider evidence, and verify that all taxes were paid and documented correctly.
|
[
[
"Internal Revenue Service",
"https://www.investopedia.com/terms/i/irs.asp"
],
[
"Correspondence audits",
"https://www.investopedia.com/terms/c/correspondence-audit.asp"
],
[
"field audit",
"https://www.investopedia.com/terms/f/field-audit.asp"
]
] |
https://www.investopedia.com/the-impact-of-cancelling-student-debt-5101053
|
The Impact of Canceling Student Debt
|
<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"> President Joe Biden’s efforts to cancel <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-debt.asp">student debt</a> for eligible borrowers would be welcomed relief and life-changing for many U.S. adults and families. Canceling this debt would be of particular benefit to households of color. But for people who never went to college or who have already paid off their loans, the impact would be minimal, and the economic impact may not be as positive as some think.
</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 2022, the Biden-Harris administration announced a three-part student debt relief plan, which would have forgiven up to $10,000 in federal <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loans-4689727">student loans</a> for those making less than $125,000 (or $250,000 for married couples) annually.</li>
<li>Borrowers who received Pell Grants would have been eligible for up to $20,000 in forgiveness.</li>
<li>Federal student loan payments were paused during the pandemic but resumed in the fall of 2023.</li>
<li>After the U.S. Supreme Court invalidated his original plan to forgive student loan debt, President Biden announced the Saving on a Valuable Education (SAVE) Plan, which is an alternative approach to forgiving student loan debt.<br/></li>
<li>The SAVE Plan officially became available to student loan borrowers in August 2023.</li>
</ul></div></div></div>
<span class="heading-toc" id="toc-what-is-bidens-plan-to-cancel-student-debt"></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 Biden’s Plan to Cancel Student Debt? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> On Aug. 24, 2022, the Biden-Harris administration announced its long-term student debt relief plan, but it was overruled by the U.S. Supreme Court in June 2023.<span class="ql-inline-citation" data-cite="31"></span><span class="ql-inline-citation" data-cite="23"></span> The plan featured three prongs:
</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>Borrowers earning less than $125,000 per year would have been eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household who make up to $250,000 still would have been eligible. Those who received the income-based <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pell-grant.asp">Pell Grant</a> while students would have been eligible for up to $20,000 in forgiveness.</li>
<li>The pause on federal student loan payments would end on Sept. 1, 2023.</li>
<li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/income-driven-repayment-plans-7562851">Income-driven repayment (IDR) plans</a> would have been capped at 5% of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discretionaryincome.asp">discretionary income</a> rather than the current 10%.</li>
</ol>
<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 application process for student loan <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/forbearance.asp">forbearance</a> was briefly opened, but legal challenges prompted the U.S. Department of Education to stop accepting applications indefinitely and pause processing applications that already were submitted.<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_11-0"></div>
<div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_12-0"><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_13-0"><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>President Biden announced the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022">Saving on a Valuable Education (SAVE) Plan</a> on June 30, 2023, which officially became available to student loan borrowers in August 2023. The plan cuts payments on undergraduate loans in half, reduces some borrowers’ monthly loan payments to $0, ensures that balances don’t grow as long as payments are kept up to date, and provides early forgiveness for low-balance borrowers.<span class="ql-inline-citation" data-cite="30"></span><span class="ql-inline-citation" data-cite="25"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> While the debt forgiveness plan was ultimately rejected by the Supreme Court, the administration continued to pursue alternative measures for debt relief through loan forgiveness and income-driven repayment (IDR) plans. The pause on student loan interest ultimately ended on Sept. 1, 2023, and payments resumed on Oct. 1, 2023.<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_15-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Note that while the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/american-rescue-plan-definition-5095694">American Rescue Plan</a> makes student loan forgiveness granted from Jan. 1, 2021, to Dec. 31, 2025, tax-free at the federal level, some states may see it differently.<span class="ql-inline-citation" data-cite="5"></span> Currently, forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.<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_17-0"></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/s/student-loan-forgiveness.asp">Student loan forgiveness</a> would apply to certain federal loans held by the Department of Education. Private loans are ineligible for forgiveness.<span class="ql-inline-citation" data-cite="32"></span><br/>
</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-positive-impacts-of-canceling-student-debt"></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"> Positive Impacts of Canceling Student Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe loan forgiveness also would 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> as borrowers could use that money for other purposes, such as buying a home.
</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 have $35,000 in student loan debt, and pay $300 per month on the loan with a 4.66% <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>, over the course of 13 years, you’ll pay almost $12,000 in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>. By canceling $10,000 of that student debt, you could save about $6,000 and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844">pay off the rest of your debt</a> five years sooner.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cost-cancel-student-debt-8585118">Canceling student debt</a> could be of particular benefit to lower-income borrowers, especially <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-race-5193137">women and people of color</a>. An academic paper in 2020 maintained that the “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness.”<span class="ql-inline-citation" data-cite="3"></span> Those are higher amounts than President Biden has suggested, but would be in keeping with his administration’s initiatives to address racial equity.<br/>
</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-warning" 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_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/refinance-student-loans-5323837">Refinancing your federal student loans</a> into private student loans could mean losing eligibility for student loan forgiveness.<span class="ql-inline-citation" data-cite="27"></span></p></div></div></div>
<span class="heading-toc" id="toc-negative-impacts-of-canceling-student-debt"></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"> Negative Impacts of Canceling Student Debt </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people: college students. While more than 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.<span class="ql-inline-citation" data-cite="31"></span><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_31-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In addition to concern regarding the fairness of the plan, it also is not without its costs. Fiscal experts estimate that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cost-cancel-student-debt-8585118">loan cancellation</a> would cost $519 billion over the course of a 10-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp#toc-income-driven-repayment-plan-forgiveness">income-driven repayment (IDR)</a> program, and the total sticker price could be near $1 trillion.<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_33-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,500 per taxpayer, whether they went to college or not.<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_35-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget said they would expect student loan debt to return to $1.6 trillion by 2028.<span class="ql-inline-citation" data-cite="13"></span> Since the plan does nothing to dampen higher education costs, it has no impact on current and future students facing historically high education costs.
</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"> Student loan debt cancellation may have another negative impact: higher <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp">inflation</a> rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000 to $20,000 for millions of borrowers could push <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> rates even higher, with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pce.asp">personal consumption expenditure (PCE)</a> inflation increasing by 15 to 27 basis points.<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_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_4-0"></h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>If federal student loan forgiveness does not go through and you are not able to get relief, then you may want to consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-consolidation-definition-4684455">loan consolidation</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-student-loan-refinance-companies-4782684">student loan refinancing</a>.</p></div></div></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-do-i-have-to-have-a-certain-type-of-loan-to-qualify-for-forgiveness"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes. The student debt relief plan applies only to federal loans held by the U.S. Department of Education. Those loans include undergraduate and graduate direct loans, Federal Family Education Loans (FFELs) and Perkins Loans held by the Department of Education, and certain defaulted loans held by the Department of Education.<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_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-are-three-pros-of-canceling-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Three Pros of Canceling Student Loan Debt?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Three of the major arguments in favor of broad student debt cancellation are:</p><ul><li>Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-debt-affect-economy-8550501">boost the national economy</a> by making it more affordable for borrowers to participate in it.</li><li>Due to a combination of family income, generational wealth, and other factors, student loan debt is disproportionately held by Black borrowers compared to their White counterparts. Canceling student debt could go a ways toward narrowing the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-racial-wealth-gap-5105010">racial wealth gap</a>.</li><li>High debt burdens have prevented an entire generation from achieving life milestones like getting married, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/get-mortgage-student-loan-debt-8551933">purchasing a home</a>, or even saving for retirement. Lessening the student debt burden would likely improve financial and personal well-being, credit, job stability and satisfaction, and even family stability for thousands of people, in addition to allowing more people to enjoy homeownership earlier in life, the capacity to build an emergency fund, human capital investments, and the accumulation of wealth.<span class="ql-inline-citation" data-cite="28"></span></li></ul></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-enrollment-in-the-saving-on-a-valuable-education-save-plan-automatic"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Enrollment in the Saving on a Valuable Education (SAVE) Plan Automatic?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>It depends. Borrowers who are already enrolled in the Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in the new Saving on a Valuable Education (SAVE) Plan. Other borrowers will have to submit an application in order to qualify for forgiveness.<span class="ql-inline-citation" data-cite="33"></span></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"> Though there is a general consensus that higher education reform, particularly in regard to costs, is desirable, experts are divided as to whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.
</p></div>
|
President Joe Biden’s efforts to cancel [student debt](https://www.investopedia.com/terms/s/student-debt.asp) for eligible borrowers would be welcomed relief and life-changing for many U.S. adults and families. Canceling this debt would be of particular benefit to households of color. But for people who never went to college or who have already paid off their loans, the impact would be minimal, and the economic impact may not be as positive as some think.
### Key Takeaways
* In 2022, the Biden-Harris administration announced a three-part student debt relief plan, which would have forgiven up to $10,000 in federal [student loans](https://www.investopedia.com/student-loans-4689727) for those making less than $125,000 (or $250,000 for married couples) annually.
* Borrowers who received Pell Grants would have been eligible for up to $20,000 in forgiveness.
* Federal student loan payments were paused during the pandemic but resumed in the fall of 2023.
* After the U.S. Supreme Court invalidated his original plan to forgive student loan debt, President Biden announced the Saving on a Valuable Education (SAVE) Plan, which is an alternative approach to forgiving student loan debt.
* The SAVE Plan officially became available to student loan borrowers in August 2023.
## What Is Biden’s Plan to Cancel Student Debt?
On Aug. 24, 2022, the Biden-Harris administration announced its long-term student debt relief plan, but it was overruled by the U.S. Supreme Court in June 2023. The plan featured three prongs:
1. Borrowers earning less than $125,000 per year would have been eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household who make up to $250,000 still would have been eligible. Those who received the income-based [Pell Grant](https://www.investopedia.com/terms/p/pell-grant.asp) while students would have been eligible for up to $20,000 in forgiveness.
2. The pause on federal student loan payments would end on Sept. 1, 2023.
3. [Income-driven repayment (IDR) plans](https://www.investopedia.com/income-driven-repayment-plans-7562851) would have been capped at 5% of [discretionary income](https://www.investopedia.com/terms/d/discretionaryincome.asp) rather than the current 10%.
The application process for student loan [forbearance](https://www.investopedia.com/terms/f/forbearance.asp) was briefly opened, but legal challenges prompted the U.S. Department of Education to stop accepting applications indefinitely and pause processing applications that already were submitted.
###
President Biden announced the [Saving on a Valuable Education (SAVE) Plan](https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022) on June 30, 2023, which officially became available to student loan borrowers in August 2023. The plan cuts payments on undergraduate loans in half, reduces some borrowers’ monthly loan payments to $0, ensures that balances don’t grow as long as payments are kept up to date, and provides early forgiveness for low-balance borrowers.
While the debt forgiveness plan was ultimately rejected by the Supreme Court, the administration continued to pursue alternative measures for debt relief through loan forgiveness and income-driven repayment (IDR) plans. The pause on student loan interest ultimately ended on Sept. 1, 2023, and payments resumed on Oct. 1, 2023.
Note that while the [American Rescue Plan](https://www.investopedia.com/american-rescue-plan-definition-5095694) makes student loan forgiveness granted from Jan. 1, 2021, to Dec. 31, 2025, tax-free at the federal level, some states may see it differently. Currently, forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
[Student loan forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) would apply to certain federal loans held by the Department of Education. Private loans are ineligible for forgiveness.
## Positive Impacts of Canceling Student Debt
Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe loan forgiveness also would stimulate the [economy](https://www.investopedia.com/terms/e/economy.asp) as borrowers could use that money for other purposes, such as buying a home.
For example, if you have $35,000 in student loan debt, and pay $300 per month on the loan with a 4.66% [interest rate](https://www.investopedia.com/terms/i/interestrate.asp), over the course of 13 years, you’ll pay almost $12,000 in [interest](https://www.investopedia.com/terms/i/interest.asp). By canceling $10,000 of that student debt, you could save about $6,000 and [pay off the rest of your debt](https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844) five years sooner.
[Canceling student debt](https://www.investopedia.com/cost-cancel-student-debt-8585118) could be of particular benefit to lower-income borrowers, especially [women and people of color](https://www.investopedia.com/student-loan-debt-by-race-5193137). An academic paper in 2020 maintained that the “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness.” Those are higher amounts than President Biden has suggested, but would be in keeping with his administration’s initiatives to address racial equity.
###
[Refinancing your federal student loans](https://www.investopedia.com/refinance-student-loans-5323837) into private student loans could mean losing eligibility for student loan forgiveness.
## Negative Impacts of Canceling Student Debt
Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people: college students. While more than 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.
In addition to concern regarding the fairness of the plan, it also is not without its costs. Fiscal experts estimate that [loan cancellation](https://www.investopedia.com/cost-cancel-student-debt-8585118) would cost $519 billion over the course of a 10-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new [income-driven repayment (IDR)](https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp#toc-income-driven-repayment-plan-forgiveness) program, and the total sticker price could be near $1 trillion.
That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,500 per taxpayer, whether they went to college or not.
While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget said they would expect student loan debt to return to $1.6 trillion by 2028. Since the plan does nothing to dampen higher education costs, it has no impact on current and future students facing historically high education costs.
Student loan debt cancellation may have another negative impact: higher [inflation](https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp) rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000 to $20,000 for millions of borrowers could push [inflation](https://www.investopedia.com/terms/i/inflation.asp) rates even higher, with [personal consumption expenditure (PCE)](https://www.investopedia.com/terms/p/pce.asp) inflation increasing by 15 to 27 basis points.
###
If federal student loan forgiveness does not go through and you are not able to get relief, then you may want to consider [loan consolidation](https://www.investopedia.com/student-loan-consolidation-definition-4684455) or [student loan refinancing](https://www.investopedia.com/best-student-loan-refinance-companies-4782684).
## Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?
Yes. The student debt relief plan applies only to federal loans held by the U.S. Department of Education. Those loans include undergraduate and graduate direct loans, Federal Family Education Loans (FFELs) and Perkins Loans held by the Department of Education, and certain defaulted loans held by the Department of Education.
## What Are Three Pros of Canceling Student Loan Debt?
Three of the major arguments in favor of broad student debt cancellation are:
* Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help [boost the national economy](https://www.investopedia.com/student-debt-affect-economy-8550501) by making it more affordable for borrowers to participate in it.
* Due to a combination of family income, generational wealth, and other factors, student loan debt is disproportionately held by Black borrowers compared to their White counterparts. Canceling student debt could go a ways toward narrowing the [racial wealth gap](https://www.investopedia.com/the-racial-wealth-gap-5105010).
* High debt burdens have prevented an entire generation from achieving life milestones like getting married, [purchasing a home](https://www.investopedia.com/get-mortgage-student-loan-debt-8551933), or even saving for retirement. Lessening the student debt burden would likely improve financial and personal well-being, credit, job stability and satisfaction, and even family stability for thousands of people, in addition to allowing more people to enjoy homeownership earlier in life, the capacity to build an emergency fund, human capital investments, and the accumulation of wealth.
## Is Enrollment in the Saving on a Valuable Education (SAVE) Plan Automatic?
It depends. Borrowers who are already enrolled in the Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in the new Saving on a Valuable Education (SAVE) Plan. Other borrowers will have to submit an application in order to qualify for forgiveness.
## The Bottom Line
Though there is a general consensus that higher education reform, particularly in regard to costs, is desirable, experts are divided as to whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.
|
President Joe Biden’s efforts to cancel student debt for eligible borrowers would be welcomed relief and life-changing for many U.S. adults and families. Canceling this debt would be of particular benefit to households of color. But for people who never went to college or who have already paid off their loans, the impact would be minimal, and the economic impact may not be as positive as some think.
Key Takeaways
In 2022, the Biden-Harris administration announced a three-part student debt relief plan, which would have forgiven up to $10,000 in federal student loans for those making less than $125,000 (or $250,000 for married couples) annually.
Borrowers who received Pell Grants would have been eligible for up to $20,000 in forgiveness.
Federal student loan payments were paused during the pandemic but resumed in the fall of 2023.
After the U.S. Supreme Court invalidated his original plan to forgive student loan debt, President Biden announced the Saving on a Valuable Education (SAVE) Plan, which is an alternative approach to forgiving student loan debt.
The SAVE Plan officially became available to student loan borrowers in August 2023.
What Is Biden’s Plan to Cancel Student Debt?
On Aug. 24, 2022, the Biden-Harris administration announced its long-term student debt relief plan, but it was overruled by the U.S. Supreme Court in June 2023. The plan featured three prongs:
Borrowers earning less than $125,000 per year would have been eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household who make up to $250,000 still would have been eligible. Those who received the income-based Pell Grant while students would have been eligible for up to $20,000 in forgiveness.
The pause on federal student loan payments would end on Sept. 1, 2023.
Income-driven repayment (IDR) plans would have been capped at 5% of discretionary income rather than the current 10%.
The application process for student loan forbearance was briefly opened, but legal challenges prompted the U.S. Department of Education to stop accepting applications indefinitely and pause processing applications that already were submitted.
President Biden announced the Saving on a Valuable Education (SAVE) Plan on June 30, 2023, which officially became available to student loan borrowers in August 2023. The plan cuts payments on undergraduate loans in half, reduces some borrowers’ monthly loan payments to $0, ensures that balances don’t grow as long as payments are kept up to date, and provides early forgiveness for low-balance borrowers.
While the debt forgiveness plan was ultimately rejected by the Supreme Court, the administration continued to pursue alternative measures for debt relief through loan forgiveness and income-driven repayment (IDR) plans. The pause on student loan interest ultimately ended on Sept. 1, 2023, and payments resumed on Oct. 1, 2023.
Note that while the American Rescue Plan makes student loan forgiveness granted from Jan. 1, 2021, to Dec. 31, 2025, tax-free at the federal level, some states may see it differently. Currently, forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
Student loan forgiveness would apply to certain federal loans held by the Department of Education. Private loans are ineligible for forgiveness.
Positive Impacts of Canceling Student Debt
Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe loan forgiveness also would stimulate the economy as borrowers could use that money for other purposes, such as buying a home.
For example, if you have $35,000 in student loan debt, and pay $300 per month on the loan with a 4.66% interest rate, over the course of 13 years, you’ll pay almost $12,000 in interest. By canceling $10,000 of that student debt, you could save about $6,000 and pay off the rest of your debt five years sooner.
Canceling student debt could be of particular benefit to lower-income borrowers, especially women and people of color. An academic paper in 2020 maintained that the “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness.” Those are higher amounts than President Biden has suggested, but would be in keeping with his administration’s initiatives to address racial equity.
Refinancing your federal student loans into private student loans could mean losing eligibility for student loan forgiveness.
Negative Impacts of Canceling Student Debt
Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people: college students. While more than 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.
In addition to concern regarding the fairness of the plan, it also is not without its costs. Fiscal experts estimate that loan cancellation would cost $519 billion over the course of a 10-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new income-driven repayment (IDR) program, and the total sticker price could be near $1 trillion.
That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,500 per taxpayer, whether they went to college or not.
While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget said they would expect student loan debt to return to $1.6 trillion by 2028. Since the plan does nothing to dampen higher education costs, it has no impact on current and future students facing historically high education costs.
Student loan debt cancellation may have another negative impact: higher inflation rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000 to $20,000 for millions of borrowers could push inflation rates even higher, with personal consumption expenditure (PCE) inflation increasing by 15 to 27 basis points.
If federal student loan forgiveness does not go through and you are not able to get relief, then you may want to consider loan consolidation or student loan refinancing.
Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?
Yes. The student debt relief plan applies only to federal loans held by the U.S. Department of Education. Those loans include undergraduate and graduate direct loans, Federal Family Education Loans (FFELs) and Perkins Loans held by the Department of Education, and certain defaulted loans held by the Department of Education.
What Are Three Pros of Canceling Student Loan Debt?
Three of the major arguments in favor of broad student debt cancellation are:Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it.Due to a combination of family income, generational wealth, and other factors, student loan debt is disproportionately held by Black borrowers compared to their White counterparts. Canceling student debt could go a ways toward narrowing the racial wealth gap.High debt burdens have prevented an entire generation from achieving life milestones like getting married, purchasing a home, or even saving for retirement. Lessening the student debt burden would likely improve financial and personal well-being, credit, job stability and satisfaction, and even family stability for thousands of people, in addition to allowing more people to enjoy homeownership earlier in life, the capacity to build an emergency fund, human capital investments, and the accumulation of wealth.
Is Enrollment in the Saving on a Valuable Education (SAVE) Plan Automatic?
It depends. Borrowers who are already enrolled in the Revised Pay as You Earn (REPAYE) plan will be automatically enrolled in the new Saving on a Valuable Education (SAVE) Plan. Other borrowers will have to submit an application in order to qualify for forgiveness.
The Bottom Line
Though there is a general consensus that higher education reform, particularly in regard to costs, is desirable, experts are divided as to whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.
|
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"https://www.investopedia.com/terms/s/student-loan-forgiveness.asp"
],
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"https://www.investopedia.com/terms/i/interest.asp"
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"pay off the rest of your debt",
"https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844"
],
[
"Canceling student debt",
"https://www.investopedia.com/cost-cancel-student-debt-8585118"
],
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"women and people of color",
"https://www.investopedia.com/student-loan-debt-by-race-5193137"
],
[
"Refinancing your federal student loans",
"https://www.investopedia.com/refinance-student-loans-5323837"
],
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"loan cancellation",
"https://www.investopedia.com/cost-cancel-student-debt-8585118"
],
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"income-driven repayment (IDR)",
"https://www.investopedia.com/articles/personal-finance/051214/debt-forgiveness-how-get-out-paying-your-student-loans.asp#toc-income-driven-repayment-plan-forgiveness"
],
[
"inflation",
"https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp"
],
[
"inflation",
"https://www.investopedia.com/terms/i/inflation.asp"
],
[
"personal consumption expenditure (PCE)",
"https://www.investopedia.com/terms/p/pce.asp"
],
[
"loan consolidation",
"https://www.investopedia.com/student-loan-consolidation-definition-4684455"
],
[
"student loan refinancing",
"https://www.investopedia.com/best-student-loan-refinance-companies-4782684"
],
[
"boost the national economy",
"https://www.investopedia.com/student-debt-affect-economy-8550501"
],
[
"racial wealth gap",
"https://www.investopedia.com/the-racial-wealth-gap-5105010"
],
[
"purchasing a home",
"https://www.investopedia.com/get-mortgage-student-loan-debt-8551933"
]
] |
https://www.investopedia.com/paramount-stock-falls-with-four-board-members-reportedly-stepping-down-amid-merger-talks-8629648
|
Paramount Stock Falls With Four Board Members Reportedly Stepping Down Amid Merger Talks
|
<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>Paramount shares lost ground Wednesday following a report four members of Paramount Global's board will step down amid merger talks. </li><li>Three of those leaving are members of a special committee looking into a possible sale, <em>The Wall Street Journal </em>reported.</li><li>Earlier in the week, Matrix Asset Advisors had blasted a potential deal between controlling shareholder Shari Redstone and David Ellison's Skydance Media.</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"> Paramount Global (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=PARA">PARA</a>) shares fell over 4% Wednesday following a report four members of the company's board will step down 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"> Board members Dawn Ostroff, Nicole Seligman, Frederick Terrell, and Rob Klieger are expected to resign in the coming weeks, and the company may be announcing the departures in a regulatory filing as early as this week, <em>The Wall Street Journal </em>reported.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Ostroff, Terrell, and Seligman are members of a special committee looking into a potential buyers of Paramount, as controlling stakeholder Shari Redstone reportedly engages in merger talks with David Ellison’s Skydance Media.
</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 news came just days after large investor Matrix Asset Advisors <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/paramount-global-stock-plunges-as-shareholder-blasts-possible-deal-with-skydance-8628484">wrote a letter</a> to the board criticizing the possible Skydance deal as “detrimental” to the company and demanding members reconsider what’s believed to be a $26 billion to $27 billion offer from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateequity.asp">private equity</a> firm Apollo Management Group that the board turned down.<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_10-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Paramount Global shares finished 4.3% lower at $10.50 Wednesday. They've lost about 27% of their value year to date.
</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:70.2%;">
<img alt="PARA" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/wFk-YskyzWatg-_PSLeObsWHH4M=/1414x0/filters:no_upscale():max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/10kXDHYsMYnRoqUFFcm3f4gF5KI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png" data-srcset="https://www.investopedia.com/thmb/mC1we7szN_SSetUtJWL2VrPuLXc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png 750w" data-tracking-container="true" height="994" id="mntl-sc-block-image_1-0" width="1414"/>
<noscript>
<img alt="PARA" class="img--noscript universal-image__image" height="994" sizes="750px" src="https://www.investopedia.com/thmb/10kXDHYsMYnRoqUFFcm3f4gF5KI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png" srcset="https://www.investopedia.com/thmb/mC1we7szN_SSetUtJWL2VrPuLXc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png 750w" width="1414"/>
</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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* Paramount shares lost ground Wednesday following a report four members of Paramount Global's board will step down amid merger talks.
* Three of those leaving are members of a special committee looking into a possible sale, *The Wall Street Journal* reported.
* Earlier in the week, Matrix Asset Advisors had blasted a potential deal between controlling shareholder Shari Redstone and David Ellison's Skydance Media.
Paramount Global ([PARA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PARA)) shares fell over 4% Wednesday following a report four members of the company's board will step down soon.
Board members Dawn Ostroff, Nicole Seligman, Frederick Terrell, and Rob Klieger are expected to resign in the coming weeks, and the company may be announcing the departures in a regulatory filing as early as this week, *The Wall Street Journal* reported.
Ostroff, Terrell, and Seligman are members of a special committee looking into a potential buyers of Paramount, as controlling stakeholder Shari Redstone reportedly engages in merger talks with David Ellison’s Skydance Media.
The news came just days after large investor Matrix Asset Advisors [wrote a letter](https://www.investopedia.com/paramount-global-stock-plunges-as-shareholder-blasts-possible-deal-with-skydance-8628484) to the board criticizing the possible Skydance deal as “detrimental” to the company and demanding members reconsider what’s believed to be a $26 billion to $27 billion offer from [private equity](https://www.investopedia.com/terms/p/privateequity.asp) firm Apollo Management Group that the board turned down.
Paramount Global shares finished 4.3% lower at $10.50 Wednesday. They've lost about 27% of their value year to date.
![PARA]()
:max_bytes(150000):strip_icc()/PARA_2024-04-10_16-48-53-8cf61c9e42f14401ba8b4a4653d5b14b.png)
TradingView
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
Paramount shares lost ground Wednesday following a report four members of Paramount Global's board will step down amid merger talks. Three of those leaving are members of a special committee looking into a possible sale, The Wall Street Journal reported.Earlier in the week, Matrix Asset Advisors had blasted a potential deal between controlling shareholder Shari Redstone and David Ellison's Skydance Media.
Paramount Global (PARA) shares fell over 4% Wednesday following a report four members of the company's board will step down soon.
Board members Dawn Ostroff, Nicole Seligman, Frederick Terrell, and Rob Klieger are expected to resign in the coming weeks, and the company may be announcing the departures in a regulatory filing as early as this week, The Wall Street Journal reported.
Ostroff, Terrell, and Seligman are members of a special committee looking into a potential buyers of Paramount, as controlling stakeholder Shari Redstone reportedly engages in merger talks with David Ellison’s Skydance Media.
The news came just days after large investor Matrix Asset Advisors wrote a letter to the board criticizing the possible Skydance deal as “detrimental” to the company and demanding members reconsider what’s believed to be a $26 billion to $27 billion offer from private equity firm Apollo Management Group that the board turned down.
Paramount Global shares finished 4.3% lower at $10.50 Wednesday. They've lost about 27% of their value year to date.
TradingView
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/where-to-stash-your-graduation-gift-money-and-earn-5-percent-or-more-8644726
|
Where to Stash Graduation Gift Money to Earn 5% or More
|
<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>If you've received gift money for graduation, consider socking it away where it can earn a great return.</li>
<li>The timing almost couldn't be better—savings accounts and CDs are paying at or near their highest rates in 20 years.</li>
<li>Our daily ranking of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">the best high-yield savings accounts</a> includes rates up to 5.55% on accounts that let you withdraw at any time.</li>
<li>Can you commit to saving for several months? Today's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best nationwide CDs</a> pay as much as 5.65% and guarantee your rate into the future.</li>
<li>A combo strategy using a high-yield savings account plus a CD is a smart way to boost earnings <em>and</em> keep some savings where you can access it quickly.</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 full article continues below these offers from our partners.
</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 mntl-sc-block-tool mntl-block mntl-sc-block--ma-rate-table--finance-mma" id="mntl-sc-block_5-0"><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_6-0"></div>
<span class="heading-toc" id="toc-high-yield-savings-accounts-offer-great-returns-with-ultimate-flexibility"></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"> High-Yield Savings Accounts Offer Great Returns With Ultimate Flexibility </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> If you've received cash gifts to congratulate you for a high school or college graduation and you don't need the money right away, you're in luck. That's because today's savings accounts are paying the highest returns we've seen in more than 20 years—possibly the highest in your lifetime, depending on your age.
</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"> Stashing your gift money in 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> can make it grow into something bigger—a gift your future self will appreciate. At the same time, a savings account leaves you the option to withdraw some or all of your money whenever you need it.
</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"> So how much can you earn? Right now, the top nationwide savings account is paying 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 (APY)</a> of 5.55%. Our daily ranking of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a> also includes 10 more options that pay 5.25% or better. Assuming you snag a rate of 5.50%, here's what your earnings would look like for different dollar amounts and durations.
</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/12ysx/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Gift money earnings at 5.50% for 3-12 months"></iframe></div>
<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"> But be aware that what you can earn on a savings account today is not guaranteed into the future. You may be lucky and earn the same high yield for months or even a year. But your bank could also lower your rate soon after you deposit your money. Banks and <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 free to change savings account rates at any time, and they don't have to warn you.
</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"> They base their rates in part on 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>, the interest rate commercial banks use when they lend to each other overnight. That benchmark rate that is set by 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>. When the Fed changes the fed funds rate your savings rate often changes as well.
</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"> Right now, the Federal Reserve is holding interest rates (namely, the fed funds rate) steady, so savings accounts are expected to continue offering roughly the same rates as they have been. But in the coming months, the Fed could begin cutting rates, which will trigger rate reductions for savings accounts. And in 2025, savings accounts may offer even lower rates.<br/>
</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-how-you-could-earn-more-with-a-top-paying-cd"></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"> How You Could Earn More With a Top-Paying CD </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Savings accounts are great for letting you earn interest on your cash, rather than letting it sit in a checking account likely earning nothing. But since you never know if your current savings rate will drop next month or the month after that, if you don't need your savings for a while, you could do better by putting it into 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>.
</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"> CDs are just another type of bank or credit union account, but they involve an agreement between you and the financial institution. In exchange for you agreeing to keep your deposit untouched in the CD until its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity</a> date, which could be months or years away, the bank or credit union agrees to pay you its advertised rate for the full duration of the CD.
</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"> This means that if interest rates come down this year or next—or both—due to changes from the Fed, any existing CD you own will keep earning its original interest rate. No future moves by the Fed can change your locked-in CD rate.
</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"> Right now, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">best nationwide CDs</a> are paying close to the same top rate as high-yield savings accounts. But depending on the term you choose, putting your grad gift money in a CD would allow you to guarantee your return with no surprises.
</p>
<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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_31-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/5XpQr/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Top short-term CD rates for a $1K deposit"></iframe></div>
<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 trade-off with a CD is that if you find you need to cash it out before it reaches its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturity date</a>, you'll be hit with an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">early withdrawal penalty</a>. Some of these are very harsh, while others are quite mild. So even though you've recently graduated, this is an area where it's still important to do your homework and learn what the early withdrawal penalty is on different CDs you're considering.
</p>
<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-callout mntl-block" id="mntl-sc-block_35-0"><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_36-0"><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>For some savers, the threat of a penalty for an early CD withdrawal is a useful tool, as it can help you keep your hands off your money for a period of your choosing. It gives you an added incentive to avoid temptation and not spend your savings on something unplanned.</p></div></div></div>
<span class="heading-toc" id="toc-a-hybrid-strategy-could-be-the-winning-choice"></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"> A Hybrid Strategy Could Be the Winning Choice </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> For many savers, a combination of a high-yield savings account and a CD is the best choice of all. By splitting your money into two pools, you can sock away some of it in a CD, where it can earn high, guaranteed interest rates. Then you can keep the other portion of your money in a high-yield savings account, where you can access it anytime you need it.
</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 mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_41-0"><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_1-0" 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_43-0"><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_2-0" 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_45-0"><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_46-0"></div>
<span class="heading-toc" id="toc-how-we-find-the-best-savings-and-cd-rates"></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"> How We Find the Best Savings and CD Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. 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 account'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_49-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> 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>.
</p></div>
|
### Key Takeaways
* If you've received gift money for graduation, consider socking it away where it can earn a great return.
* The timing almost couldn't be better—savings accounts and CDs are paying at or near their highest rates in 20 years.
* Our daily ranking of [the best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) includes rates up to 5.55% on accounts that let you withdraw at any time.
* Can you commit to saving for several months? Today's [best nationwide CDs](https://www.investopedia.com/best-cd-rates-4770214) pay as much as 5.65% and guarantee your rate into the future.
* A combo strategy using a high-yield savings account plus a CD is a smart way to boost earnings *and* keep some savings where you can access it quickly.
The full article continues below these offers from our partners.
## High-Yield Savings Accounts Offer Great Returns With Ultimate Flexibility
If you've received cash gifts to congratulate you for a high school or college graduation and you don't need the money right away, you're in luck. That's because today's savings accounts are paying the highest returns we've seen in more than 20 years—possibly the highest in your lifetime, depending on your age.
Stashing your gift money in a [high-yield savings account](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp) can make it grow into something bigger—a gift your future self will appreciate. At the same time, a savings account leaves you the option to withdraw some or all of your money whenever you need it.
So how much can you earn? Right now, the top nationwide savings account is paying an [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp) of 5.55%. Our daily ranking of the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) also includes 10 more options that pay 5.25% or better. Assuming you snag a rate of 5.50%, here's what your earnings would look like for different dollar amounts and durations.
But be aware that what you can earn on a savings account today is not guaranteed into the future. You may be lucky and earn the same high yield for months or even a year. But your bank could also lower your rate soon after you deposit your money. Banks and [credit unions](https://www.investopedia.com/terms/c/creditunion.asp) are free to change savings account rates at any time, and they don't have to warn you.
They base their rates in part on the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp), the interest rate commercial banks use when they lend to each other overnight. That benchmark rate that is set by the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp). When the Fed changes the fed funds rate your savings rate often changes as well.
Right now, the Federal Reserve is holding interest rates (namely, the fed funds rate) steady, so savings accounts are expected to continue offering roughly the same rates as they have been. But in the coming months, the Fed could begin cutting rates, which will trigger rate reductions for savings accounts. And in 2025, savings accounts may offer even lower rates.
## How You Could Earn More With a Top-Paying CD
Savings accounts are great for letting you earn interest on your cash, rather than letting it sit in a checking account likely earning nothing. But since you never know if your current savings rate will drop next month or the month after that, if you don't need your savings for a while, you could do better by putting it into a [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp).
CDs are just another type of bank or credit union account, but they involve an agreement between you and the financial institution. In exchange for you agreeing to keep your deposit untouched in the CD until its [maturity](https://www.investopedia.com/terms/m/maturity.asp) date, which could be months or years away, the bank or credit union agrees to pay you its advertised rate for the full duration of the CD.
This means that if interest rates come down this year or next—or both—due to changes from the Fed, any existing CD you own will keep earning its original interest rate. No future moves by the Fed can change your locked-in CD rate.
Right now, the [best nationwide CDs](https://www.investopedia.com/best-cd-rates-4770214) are paying close to the same top rate as high-yield savings accounts. But depending on the term you choose, putting your grad gift money in a CD would allow you to guarantee your return with no surprises.
The trade-off with a CD is that if you find you need to cash it out before it reaches its [maturity date](https://www.investopedia.com/terms/m/maturity.asp), you'll be hit with an [early withdrawal penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111). Some of these are very harsh, while others are quite mild. So even though you've recently graduated, this is an area where it's still important to do your homework and learn what the early withdrawal penalty is on different CDs you're considering.
###
For some savers, the threat of a penalty for an early CD withdrawal is a useful tool, as it can help you keep your hands off your money for a period of your choosing. It gives you an added incentive to avoid temptation and not spend your savings on something unplanned.
## A Hybrid Strategy Could Be the Winning Choice
For many savers, a combination of a high-yield savings account and a CD is the best choice of all. By splitting your money into two pools, you can sock away some of it in a CD, where it can earn high, guaranteed interest rates. Then you can keep the other portion of your money in a high-yield savings account, where you can access it anytime you need it.
[Best CD Rates for May 2024: Up to 5.51%](https://www.investopedia.com/best-cd-rates-4770214)
[Best High-Yield Savings Accounts for May 2024—Up to 5.55%](https://www.investopedia.com/best-high-yield-savings-accounts-4770633)
[Best Money Market Account Rates for May 2024—Up to 5.35%](https://www.investopedia.com/best-money-market-accounts-5096917)
## How We Find the Best Savings and CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. 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 account'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
If you've received gift money for graduation, consider socking it away where it can earn a great return.
The timing almost couldn't be better—savings accounts and CDs are paying at or near their highest rates in 20 years.
Our daily ranking of the best high-yield savings accounts includes rates up to 5.55% on accounts that let you withdraw at any time.
Can you commit to saving for several months? Today's best nationwide CDs pay as much as 5.65% and guarantee your rate into the future.
A combo strategy using a high-yield savings account plus a CD is a smart way to boost earnings and keep some savings where you can access it quickly.
The full article continues below these offers from our partners.
High-Yield Savings Accounts Offer Great Returns With Ultimate Flexibility
If you've received cash gifts to congratulate you for a high school or college graduation and you don't need the money right away, you're in luck. That's because today's savings accounts are paying the highest returns we've seen in more than 20 years—possibly the highest in your lifetime, depending on your age.
Stashing your gift money in a high-yield savings account can make it grow into something bigger—a gift your future self will appreciate. At the same time, a savings account leaves you the option to withdraw some or all of your money whenever you need it.
So how much can you earn? Right now, the top nationwide savings account is paying an annual percentage yield (APY) of 5.55%. Our daily ranking of the best high-yield savings accounts also includes 10 more options that pay 5.25% or better. Assuming you snag a rate of 5.50%, here's what your earnings would look like for different dollar amounts and durations.
But be aware that what you can earn on a savings account today is not guaranteed into the future. You may be lucky and earn the same high yield for months or even a year. But your bank could also lower your rate soon after you deposit your money. Banks and credit unions are free to change savings account rates at any time, and they don't have to warn you.
They base their rates in part on the federal funds rate, the interest rate commercial banks use when they lend to each other overnight. That benchmark rate that is set by the Federal Reserve. When the Fed changes the fed funds rate your savings rate often changes as well.
Right now, the Federal Reserve is holding interest rates (namely, the fed funds rate) steady, so savings accounts are expected to continue offering roughly the same rates as they have been. But in the coming months, the Fed could begin cutting rates, which will trigger rate reductions for savings accounts. And in 2025, savings accounts may offer even lower rates.
How You Could Earn More With a Top-Paying CD
Savings accounts are great for letting you earn interest on your cash, rather than letting it sit in a checking account likely earning nothing. But since you never know if your current savings rate will drop next month or the month after that, if you don't need your savings for a while, you could do better by putting it into a certificate of deposit (CD).
CDs are just another type of bank or credit union account, but they involve an agreement between you and the financial institution. In exchange for you agreeing to keep your deposit untouched in the CD until its maturity date, which could be months or years away, the bank or credit union agrees to pay you its advertised rate for the full duration of the CD.
This means that if interest rates come down this year or next—or both—due to changes from the Fed, any existing CD you own will keep earning its original interest rate. No future moves by the Fed can change your locked-in CD rate.
Right now, the best nationwide CDs are paying close to the same top rate as high-yield savings accounts. But depending on the term you choose, putting your grad gift money in a CD would allow you to guarantee your return with no surprises.
The trade-off with a CD is that if you find you need to cash it out before it reaches its maturity date, you'll be hit with an early withdrawal penalty. Some of these are very harsh, while others are quite mild. So even though you've recently graduated, this is an area where it's still important to do your homework and learn what the early withdrawal penalty is on different CDs you're considering.
For some savers, the threat of a penalty for an early CD withdrawal is a useful tool, as it can help you keep your hands off your money for a period of your choosing. It gives you an added incentive to avoid temptation and not spend your savings on something unplanned.
A Hybrid Strategy Could Be the Winning Choice
For many savers, a combination of a high-yield savings account and a CD is the best choice of all. By splitting your money into two pools, you can sock away some of it in a CD, where it can earn high, guaranteed interest rates. Then you can keep the other portion of your money in a high-yield savings account, where you can access it anytime you need it.
Best CD Rates for May 2024: Up to 5.51%
Best High-Yield Savings Accounts for May 2024—Up to 5.55%
Best Money Market Account Rates for May 2024—Up to 5.35%
How We Find the Best Savings and CD Rates
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account'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.
|
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https://www.investopedia.com/everything-to-know-about-individual-2020-taxes-4775907
|
What You Need to Know About Your 2023 Personal Income Taxes
|
<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 deadline for filing a personal tax return for tax year 2023 is April 15, 2024 for most people. As in previous years, there are some tax changes to keep track of, such as inflation adjustments. Here's a rundown of issues to consider as you prepare to file your 2023 return.
</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>The deadline for filing your 2023 tax return is April 15, 2024.</li><li>The standard deduction for married filing jointly taxpayers is $27,700 for the 2023 tax year. It's $13,850 for single filers and those who are married but file separate returns.</li><li>There are still seven marginal tax rates with higher income bracket limits in 2023 to account for inflation.</li><li>Estates of people who died during 2023 have a basic exemption amount of $12.92 million, up from $12.06 million in the previous year.</li></ul></div></div></div>
<span class="heading-toc" id="toc-tax-brackets-and-marginal-rates"></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"> Tax Brackets and Marginal Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> There are still seven marginal tax rates at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds increased from 2022 to 2023. Here's a rundown of tax brackets for 2023, due in 2024:<span class="ql-inline-citation" data-cite="96"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_8-0"> <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">2023 Tax Brackets and Rates</th>
</tr>
<tr>
<th> 2023 Tax Rate</th>
<th>Single Filers</th>
<th>Married Filing Jointly</th>
<th>Heads of Household</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>10%</td>
<td> $0 to $11,000</td>
<td> $0 to $22,000</td>
<td> $0 to $15,700</td>
</tr>
<tr>
<td>12% </td>
<td> $11,000 to $44,725</td>
<td> $22,000 to $89,450</td>
<td> $15,700 to $59,850</td>
</tr>
<tr>
<td>22% </td>
<td>$44,725 to $95,375</td>
<td> $89,450 to $190,750</td>
<td> $59,850 to $95,350</td>
</tr>
<tr>
<td>24% </td>
<td> $95,375 to $182,100</td>
<td> $190,750 to $364,200</td>
<td> $93,350 to $182,100</td>
</tr>
<tr>
<td>32% </td>
<td> $182,100 to $231,250</td>
<td> $364,200 to $462,500</td>
<td> $182,100 to $231,250</td>
</tr>
<tr>
<td>35% </td>
<td> $231,250 to $578,125</td>
<td> $462,500 to $693,750</td>
<td> $231,250 to $578,100</td>
</tr>
<tr>
<td>37% </td>
<td>$578,125 or more</td>
<td> $693,750 or more</td>
<td> $578,100 or more</td>
</tr>
</tbody>
</table>
</div></figure>
<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-standard-deductions"></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"> Standard Deductions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The standard deduction is the portion of your income that's not subject to income tax. You can take the standard deduction unless you decide to itemize your deductions on Form 1040 Schedule A instead.
</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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/">Tax Cuts and Jobs Act (TCJA)</a> of 2017 nearly doubled the standard deduction beginning in 2018. These changes expire after 2025 unless Congress takes steps to renew them.<span class="ql-inline-citation" data-cite="76"></span> Here are the standard deduction amounts by filing status for the 2023 tax year:<span class="ql-inline-citation" data-cite="53"></span>
</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-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_15-0"> <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">Standard Deductions 2023</th>
</tr>
<tr>
<th> Filing Status</th>
<th>2023 Standard Deduction</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Single</td>
<td>$13,850</td>
</tr>
<tr>
<td>Married Filing Separately </td>
<td>$13,850</td>
</tr>
<tr>
<td>Heads of Household </td>
<td>$20,800</td>
</tr>
<tr>
<td>Married Filing Jointly </td>
<td>$27,700</td>
</tr>
<tr>
<td>Surviving Spouses </td>
<td>$27,700</td>
</tr>
</tbody>
</table>
</div></figure>
<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-itemized-deductions"></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"> Itemized Deductions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> It's easier for most filers to take the standard deduction but it makes sense to itemize if the value of your itemized deductions is greater than the standard deduction for your filing status. Not much has changed for 2023, but here are a few reminders:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <li><strong>State and local taxes (SALT)</strong>: The combined deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.<span class="ql-inline-citation" data-cite="95"></span></li><li><strong>Mortgage interest deduction</strong>: You can deduct your mortgage interest on up to $750,000 of debt. The limit is $1 million if you bought the home before Dec. 16, 2017.<span class="ql-inline-citation" data-cite="79"></span></li><li><strong>Charitable donations</strong>: The cash donation limit of 60% of AGI remains in place for 2023. Note that this limit is not automatic; you must elect it on your Form 1040.<span class="ql-inline-citation" data-cite="81"></span><span class="ql-inline-citation" data-cite="80"></span></li><li><strong>Medical expenses</strong>: You can deduct medical expenses that exceed 7.5% of your AGI.<span class="ql-inline-citation" data-cite="79"></span></li><li><strong>Miscellaneous deductions</strong>: You can no longer deduct miscellaneous itemized deductions unless you claim a deduction that's related to certain unreimbursed employee expenses.<span class="ql-inline-citation" data-cite="78"></span></li>
</ul>
<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-capital-gains-tax-rates"></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"> Capital Gains Tax Rates </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The tax treatment of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp">long-term capital gains</a> changed with the TCJA. The capital gains tax brackets closely aligned with income tax brackets before 2018, but the TJCA created unique capital gains tax brackets:<span class="ql-inline-citation" data-cite="96"></span><br/>
</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>
<colgroup span="1" style="width: 114px;"></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="4">Long-Term Capital Gains Tax Rates for 2023</th>
</tr>
<tr>
<th> Filing Status</th>
<th>0% Rate</th>
<th>15% Rate</th>
<th>20% Rate</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Single</td>
<td>Up to $44,625</td>
<td>$44,625 to $492,300</td>
<td>Over $492,300</td>
</tr>
<tr>
<td>Head of Household</td>
<td>Up to $59,750</td>
<td>$59,750 to $523,050</td>
<td>Over $523,050</td>
</tr>
<tr>
<td>Married Filing Jointly</td>
<td>Up to $89,250</td>
<td>$89,250 to $553,850</td>
<td>Over $5553,850</td>
</tr>
<tr>
<td>Married Filing Separately</td>
<td>Up to $44,625</td>
<td>$44,625 to $492,300</td>
<td>Over $492,300</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>
<span class="heading-toc" id="toc-child-tax-credit"></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"> Child Tax Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/childtaxcredit.asp">Child Tax Credit</a> is a tax benefit granted to American taxpayers for each qualifying dependent child. The credit amount is $2,000 per qualifying child and the maximum refundable portion of the credit is $1,600 in 2023.<span class="ql-inline-citation" data-cite="96"></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-alternative-minimum-tax"></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"> Alternative Minimum Tax </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/alternativeminimumtax.asp">alternative minimum tax (AMT)</a> limits certain tax breaks for higher-income taxpayers to ensure that they pay at least a minimum amount of income tax. According to the Tax Foundation, "The federal AMT was created in 1963 after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all."<span class="ql-inline-citation" data-cite="54"></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"> High-income taxpayers have to calculate their tax bill twice, once using the standard income tax system and then again under the AMT. They must pay the higher of the two results. The AMT is levied at two rates: 26% and 28%.<span class="ql-inline-citation" data-cite="85"></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"> Here are the AMT exemptions and phase-outs for 2023:<span class="ql-inline-citation" data-cite="53"></span>
</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=""></colgroup>
<colgroup span="1" style=""></colgroup>
<colgroup span="1" style=""></colgroup>
<thead>
<tr>
<th class="mntl-sc-block-table__title" colspan="3">AMT Limits for 2023</th>
</tr>
<tr>
<th> </th>
<th>2023 Exemption</th>
<th>2023 Phase-out</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>Single</td>
<td>$81,300</td>
<td>$578,150</td>
</tr>
<tr>
<td> Married Filing Jointly</td>
<td>$126,500</td>
<td>$1,156,300</td>
</tr>
</tbody>
</table>
</div></figure>
<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-note" 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 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>Five states (California, Colorado, Connecticut, Iowa, and Minnesota) have their own separate alternative minimum tax (AMT) in their individual income tax codes.<span class="ql-inline-citation" data-cite="102"></span></p></div></div></div>
<span class="heading-toc" id="toc-charitable-contributions"></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"> Charitable Contributions </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> There is a limit of 60% of AGI on cash contributions for those who itemize: You can deduct donations for up to 100% of your AGI. Donations to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/donoradvisedfund.asp">donor-advised funds</a> and supporting organizations don't qualify.<span class="ql-inline-citation" data-cite="86"></span><span class="ql-inline-citation" data-cite="69"></span>
</p>
<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-401k-plan-contribution-limits"></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"> 401(k) Plan Contribution Limits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement/now-you-can-save-more-retirement/">contribution limit</a> for employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/thrift_savings_plan.asp">thrift savings plan (TSP)</a> is $22,500 for 2023. The catch-up contribution limit for employees ages 50 or older is $7,500 for 2023.<span class="ql-inline-citation" data-cite="101"></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"> The contribution limit for SIMPLE retirement accounts is $15,500 for 2023, and a $3,500 catch-up limit applies to participants age 50 and up for both years.<span class="ql-inline-citation" data-cite="97"></span>
</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-ira-contribution-limits"></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"> IRA Contribution Limits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The annual contribution limit for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/roth-and-traditional-ira-contribution-limits-for-2021-5085118">traditional IRAs and Roth IRAs</a> increases to $6,500 for 2023. There's an additional catch-up contribution of $1,000 for those over 50.<span class="ql-inline-citation" data-cite="97"></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"> Taxpayers can deduct contributions to 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> if they meet certain conditions. The deduction may be reduced or phased out if either the taxpayer or their spouse was covered by a retirement plan at work during the year. The phase-outs don't apply if neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan.<span class="ql-inline-citation" data-cite="87"></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"> Traditional IRA phase-out ranges for 2023 are as follows:
</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>$73,000 to $83,000 for single taxpayers covered by a workplace plan</li><li>$116,000 to $136,000 for married taxpayers filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan</li><li>$218,000 to $228,000 for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered</li><li>The phase-out range for a married individual filing a separate return who is covered by a workplace retirement plan is not subject to an annual cost-of-living adjustment and remains at $0 to $10,000 in 2023.<span class="ql-inline-citation" data-cite="98"></span></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"> Roth IRA contributions are not tax-deductible. There are also income limitations on the amount you can contribute to a Roth IRA. The income phase-out range for taxpayers making contributions to 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 $138,000 to $153,000 for singles and heads of household in 2023. The income phase-out range is $218,000 to $228,000 for married couples who file jointly.<span class="ql-inline-citation" data-cite="98"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div>
<span class="heading-toc" id="toc-the-savers-credit"></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"> The Saver's Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> People with low to moderate incomes may qualify for the saver's credit, a dollar-for-dollar reduction of the taxes they owe. The credit is available to people who contribute to an IRA, 401(k), or any other qualified retirement account, provided their AGI falls within specific parameters.<span class="ql-inline-citation" data-cite="88"></span>
</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"> The income limit for the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/retirement/04/031704.asp">saver’s credit</a> (also referred to as the retirement savings contributions credit) is $73,000 for married couples filing jointly in 2023, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.<span class="ql-inline-citation" data-cite="98"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div>
<span class="heading-toc" id="toc-required-minimum-distributions-rmds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_65-0"> <span class="mntl-sc-block-heading__text"> Required Minimum Distributions (RMDs) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> <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 (RMDs)</a> are back for 2023 and beyond. You must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan accounts at age 72. The withdrawal amount is based on a calculation dictated by factors like account value and longevity. The Secure 2.0 Act, signed into law in late 2022, raises the RMD starting age in two tranches: to 73 starting in 2023, and to 75 starting in 2033.<span class="ql-inline-citation" data-cite="94"></span><span class="ql-inline-citation" data-cite="60"></span>
</p>
<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-callout mntl-block" id="mntl-sc-block_68-0"><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_69-0"><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>Roth IRAs have no required minimum distributions during the account owner's lifetime. You can leave the money invested if you don't need it and let the account <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/roth-ira-withdrawal-rules-4769951">grow tax-free for your heirs</a>.<span class="ql-inline-citation" data-cite="60"></span></p></div></div></div>
<span class="heading-toc" id="toc-earned-income-tax-credit"></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"> Earned Income Tax Credit </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnedincomecredit.asp">earned income tax credit (EITC)</a> is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. It's a refundable tax credit so taxpayers may be eligible for a refund even if they have no tax liability for the year.<span class="ql-inline-citation" data-cite="72"></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"> Here are the EITC AGI limits and maximum credit amounts for 2023:<span class="ql-inline-citation" data-cite="72"></span>
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div>
<figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_75-0"> <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">EITC for 2023</th>
</tr>
<tr>
<th> Dependents</th>
<th>Single or Head of Household</th>
<th>Married Filing Jointly</th>
<th>Maximum EITC</th>
</tr>
</thead>
<tbody data-check="0">
<tr>
<td>0</td>
<td>$17,640</td>
<td>$24,210</td>
<td>$600</td>
</tr>
<tr>
<td>1 </td>
<td>$46,560</td>
<td>$53,120</td>
<td>$3,995</td>
</tr>
<tr>
<td>2 </td>
<td>$52,918</td>
<td>$59,478</td>
<td>$6,604</td>
</tr>
<tr>
<td>3 </td>
<td>$56,838</td>
<td>$63,698</td>
<td>$7,430</td>
</tr>
</tbody>
</table>
</div></figure>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div>
<span class="heading-toc" id="toc-hsa-contribution-limits"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-heading__text"> HSA Contribution Limits </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> The dollar limit for employee salary reductions for contributions to a health <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/flexiblespendingaccount.asp">flexible spending account (FSA)</a> is $3,050 for 2023.<span class="ql-inline-citation" data-cite="100"></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"> For tax year 2023, people who have self-only coverage in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/medical-savings-account.asp">medical savings account (MSA)</a> must have an annual deductible that's between $2,650 and $3,950. The maximum out-of-pocket expense for self-only coverage is $5,300.<span class="ql-inline-citation" data-cite="53"></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"> The annual deductible for participants with family coverage must be between $5,300 and $7,900 for 2023. For family coverage, the out-of-pocket expense limit is $9,650.<span class="ql-inline-citation" data-cite="53"></span>
</p>
<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-callout mntl-block" id="mntl-sc-block_84-0"><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_85-0"><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 IRS often extends tax filing and payment deadlines for victims of major storms and other disasters. Consult <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/newsroom/tax-relief-in-disaster-situations">IRS disaster relief announcements</a> to determine your eligibility.<br/></p></div></div></div>
<span class="heading-toc" id="toc-estate-tax-exemption-and-annual-gift-exclusion"></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"> Estate Tax Exemption and Annual Gift Exclusion </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Estates of people who die during the tax year have a basic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp">estate tax</a> exemption amount of $12.92 million in 2023. The annual exclusion for gifts is $17,000 for 2023.<span class="ql-inline-citation" data-cite="53"></span><br/>
</p>
<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-what-is-the-deadline-for-filing-my-2023-tax-return"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Deadline for Filing My 2023 Tax Return?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Your 2023 tax return is due by Monday, April 15, 2024, unless you live in Maine or Massachusetts. Your deadline is April 17 if you live in either of these states because they observe national holidays on April 15 and 16. You can get an automatic <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/021314/how-file-tax-extension.asp">six-month extension</a> by filing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/pub/irs-pdf/f4868.pdf">Form 4868</a>, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.<span class="ql-inline-citation" data-cite="99"></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-should-i-hire-a-tax-preparer-or-use-tax-software"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should I Hire a Tax Preparer or Use Tax Software?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>A slight majority of people in the U.S. pay a professional tax preparer to file their returns but tax software such as TurboTax has made it easier for people to prepare and file their own returns. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/022515/tax-preparer-vs-software-how-choose.asp">decision</a> can come down to cost: Tax software is generally cheaper than hiring a tax pro.</p><p>But you should also consider the complexity of your return. Go the pro route if you own a business, had a major life event, or want to itemize. Consider your tax proficiency and your schedule. Of course, an experienced tax preparer may save you more money in taxes than you would spend on their services, so that should be taken into account, too.</p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_93-0"><span class="heading-toc" id="toc-why-are-there-so-many-tax-changes-every-year"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are There So Many Tax Changes Every Year?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The IRS adjusts tax rates and income brackets yearly to keep pace with inflation. More than 60 tax provisions are tweaked each year but not all are adjusted. For example, the Lifetime Learning Credit hasn't been adjusted since 2020.<span class="ql-inline-citation" data-cite="53"></span></p></div>
</div>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></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_95-0"> <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_96-0"> IRS inflation adjustments intend to keep federal taxes in line with inflation. Given that inflation started climbing in 2021 and continued climbing further in 2022 to historically high levels, particularly when compared to the last few decades, it's important to note the adjustments from previous years. It's also helpful to keep tabs on tax law changes that are unrelated to inflation.
</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"> This information can help you plan for the 2023 tax year and beyond. Just be sure to keep an eye on 2024 adjustments going forward so you can plan ahead for that tax return due in 2025.<span class="ql-inline-citation" data-cite="91"></span>
</p></div>
|
The deadline for filing a personal tax return for tax year 2023 is April 15, 2024 for most people. As in previous years, there are some tax changes to keep track of, such as inflation adjustments. Here's a rundown of issues to consider as you prepare to file your 2023 return.
### Key Takeaways
* The deadline for filing your 2023 tax return is April 15, 2024.
* The standard deduction for married filing jointly taxpayers is $27,700 for the 2023 tax year. It's $13,850 for single filers and those who are married but file separate returns.
* There are still seven marginal tax rates with higher income bracket limits in 2023 to account for inflation.
* Estates of people who died during 2023 have a basic exemption amount of $12.92 million, up from $12.06 million in the previous year.
## Tax Brackets and Marginal Rates
There are still seven marginal tax rates at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds increased from 2022 to 2023. Here's a rundown of tax brackets for 2023, due in 2024:
| 2023 Tax Brackets and Rates | | | |
| --- | --- | --- | --- |
| 2023 Tax Rate | Single Filers | Married Filing Jointly | Heads of Household |
| 10% | $0 to $11,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 | $93,350 to $182,100 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 | $182,100 to $231,250 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 | $231,250 to $578,100 |
| 37% | $578,125 or more | $693,750 or more | $578,100 or more |
## Standard Deductions
The standard deduction is the portion of your income that's not subject to income tax. You can take the standard deduction unless you decide to itemize your deductions on Form 1040 Schedule A instead.
The [Tax Cuts and Jobs Act (TCJA)](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) of 2017 nearly doubled the standard deduction beginning in 2018. These changes expire after 2025 unless Congress takes steps to renew them. Here are the standard deduction amounts by filing status for the 2023 tax year:
| Standard Deductions 2023 | |
| --- | --- |
| Filing Status | 2023 Standard Deduction |
| Single | $13,850 |
| Married Filing Separately | $13,850 |
| Heads of Household | $20,800 |
| Married Filing Jointly | $27,700 |
| Surviving Spouses | $27,700 |
## Itemized Deductions
It's easier for most filers to take the standard deduction but it makes sense to itemize if the value of your itemized deductions is greater than the standard deduction for your filing status. Not much has changed for 2023, but here are a few reminders:
* **State and local taxes (SALT)**: The combined deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
* **Mortgage interest deduction**: You can deduct your mortgage interest on up to $750,000 of debt. The limit is $1 million if you bought the home before Dec. 16, 2017.
* **Charitable donations**: The cash donation limit of 60% of AGI remains in place for 2023. Note that this limit is not automatic; you must elect it on your Form 1040.
* **Medical expenses**: You can deduct medical expenses that exceed 7.5% of your AGI.
* **Miscellaneous deductions**: You can no longer deduct miscellaneous itemized deductions unless you claim a deduction that's related to certain unreimbursed employee expenses.
## Capital Gains Tax Rates
The tax treatment of [long-term capital gains](https://www.investopedia.com/articles/personal-finance/101515/comparing-longterm-vs-shortterm-capital-gain-tax-rates.asp) changed with the TCJA. The capital gains tax brackets closely aligned with income tax brackets before 2018, but the TJCA created unique capital gains tax brackets:
| Long-Term Capital Gains Tax Rates for 2023 | | | |
| --- | --- | --- | --- |
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | Up to $44,625 | $44,625 to $492,300 | Over $492,300 |
| Head of Household | Up to $59,750 | $59,750 to $523,050 | Over $523,050 |
| Married Filing Jointly | Up to $89,250 | $89,250 to $553,850 | Over $5553,850 |
| Married Filing Separately | Up to $44,625 | $44,625 to $492,300 | Over $492,300 |
## Child Tax Credit
The [Child Tax Credit](https://www.investopedia.com/terms/c/childtaxcredit.asp) is a tax benefit granted to American taxpayers for each qualifying dependent child. The credit amount is $2,000 per qualifying child and the maximum refundable portion of the credit is $1,600 in 2023.
## Alternative Minimum Tax
The [alternative minimum tax (AMT)](https://www.investopedia.com/terms/a/alternativeminimumtax.asp) limits certain tax breaks for higher-income taxpayers to ensure that they pay at least a minimum amount of income tax. According to the Tax Foundation, "The federal AMT was created in 1963 after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all."
High-income taxpayers have to calculate their tax bill twice, once using the standard income tax system and then again under the AMT. They must pay the higher of the two results. The AMT is levied at two rates: 26% and 28%.
Here are the AMT exemptions and phase-outs for 2023:
| AMT Limits for 2023 | | |
| --- | --- | --- |
| | 2023 Exemption | 2023 Phase-out |
| Single | $81,300 | $578,150 |
| Married Filing Jointly | $126,500 | $1,156,300 |
###
Five states (California, Colorado, Connecticut, Iowa, and Minnesota) have their own separate alternative minimum tax (AMT) in their individual income tax codes.
## Charitable Contributions
There is a limit of 60% of AGI on cash contributions for those who itemize: You can deduct donations for up to 100% of your AGI. Donations to [donor-advised funds](https://www.investopedia.com/terms/d/donoradvisedfund.asp) and supporting organizations don't qualify.
## 401(k) Plan Contribution Limits
The [contribution limit](https://www.investopedia.com/retirement/now-you-can-save-more-retirement/) for employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s [thrift savings plan (TSP)](https://www.investopedia.com/terms/t/thrift_savings_plan.asp) is $22,500 for 2023. The catch-up contribution limit for employees ages 50 or older is $7,500 for 2023.
The contribution limit for SIMPLE retirement accounts is $15,500 for 2023, and a $3,500 catch-up limit applies to participants age 50 and up for both years.
## IRA Contribution Limits
The annual contribution limit for [traditional IRAs and Roth IRAs](https://www.investopedia.com/roth-and-traditional-ira-contribution-limits-for-2021-5085118) increases to $6,500 for 2023. There's an additional catch-up contribution of $1,000 for those over 50.
Taxpayers can deduct contributions to a [traditional IRA](https://www.investopedia.com/terms/t/traditionalira.asp) if they meet certain conditions. The deduction may be reduced or phased out if either the taxpayer or their spouse was covered by a retirement plan at work during the year. The phase-outs don't apply if neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan.
Traditional IRA phase-out ranges for 2023 are as follows:
* $73,000 to $83,000 for single taxpayers covered by a workplace plan
* $116,000 to $136,000 for married taxpayers filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan
* $218,000 to $228,000 for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered
* The phase-out range for a married individual filing a separate return who is covered by a workplace retirement plan is not subject to an annual cost-of-living adjustment and remains at $0 to $10,000 in 2023.
Roth IRA contributions are not tax-deductible. There are also income limitations on the amount you can contribute to a Roth IRA. The income phase-out range for taxpayers making contributions to a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) is $138,000 to $153,000 for singles and heads of household in 2023. The income phase-out range is $218,000 to $228,000 for married couples who file jointly.
## The Saver's Credit
People with low to moderate incomes may qualify for the saver's credit, a dollar-for-dollar reduction of the taxes they owe. The credit is available to people who contribute to an IRA, 401(k), or any other qualified retirement account, provided their AGI falls within specific parameters.
The income limit for the [saver’s credit](https://www.investopedia.com/articles/retirement/04/031704.asp) (also referred to as the retirement savings contributions credit) is $73,000 for married couples filing jointly in 2023, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.
## Required Minimum Distributions (RMDs)
[Required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) are back for 2023 and beyond. You must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan accounts at age 72. The withdrawal amount is based on a calculation dictated by factors like account value and longevity. The Secure 2.0 Act, signed into law in late 2022, raises the RMD starting age in two tranches: to 73 starting in 2023, and to 75 starting in 2033.
###
Roth IRAs have no required minimum distributions during the account owner's lifetime. You can leave the money invested if you don't need it and let the account [grow tax-free for your heirs](https://www.investopedia.com/roth-ira-withdrawal-rules-4769951).
## Earned Income Tax Credit
The [earned income tax credit (EITC)](https://www.investopedia.com/terms/e/earnedincomecredit.asp) is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. It's a refundable tax credit so taxpayers may be eligible for a refund even if they have no tax liability for the year.
Here are the EITC AGI limits and maximum credit amounts for 2023:
| EITC for 2023 | | | |
| --- | --- | --- | --- |
| Dependents | Single or Head of Household | Married Filing Jointly | Maximum EITC |
| 0 | $17,640 | $24,210 | $600 |
| 1 | $46,560 | $53,120 | $3,995 |
| 2 | $52,918 | $59,478 | $6,604 |
| 3 | $56,838 | $63,698 | $7,430 |
## HSA Contribution Limits
The dollar limit for employee salary reductions for contributions to a health [flexible spending account (FSA)](https://www.investopedia.com/terms/f/flexiblespendingaccount.asp) is $3,050 for 2023.
For tax year 2023, people who have self-only coverage in a [medical savings account (MSA)](https://www.investopedia.com/terms/m/medical-savings-account.asp) must have an annual deductible that's between $2,650 and $3,950. The maximum out-of-pocket expense for self-only coverage is $5,300.
The annual deductible for participants with family coverage must be between $5,300 and $7,900 for 2023. For family coverage, the out-of-pocket expense limit is $9,650.
###
The IRS often extends tax filing and payment deadlines for victims of major storms and other disasters. Consult [IRS disaster relief announcements](https://www.irs.gov/newsroom/tax-relief-in-disaster-situations) to determine your eligibility.
## Estate Tax Exemption and Annual Gift Exclusion
Estates of people who die during the tax year have a basic [estate tax](https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp) exemption amount of $12.92 million in 2023. The annual exclusion for gifts is $17,000 for 2023.
## What Is the Deadline for Filing My 2023 Tax Return?
Your 2023 tax return is due by Monday, April 15, 2024, unless you live in Maine or Massachusetts. Your deadline is April 17 if you live in either of these states because they observe national holidays on April 15 and 16. You can get an automatic [six-month extension](https://www.investopedia.com/articles/personal-finance/021314/how-file-tax-extension.asp) by filing [Form 4868](https://www.irs.gov/pub/irs-pdf/f4868.pdf), the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
## Should I Hire a Tax Preparer or Use Tax Software?
A slight majority of people in the U.S. pay a professional tax preparer to file their returns but tax software such as TurboTax has made it easier for people to prepare and file their own returns. The [decision](https://www.investopedia.com/articles/personal-finance/022515/tax-preparer-vs-software-how-choose.asp) can come down to cost: Tax software is generally cheaper than hiring a tax pro.
But you should also consider the complexity of your return. Go the pro route if you own a business, had a major life event, or want to itemize. Consider your tax proficiency and your schedule. Of course, an experienced tax preparer may save you more money in taxes than you would spend on their services, so that should be taken into account, too.
## Why Are There So Many Tax Changes Every Year?
The IRS adjusts tax rates and income brackets yearly to keep pace with inflation. More than 60 tax provisions are tweaked each year but not all are adjusted. For example, the Lifetime Learning Credit hasn't been adjusted since 2020.
## The Bottom Line
IRS inflation adjustments intend to keep federal taxes in line with inflation. Given that inflation started climbing in 2021 and continued climbing further in 2022 to historically high levels, particularly when compared to the last few decades, it's important to note the adjustments from previous years. It's also helpful to keep tabs on tax law changes that are unrelated to inflation.
This information can help you plan for the 2023 tax year and beyond. Just be sure to keep an eye on 2024 adjustments going forward so you can plan ahead for that tax return due in 2025.
|
The deadline for filing a personal tax return for tax year 2023 is April 15, 2024 for most people. As in previous years, there are some tax changes to keep track of, such as inflation adjustments. Here's a rundown of issues to consider as you prepare to file your 2023 return.
Key Takeaways
The deadline for filing your 2023 tax return is April 15, 2024.The standard deduction for married filing jointly taxpayers is $27,700 for the 2023 tax year. It's $13,850 for single filers and those who are married but file separate returns.There are still seven marginal tax rates with higher income bracket limits in 2023 to account for inflation.Estates of people who died during 2023 have a basic exemption amount of $12.92 million, up from $12.06 million in the previous year.
Tax Brackets and Marginal Rates
There are still seven marginal tax rates at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds increased from 2022 to 2023. Here's a rundown of tax brackets for 2023, due in 2024:
2023 Tax Brackets and Rates
2023 Tax Rate
Single Filers
Married Filing Jointly
Heads of Household
10%
$0 to $11,000
$0 to $22,000
$0 to $15,700
12%
$11,000 to $44,725
$22,000 to $89,450
$15,700 to $59,850
22%
$44,725 to $95,375
$89,450 to $190,750
$59,850 to $95,350
24%
$95,375 to $182,100
$190,750 to $364,200
$93,350 to $182,100
32%
$182,100 to $231,250
$364,200 to $462,500
$182,100 to $231,250
35%
$231,250 to $578,125
$462,500 to $693,750
$231,250 to $578,100
37%
$578,125 or more
$693,750 or more
$578,100 or more
Standard Deductions
The standard deduction is the portion of your income that's not subject to income tax. You can take the standard deduction unless you decide to itemize your deductions on Form 1040 Schedule A instead.
The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction beginning in 2018. These changes expire after 2025 unless Congress takes steps to renew them. Here are the standard deduction amounts by filing status for the 2023 tax year:
Standard Deductions 2023
Filing Status
2023 Standard Deduction
Single
$13,850
Married Filing Separately
$13,850
Heads of Household
$20,800
Married Filing Jointly
$27,700
Surviving Spouses
$27,700
Itemized Deductions
It's easier for most filers to take the standard deduction but it makes sense to itemize if the value of your itemized deductions is greater than the standard deduction for your filing status. Not much has changed for 2023, but here are a few reminders:
State and local taxes (SALT): The combined deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.Mortgage interest deduction: You can deduct your mortgage interest on up to $750,000 of debt. The limit is $1 million if you bought the home before Dec. 16, 2017.Charitable donations: The cash donation limit of 60% of AGI remains in place for 2023. Note that this limit is not automatic; you must elect it on your Form 1040.Medical expenses: You can deduct medical expenses that exceed 7.5% of your AGI.Miscellaneous deductions: You can no longer deduct miscellaneous itemized deductions unless you claim a deduction that's related to certain unreimbursed employee expenses.
Capital Gains Tax Rates
The tax treatment of long-term capital gains changed with the TCJA. The capital gains tax brackets closely aligned with income tax brackets before 2018, but the TJCA created unique capital gains tax brackets:
Long-Term Capital Gains Tax Rates for 2023
Filing Status
0% Rate
15% Rate
20% Rate
Single
Up to $44,625
$44,625 to $492,300
Over $492,300
Head of Household
Up to $59,750
$59,750 to $523,050
Over $523,050
Married Filing Jointly
Up to $89,250
$89,250 to $553,850
Over $5553,850
Married Filing Separately
Up to $44,625
$44,625 to $492,300
Over $492,300
Child Tax Credit
The Child Tax Credit is a tax benefit granted to American taxpayers for each qualifying dependent child. The credit amount is $2,000 per qualifying child and the maximum refundable portion of the credit is $1,600 in 2023.
Alternative Minimum Tax
The alternative minimum tax (AMT) limits certain tax breaks for higher-income taxpayers to ensure that they pay at least a minimum amount of income tax. According to the Tax Foundation, "The federal AMT was created in 1963 after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all."
High-income taxpayers have to calculate their tax bill twice, once using the standard income tax system and then again under the AMT. They must pay the higher of the two results. The AMT is levied at two rates: 26% and 28%.
Here are the AMT exemptions and phase-outs for 2023:
AMT Limits for 2023
2023 Exemption
2023 Phase-out
Single
$81,300
$578,150
Married Filing Jointly
$126,500
$1,156,300
Five states (California, Colorado, Connecticut, Iowa, and Minnesota) have their own separate alternative minimum tax (AMT) in their individual income tax codes.
Charitable Contributions
There is a limit of 60% of AGI on cash contributions for those who itemize: You can deduct donations for up to 100% of your AGI. Donations to donor-advised funds and supporting organizations don't qualify.
401(k) Plan Contribution Limits
The contribution limit for employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s thrift savings plan (TSP) is $22,500 for 2023. The catch-up contribution limit for employees ages 50 or older is $7,500 for 2023.
The contribution limit for SIMPLE retirement accounts is $15,500 for 2023, and a $3,500 catch-up limit applies to participants age 50 and up for both years.
IRA Contribution Limits
The annual contribution limit for traditional IRAs and Roth IRAs increases to $6,500 for 2023. There's an additional catch-up contribution of $1,000 for those over 50.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction may be reduced or phased out if either the taxpayer or their spouse was covered by a retirement plan at work during the year. The phase-outs don't apply if neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan.
Traditional IRA phase-out ranges for 2023 are as follows:
$73,000 to $83,000 for single taxpayers covered by a workplace plan$116,000 to $136,000 for married taxpayers filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan$218,000 to $228,000 for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is coveredThe phase-out range for a married individual filing a separate return who is covered by a workplace retirement plan is not subject to an annual cost-of-living adjustment and remains at $0 to $10,000 in 2023.
Roth IRA contributions are not tax-deductible. There are also income limitations on the amount you can contribute to a Roth IRA. The income phase-out range for taxpayers making contributions to a Roth IRA is $138,000 to $153,000 for singles and heads of household in 2023. The income phase-out range is $218,000 to $228,000 for married couples who file jointly.
The Saver's Credit
People with low to moderate incomes may qualify for the saver's credit, a dollar-for-dollar reduction of the taxes they owe. The credit is available to people who contribute to an IRA, 401(k), or any other qualified retirement account, provided their AGI falls within specific parameters.
The income limit for the saver’s credit (also referred to as the retirement savings contributions credit) is $73,000 for married couples filing jointly in 2023, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.
Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) are back for 2023 and beyond. You must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan accounts at age 72. The withdrawal amount is based on a calculation dictated by factors like account value and longevity. The Secure 2.0 Act, signed into law in late 2022, raises the RMD starting age in two tranches: to 73 starting in 2023, and to 75 starting in 2033.
Roth IRAs have no required minimum distributions during the account owner's lifetime. You can leave the money invested if you don't need it and let the account grow tax-free for your heirs.
Earned Income Tax Credit
The earned income tax credit (EITC) is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. It's a refundable tax credit so taxpayers may be eligible for a refund even if they have no tax liability for the year.
Here are the EITC AGI limits and maximum credit amounts for 2023:
EITC for 2023
Dependents
Single or Head of Household
Married Filing Jointly
Maximum EITC
0
$17,640
$24,210
$600
1
$46,560
$53,120
$3,995
2
$52,918
$59,478
$6,604
3
$56,838
$63,698
$7,430
HSA Contribution Limits
The dollar limit for employee salary reductions for contributions to a health flexible spending account (FSA) is $3,050 for 2023.
For tax year 2023, people who have self-only coverage in a medical savings account (MSA) must have an annual deductible that's between $2,650 and $3,950. The maximum out-of-pocket expense for self-only coverage is $5,300.
The annual deductible for participants with family coverage must be between $5,300 and $7,900 for 2023. For family coverage, the out-of-pocket expense limit is $9,650.
The IRS often extends tax filing and payment deadlines for victims of major storms and other disasters. Consult IRS disaster relief announcements to determine your eligibility.
Estate Tax Exemption and Annual Gift Exclusion
Estates of people who die during the tax year have a basic estate tax exemption amount of $12.92 million in 2023. The annual exclusion for gifts is $17,000 for 2023.
What Is the Deadline for Filing My 2023 Tax Return?
Your 2023 tax return is due by Monday, April 15, 2024, unless you live in Maine or Massachusetts. Your deadline is April 17 if you live in either of these states because they observe national holidays on April 15 and 16. You can get an automatic six-month extension by filing Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Should I Hire a Tax Preparer or Use Tax Software?
A slight majority of people in the U.S. pay a professional tax preparer to file their returns but tax software such as TurboTax has made it easier for people to prepare and file their own returns. The decision can come down to cost: Tax software is generally cheaper than hiring a tax pro.But you should also consider the complexity of your return. Go the pro route if you own a business, had a major life event, or want to itemize. Consider your tax proficiency and your schedule. Of course, an experienced tax preparer may save you more money in taxes than you would spend on their services, so that should be taken into account, too.
Why Are There So Many Tax Changes Every Year?
The IRS adjusts tax rates and income brackets yearly to keep pace with inflation. More than 60 tax provisions are tweaked each year but not all are adjusted. For example, the Lifetime Learning Credit hasn't been adjusted since 2020.
The Bottom Line
IRS inflation adjustments intend to keep federal taxes in line with inflation. Given that inflation started climbing in 2021 and continued climbing further in 2022 to historically high levels, particularly when compared to the last few decades, it's important to note the adjustments from previous years. It's also helpful to keep tabs on tax law changes that are unrelated to inflation.
This information can help you plan for the 2023 tax year and beyond. Just be sure to keep an eye on 2024 adjustments going forward so you can plan ahead for that tax return due in 2025.
|
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https://www.investopedia.com/terms/m/msr.asp
|
Mortgage Servicing Rights (MSR): Meaning, Example, and History
|
<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-mortgage-servicing-rights-msr"></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 Mortgage Servicing Rights (MSR)? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Mortgage servicing rights (MSR) refer to a contractual agreement in which the right to service an existing mortgage is sold by the original <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-guide/mortgage-lenders/" rel="noopener noreferrer">mortgage lender</a> to another party that specializes in the various functions involved with servicing mortgages.
</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>Mortgage servicing rights are sold by the originator of a mortgage to another financial institution, which then takes over the administration of the mortgage, including tasks such as collecting payments and forwarding them to the originator.</li><li>The original lender pays the servicer a fee for performing this work.</li><li>Nothing changes for the mortgagor except the address to which payments are sent.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-mortgage-servicing-rights-msr"></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 Mortgage Servicing Rights (MSR) </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Mortgages have ongoing administrative duties that are regularly processed for the entire length of a mortgage. Common rights included in MSRs are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward the interest and principal portions to the mortgage lender. In return, the servicer is compensated with a specific fee, which is outlined in the contract that has been established and entered into at the beginning of the servicing agreement.<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"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">mortgage payment amount</a>, interest rate, type of loan, and other factors remain the same. As far as the borrower is concerned, only the address to which payments are sent is changed, and you should contact the servicer, rather than your original mortgage lender, with any questions you may have regarding your loan. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan-production-office-lpo.asp">Your servicer can change</a> at any time, but you should receive notice from your original lender at least 15 days before it happens, and your new servicer should notify you within 15 days of assuming rights as well.<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_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>Federal banking laws let financial institutions sell mortgages or transfer servicing rights to other institutions without consumer consent.<span class="ql-inline-citation" data-cite="1"></span></p></div></div></div>
<span class="heading-toc" id="toc-example-of-selling-an-msr"></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"> Example of Selling an MSR </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Sarah takes out a $500,000 mortgage from Lender A. She sends the lender a monthly payment of principal and interest. Three years later, Lender A decides to transfer its MSR on Sarah’s mortgage to Company B. Under the terms of the contract, Company B is paid a fee by Lender A for <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan_servicing.asp">processing</a> all of Sarah’s remaining mortgage payments. The mortgage lender can then spend more time and money providing new mortgages while the company assuming the MSR forwards the mortgage payments to the lender. Sarah now sends her monthly payment to Company B instead of Lender A.
</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"> A lender will often sell MSRs as a means of freeing up lines of credit so it can lend money to additional borrowers. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/051914/mortgage-amortization-strategies.asp">The majority of mortgages are in effect for 15 to 30 years</a>, and the bank needs billions of dollars to lend money to other consumers requesting mortgages during this time. Because the term is so long, it is important to do thorough research among the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">best mortgage lenders</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"> In a roundabout way, selling MSRs means that more people can become homeowners because the sale of these rights produces revenue.
</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"> Lenders also make money by charging fees for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgage_originator.asp">originating mortgages</a> and earning monthly interest from payments. Mortgages are simply additional assets that bring in more revenue for banks.
</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-history-of-msrs"></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"> History of MSRs </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The market for MSRs tends to be strong during periods of economic growth, due to higher quality mortgage originations and fewer defaults. Hedge funds, banks, and <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) find these assets attractive because MSRs can yield high amounts of interest. For example, SunTrust purchased $8 billion in MSRs in the first quarter of 2016 as a means of earning a solid <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> (ROI), and within months its MSR portfolio contained $1.123 billion in unpaid principal balances of loans that the bank was servicing for lenders.<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_25-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> National Mortgage News reported in June 2019 that MSRs "have been one of the best-performing fixed-income asset classes over the past five years." However, it also reported that "since October 2018, as medium- and long-term interest rates have fallen, projected and actual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prepayment.asp">mortgage prepayment</a> assumptions have accelerated, causing the expected average life of MSRs to shorten considerably."
</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"> As a result, "MSR values from April to May were down consistently (by a half) multiple." That said, reports National Mortgage News, "the demand from MSR buyers is still very strong, and there is general consensus around MSR values."<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>
<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-mortgage-excess-servicing"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Mortgage Excess Servicing?</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/m/mortgageexcessservicing.asp">Mortgage excess servicing</a> is a fee based on the excess cash flow after a basket of loans is pooled together and securitized. This is paid out to mortgage servicers as a fee to maintain a mortgage-backed security.</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-why-do-banks-sell-mortgage-servicing-rights"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Do Banks Sell Mortgage Servicing Rights?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Banks sell mortgage servicing rights as a way to free up lines of credit. This allows them to lend out more money, ultimately helping more people finance properties.</p></div>
</div>
<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-how-do-you-value-mortgage-servicing-rights"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Value Mortgage Servicing Rights?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>According to the Federal Housing Financing Agency (FHFA), the value of a mortgage servicing right is determined by the discounted present value of future cash flows, adjusted for the expected amount of prepayments.<span class="ql-inline-citation" data-cite="4"></span></p></div>
</div>
<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-the-bottom-line"></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"> The Bottom Line </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Mortgage servicing rights, or MSRs, give a company the ability to purchase the cash flow from a mortgage, even if that person is not the original mortgage lender. Banks and lenders sell MSRs in order to free up capital, thereby allowing them to originate more loans. Nothing changes for the borrower, except the address where they direct their payments.<br/>
</p></div>
|
## What Are Mortgage Servicing Rights (MSR)?
Mortgage servicing rights (MSR) refer to a contractual agreement in which the right to service an existing mortgage is sold by the original [mortgage lender](https://www.investopedia.com/mortgage/mortgage-guide/mortgage-lenders/) to another party that specializes in the various functions involved with servicing mortgages.
### Key Takeaways
* Mortgage servicing rights are sold by the originator of a mortgage to another financial institution, which then takes over the administration of the mortgage, including tasks such as collecting payments and forwarding them to the originator.
* The original lender pays the servicer a fee for performing this work.
* Nothing changes for the mortgagor except the address to which payments are sent.
## Understanding Mortgage Servicing Rights (MSR)
Mortgages have ongoing administrative duties that are regularly processed for the entire length of a mortgage. Common rights included in MSRs are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward the interest and principal portions to the mortgage lender. In return, the servicer is compensated with a specific fee, which is outlined in the contract that has been established and entered into at the beginning of the servicing agreement.
The [mortgage payment amount](https://www.investopedia.com/mortgage-calculator-5084794), interest rate, type of loan, and other factors remain the same. As far as the borrower is concerned, only the address to which payments are sent is changed, and you should contact the servicer, rather than your original mortgage lender, with any questions you may have regarding your loan. [Your servicer can change](https://www.investopedia.com/terms/l/loan-production-office-lpo.asp) at any time, but you should receive notice from your original lender at least 15 days before it happens, and your new servicer should notify you within 15 days of assuming rights as well.
###
Federal banking laws let financial institutions sell mortgages or transfer servicing rights to other institutions without consumer consent.
## Example of Selling an MSR
Sarah takes out a $500,000 mortgage from Lender A. She sends the lender a monthly payment of principal and interest. Three years later, Lender A decides to transfer its MSR on Sarah’s mortgage to Company B. Under the terms of the contract, Company B is paid a fee by Lender A for [processing](https://www.investopedia.com/terms/l/loan_servicing.asp) all of Sarah’s remaining mortgage payments. The mortgage lender can then spend more time and money providing new mortgages while the company assuming the MSR forwards the mortgage payments to the lender. Sarah now sends her monthly payment to Company B instead of Lender A.
## Special Considerations
A lender will often sell MSRs as a means of freeing up lines of credit so it can lend money to additional borrowers. [The majority of mortgages are in effect for 15 to 30 years](https://www.investopedia.com/articles/personal-finance/051914/mortgage-amortization-strategies.asp), and the bank needs billions of dollars to lend money to other consumers requesting mortgages during this time. Because the term is so long, it is important to do thorough research among the [best mortgage lenders](https://www.investopedia.com/best-mortgage-lenders-5076852).
In a roundabout way, selling MSRs means that more people can become homeowners because the sale of these rights produces revenue.
Lenders also make money by charging fees for [originating mortgages](https://www.investopedia.com/terms/m/mortgage_originator.asp) and earning monthly interest from payments. Mortgages are simply additional assets that bring in more revenue for banks.
## History of MSRs
The market for MSRs tends to be strong during periods of economic growth, due to higher quality mortgage originations and fewer defaults. Hedge funds, banks, and [real estate investment trusts](https://www.investopedia.com/terms/r/reit.asp) (REITs) find these assets attractive because MSRs can yield high amounts of interest. For example, SunTrust purchased $8 billion in MSRs in the first quarter of 2016 as a means of earning a solid [return on investment](https://www.investopedia.com/terms/r/returnoninvestment.asp) (ROI), and within months its MSR portfolio contained $1.123 billion in unpaid principal balances of loans that the bank was servicing for lenders.
National Mortgage News reported in June 2019 that MSRs "have been one of the best-performing fixed-income asset classes over the past five years." However, it also reported that "since October 2018, as medium- and long-term interest rates have fallen, projected and actual [mortgage prepayment](https://www.investopedia.com/terms/p/prepayment.asp) assumptions have accelerated, causing the expected average life of MSRs to shorten considerably."
As a result, "MSR values from April to May were down consistently (by a half) multiple." That said, reports National Mortgage News, "the demand from MSR buyers is still very strong, and there is general consensus around MSR values."
## What Is Mortgage Excess Servicing?
[Mortgage excess servicing](https://www.investopedia.com/terms/m/mortgageexcessservicing.asp) is a fee based on the excess cash flow after a basket of loans is pooled together and securitized. This is paid out to mortgage servicers as a fee to maintain a mortgage-backed security.
## Why Do Banks Sell Mortgage Servicing Rights?
Banks sell mortgage servicing rights as a way to free up lines of credit. This allows them to lend out more money, ultimately helping more people finance properties.
## How Do You Value Mortgage Servicing Rights?
According to the Federal Housing Financing Agency (FHFA), the value of a mortgage servicing right is determined by the discounted present value of future cash flows, adjusted for the expected amount of prepayments.
## The Bottom Line
Mortgage servicing rights, or MSRs, give a company the ability to purchase the cash flow from a mortgage, even if that person is not the original mortgage lender. Banks and lenders sell MSRs in order to free up capital, thereby allowing them to originate more loans. Nothing changes for the borrower, except the address where they direct their payments.
|
What Are Mortgage Servicing Rights (MSR)?
Mortgage servicing rights (MSR) refer to a contractual agreement in which the right to service an existing mortgage is sold by the original mortgage lender to another party that specializes in the various functions involved with servicing mortgages.
Key Takeaways
Mortgage servicing rights are sold by the originator of a mortgage to another financial institution, which then takes over the administration of the mortgage, including tasks such as collecting payments and forwarding them to the originator.The original lender pays the servicer a fee for performing this work.Nothing changes for the mortgagor except the address to which payments are sent.
Understanding Mortgage Servicing Rights (MSR)
Mortgages have ongoing administrative duties that are regularly processed for the entire length of a mortgage. Common rights included in MSRs are the right to collect mortgage payments monthly, set aside taxes and insurance premiums in escrow, and forward the interest and principal portions to the mortgage lender. In return, the servicer is compensated with a specific fee, which is outlined in the contract that has been established and entered into at the beginning of the servicing agreement.
The mortgage payment amount, interest rate, type of loan, and other factors remain the same. As far as the borrower is concerned, only the address to which payments are sent is changed, and you should contact the servicer, rather than your original mortgage lender, with any questions you may have regarding your loan. Your servicer can change at any time, but you should receive notice from your original lender at least 15 days before it happens, and your new servicer should notify you within 15 days of assuming rights as well.
Federal banking laws let financial institutions sell mortgages or transfer servicing rights to other institutions without consumer consent.
Example of Selling an MSR
Sarah takes out a $500,000 mortgage from Lender A. She sends the lender a monthly payment of principal and interest. Three years later, Lender A decides to transfer its MSR on Sarah’s mortgage to Company B. Under the terms of the contract, Company B is paid a fee by Lender A for processing all of Sarah’s remaining mortgage payments. The mortgage lender can then spend more time and money providing new mortgages while the company assuming the MSR forwards the mortgage payments to the lender. Sarah now sends her monthly payment to Company B instead of Lender A.
Special Considerations
A lender will often sell MSRs as a means of freeing up lines of credit so it can lend money to additional borrowers. The majority of mortgages are in effect for 15 to 30 years, and the bank needs billions of dollars to lend money to other consumers requesting mortgages during this time. Because the term is so long, it is important to do thorough research among the best mortgage lenders.
In a roundabout way, selling MSRs means that more people can become homeowners because the sale of these rights produces revenue.
Lenders also make money by charging fees for originating mortgages and earning monthly interest from payments. Mortgages are simply additional assets that bring in more revenue for banks.
History of MSRs
The market for MSRs tends to be strong during periods of economic growth, due to higher quality mortgage originations and fewer defaults. Hedge funds, banks, and real estate investment trusts (REITs) find these assets attractive because MSRs can yield high amounts of interest. For example, SunTrust purchased $8 billion in MSRs in the first quarter of 2016 as a means of earning a solid return on investment (ROI), and within months its MSR portfolio contained $1.123 billion in unpaid principal balances of loans that the bank was servicing for lenders.
National Mortgage News reported in June 2019 that MSRs "have been one of the best-performing fixed-income asset classes over the past five years." However, it also reported that "since October 2018, as medium- and long-term interest rates have fallen, projected and actual mortgage prepayment assumptions have accelerated, causing the expected average life of MSRs to shorten considerably."
As a result, "MSR values from April to May were down consistently (by a half) multiple." That said, reports National Mortgage News, "the demand from MSR buyers is still very strong, and there is general consensus around MSR values."
What Is Mortgage Excess Servicing?
Mortgage excess servicing is a fee based on the excess cash flow after a basket of loans is pooled together and securitized. This is paid out to mortgage servicers as a fee to maintain a mortgage-backed security.
Why Do Banks Sell Mortgage Servicing Rights?
Banks sell mortgage servicing rights as a way to free up lines of credit. This allows them to lend out more money, ultimately helping more people finance properties.
How Do You Value Mortgage Servicing Rights?
According to the Federal Housing Financing Agency (FHFA), the value of a mortgage servicing right is determined by the discounted present value of future cash flows, adjusted for the expected amount of prepayments.
The Bottom Line
Mortgage servicing rights, or MSRs, give a company the ability to purchase the cash flow from a mortgage, even if that person is not the original mortgage lender. Banks and lenders sell MSRs in order to free up capital, thereby allowing them to originate more loans. Nothing changes for the borrower, except the address where they direct their payments.
|
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] |
https://www.investopedia.com/three-reasons-high-interest-rates-have-not-stopped-people-from-spending-8635158
|
3 Reasons High Interest Rates Haven't Stopped People From Spending
|
<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>Inflation's downward trajectory has stalled and economists think they know a few reasons why the high interest rates designed to beat back price increases may not be as effective. </li><li>High mortgage rates have made it harder to get into the real estate market, but those who own their home and have no intention of moving have been shielded from increased shelter costs.</li><li> Consumers have more money in their pockets, either from increased wages, excess pandemic-era savings or earnings on stocks and their homes. This has made many rely less on credit and continue spending. </li><li>Government spending has stimulated the economy but has increased the country's deficits.</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 Federal Reserve’s interest rate hikes were supposed to make consumers curtail their spending—but consumers haven’t gotten the memo, and economists have identified three major reasons why.
</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"> There’s no doubt it’s harder and more expensive to borrow money these days, thanks to the Federal Reserve’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723">campaign of interest rate hikes</a>. The fed funds rate—a major driver of borrowing costs on all kinds of loans—has been pushed to its highest since 2001. Those rate hikes were designed to slow the economy, discourage borrowing and spending, and drag down inflation.<br/><br/>Indeed, rates for 30-year fixed mortgages <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t160150249z">are above 7%</a>, close to their highest in decades, credit card interest rates are at their highest since at least the 1990s, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/almost-every-kind-of-loan-got-harder-to-get-in-fourth-quarter-8559166">banks are raising their standards on who they’ll lend money to</a>.<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_6-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Yet, consumer spending <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449">continues to surge ahead</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-have-forecasters-underestimated-the-us-economy-lately-8633636">defying expectations</a>, and progress against <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">inflation has stalled</a> for several months. Economists have pinpointed several major reasons the Fed’s tough medicine is going down easier than experts had expected.
</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-fixed-rate-mortgages-have-shielded-homeowners"></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"> Fixed-Rate Mortgages Have Shielded Homeowners </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> High mortgage rates may be the bane of homebuyers and, more broadly, the entire housing market, but there’s a big category of people who are unfazed by them: homeowners who aren’t planning on moving.
</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 vast majority of home loans have fixed-rate mortgages, so they’re completely untouched by interest rate changes.
</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 lot of consumers—those with mortgages fixed for 15 or 30 years—have been protected from the worst of the rate increases,” said Nicholas Brooks, head of economic and investment research at Intermediate Capital Group. “Unless they've been borrowing extremely heavily on their credit cards, and most data would indicate that that hasn't been structurally an issue, the increase in interest rates for the average family has had less of an impact than one might have expected.”
</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"> This fact sets the U.S. economy apart from other countries around the world, where people are feeling much more financial pain as central banks have raised interest rates to combat inflation according to research this week by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/imf.asp">International Monetary Fund</a>, the U.N.’s financial arm.<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-households-stockpiled-an-astonishing-amount-of-wealth-during-the-pandemic"></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"> Households Stockpiled an Astonishing Amount of Wealth During the Pandemic </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Another major reason: Households on average stockpiled a massive amount of wealth during the pandemic, and they’ve been drawing on it to continue their spending habits without borrowing. It wasn’t just stimulus checks: Soaring stocks and home prices <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/americans-are-wealthier-than-ever-why-do-they-feel-worse-about-their-finances-8379568">made many people richer</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"> Experts have made various estimates of how much money people accumulated compared to what they would have saved if the economy had stayed on its pre-pandemic course. In February, economists at the San Francisco Fed estimated this “excess wealth” got as high as $13 trillion in 2021 and is now mostly gone.<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_22-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Increased wages have also largely helped consumers keep up with inflation, keeping their purchasing power steady.
</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-government-spending-has-stimulated-the-economy"></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"> Government Spending Has Stimulated the Economy </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Government spending did not slow down too much once the pandemic faded, as President Joe Biden has signed bills <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/samsung-latest-chips-act-beneficiary-with-up-to-usd6-4b-for-texas-plants-8631383">investing heavily in infrastructure</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-reduction-act-of-2022-6362263">green energy projects</a>, and social programs.
</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"> “Government spending, primarily focused on supporting businesses, has kept employment strong and kept wage growth strong,” Brooks said.
</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’s helped keep businesses in hiring mode, with jobs plentiful and pay raises keeping ahead of inflation. That’s all good for household balance sheets and consumer spending, Brooks said.<br/><br/>While that spending has helped the economy, it’s been paid for by spending deficits rather than new revenue, leading some economists—for example, those at the IMF, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/imf-credits-strong-us-economy-but-cites-financial-risks-of-rising-debt-8634351">in a recent report</a>—to warn that the U.S. national debt is becoming unsustainable.<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:[email protected]" id="news-tip__email_1-0" rel="noopener nofollow nocaes" target="_blank"><span class="link__wrapper">[email protected]</span></a></div></div>
|
### Key Takeaways
* Inflation's downward trajectory has stalled and economists think they know a few reasons why the high interest rates designed to beat back price increases may not be as effective.
* High mortgage rates have made it harder to get into the real estate market, but those who own their home and have no intention of moving have been shielded from increased shelter costs.
* Consumers have more money in their pockets, either from increased wages, excess pandemic-era savings or earnings on stocks and their homes. This has made many rely less on credit and continue spending.
* Government spending has stimulated the economy but has increased the country's deficits.
The Federal Reserve’s interest rate hikes were supposed to make consumers curtail their spending—but consumers haven’t gotten the memo, and economists have identified three major reasons why.
There’s no doubt it’s harder and more expensive to borrow money these days, thanks to the Federal Reserve’s [campaign of interest rate hikes](https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723). The fed funds rate—a major driver of borrowing costs on all kinds of loans—has been pushed to its highest since 2001. Those rate hikes were designed to slow the economy, discourage borrowing and spending, and drag down inflation.
Indeed, rates for 30-year fixed mortgages [are above 7%](https://www.investopedia.com/us-economy-news-today-8635358#toc-2024-04-18t160150249z), close to their highest in decades, credit card interest rates are at their highest since at least the 1990s, and [banks are raising their standards on who they’ll lend money to](https://www.investopedia.com/almost-every-kind-of-loan-got-harder-to-get-in-fourth-quarter-8559166).
Yet, consumer spending [continues to surge ahead](https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449), [defying expectations](https://www.investopedia.com/why-have-forecasters-underestimated-the-us-economy-lately-8633636), and progress against [inflation has stalled](https://www.investopedia.com/inflation-heated-up-in-march-8629363) for several months. Economists have pinpointed several major reasons the Fed’s tough medicine is going down easier than experts had expected.
## Fixed-Rate Mortgages Have Shielded Homeowners
High mortgage rates may be the bane of homebuyers and, more broadly, the entire housing market, but there’s a big category of people who are unfazed by them: homeowners who aren’t planning on moving.
The vast majority of home loans have fixed-rate mortgages, so they’re completely untouched by interest rate changes.
“A lot of consumers—those with mortgages fixed for 15 or 30 years—have been protected from the worst of the rate increases,” said Nicholas Brooks, head of economic and investment research at Intermediate Capital Group. “Unless they've been borrowing extremely heavily on their credit cards, and most data would indicate that that hasn't been structurally an issue, the increase in interest rates for the average family has had less of an impact than one might have expected.”
This fact sets the U.S. economy apart from other countries around the world, where people are feeling much more financial pain as central banks have raised interest rates to combat inflation according to research this week by the [International Monetary Fund](https://www.investopedia.com/terms/i/imf.asp), the U.N.’s financial arm.
## Households Stockpiled an Astonishing Amount of Wealth During the Pandemic
Another major reason: Households on average stockpiled a massive amount of wealth during the pandemic, and they’ve been drawing on it to continue their spending habits without borrowing. It wasn’t just stimulus checks: Soaring stocks and home prices [made many people richer](https://www.investopedia.com/americans-are-wealthier-than-ever-why-do-they-feel-worse-about-their-finances-8379568).
Experts have made various estimates of how much money people accumulated compared to what they would have saved if the economy had stayed on its pre-pandemic course. In February, economists at the San Francisco Fed estimated this “excess wealth” got as high as $13 trillion in 2021 and is now mostly gone.
Increased wages have also largely helped consumers keep up with inflation, keeping their purchasing power steady.
## Government Spending Has Stimulated the Economy
Government spending did not slow down too much once the pandemic faded, as President Joe Biden has signed bills [investing heavily in infrastructure](https://www.investopedia.com/samsung-latest-chips-act-beneficiary-with-up-to-usd6-4b-for-texas-plants-8631383), [green energy projects](https://www.investopedia.com/inflation-reduction-act-of-2022-6362263), and social programs.
“Government spending, primarily focused on supporting businesses, has kept employment strong and kept wage growth strong,” Brooks said.
That’s helped keep businesses in hiring mode, with jobs plentiful and pay raises keeping ahead of inflation. That’s all good for household balance sheets and consumer spending, Brooks said.
While that spending has helped the economy, it’s been paid for by spending deficits rather than new revenue, leading some economists—for example, those at the IMF, [in a recent report](https://www.investopedia.com/imf-credits-strong-us-economy-but-cites-financial-risks-of-rising-debt-8634351)—to warn that the U.S. national debt is becoming unsustainable.
Do you have a news tip for Investopedia reporters? Please email us at
[[email protected]](mailto:[email protected])
|
Key Takeaways
Inflation's downward trajectory has stalled and economists think they know a few reasons why the high interest rates designed to beat back price increases may not be as effective. High mortgage rates have made it harder to get into the real estate market, but those who own their home and have no intention of moving have been shielded from increased shelter costs. Consumers have more money in their pockets, either from increased wages, excess pandemic-era savings or earnings on stocks and their homes. This has made many rely less on credit and continue spending. Government spending has stimulated the economy but has increased the country's deficits.
The Federal Reserve’s interest rate hikes were supposed to make consumers curtail their spending—but consumers haven’t gotten the memo, and economists have identified three major reasons why.
There’s no doubt it’s harder and more expensive to borrow money these days, thanks to the Federal Reserve’s campaign of interest rate hikes. The fed funds rate—a major driver of borrowing costs on all kinds of loans—has been pushed to its highest since 2001. Those rate hikes were designed to slow the economy, discourage borrowing and spending, and drag down inflation.Indeed, rates for 30-year fixed mortgages are above 7%, close to their highest in decades, credit card interest rates are at their highest since at least the 1990s, and banks are raising their standards on who they’ll lend money to.
Yet, consumer spending continues to surge ahead, defying expectations, and progress against inflation has stalled for several months. Economists have pinpointed several major reasons the Fed’s tough medicine is going down easier than experts had expected.
Fixed-Rate Mortgages Have Shielded Homeowners
High mortgage rates may be the bane of homebuyers and, more broadly, the entire housing market, but there’s a big category of people who are unfazed by them: homeowners who aren’t planning on moving.
The vast majority of home loans have fixed-rate mortgages, so they’re completely untouched by interest rate changes.
“A lot of consumers—those with mortgages fixed for 15 or 30 years—have been protected from the worst of the rate increases,” said Nicholas Brooks, head of economic and investment research at Intermediate Capital Group. “Unless they've been borrowing extremely heavily on their credit cards, and most data would indicate that that hasn't been structurally an issue, the increase in interest rates for the average family has had less of an impact than one might have expected.”
This fact sets the U.S. economy apart from other countries around the world, where people are feeling much more financial pain as central banks have raised interest rates to combat inflation according to research this week by the International Monetary Fund, the U.N.’s financial arm.
Households Stockpiled an Astonishing Amount of Wealth During the Pandemic
Another major reason: Households on average stockpiled a massive amount of wealth during the pandemic, and they’ve been drawing on it to continue their spending habits without borrowing. It wasn’t just stimulus checks: Soaring stocks and home prices made many people richer.
Experts have made various estimates of how much money people accumulated compared to what they would have saved if the economy had stayed on its pre-pandemic course. In February, economists at the San Francisco Fed estimated this “excess wealth” got as high as $13 trillion in 2021 and is now mostly gone.
Increased wages have also largely helped consumers keep up with inflation, keeping their purchasing power steady.
Government Spending Has Stimulated the Economy
Government spending did not slow down too much once the pandemic faded, as President Joe Biden has signed bills investing heavily in infrastructure, green energy projects, and social programs.
“Government spending, primarily focused on supporting businesses, has kept employment strong and kept wage growth strong,” Brooks said.
That’s helped keep businesses in hiring mode, with jobs plentiful and pay raises keeping ahead of inflation. That’s all good for household balance sheets and consumer spending, Brooks said.While that spending has helped the economy, it’s been paid for by spending deficits rather than new revenue, leading some economists—for example, those at the IMF, in a recent report—to warn that the U.S. national debt is becoming unsustainable.
Do you have a news tip for Investopedia reporters? Please email us at
[email protected]
|
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https://www.investopedia.com/articles/personal-finance/112315/6-ways-load-your-walmart-money-card.asp
|
How to Load Your Walmart Money Card
|
<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 Walmart MoneyCard is a debit card that requires no bank account or credit check and therefore avoids <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> fees.
</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 Walmart MoneyCard is one of many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp">prepaid debit card</a> options that have come on the market over the last several years for those who are unable or unwilling to get traditional bank accounts. Available in either Visa or MasterCard versions, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111015/does-walmart-take-international-credit-cards.asp">card can be used at Walmart</a> and any retailer that accepts Visa or MasterCard.<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_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 Walmart MoneyCard is Walmart’s low-cost prepaid debit card.</li><li>You can use the Walmart MoneyCard even if you have no bank account.</li><li>Funding the Walmart MoneyCard can be done via direct deposit.</li><li>The MoneyCard can be loaded at store registers, at Walmart MoneyCenters, or with your Internal Revenue Service (IRS) tax refund, among others.</li><li>MoneyCard fees include a $5.94 monthly service fee.</li></ul></div></div></div>
<span class="heading-toc" id="toc-loading-the-walmart-moneycard"></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"> Loading the Walmart MoneyCard </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Money can be added to Walmart MoneyCards via <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp">direct deposit</a>, Walmart store reload, online transfer, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-refund.asp">tax return</a> deposit. Here are those methods in more detail:<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="6"></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_9-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-subheading__text"> 1. Direct Deposit </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Payroll checks or your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/government-assistance-programs-4845368">government benefits</a> can be loaded directly onto a MoneyCard through direct deposit. This service is free, and you can opt to deposit all or part of your check. Employers may notify the bank of direct deposits up to two days before the official “payday,” and Walmart will then transfer funds to the card early.
</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"> 2. Walmart Rapid Reload </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> This option allows you to add money to your card at Walmart locations for a $3 fee. Cash deposits are free using the Walmart MoneyCard app at Walmart stores. For these deposits, you can deposit cash by touching the Deposit tab in the Walmart MoneyCard app and selecting “Deposit Cash using the Walmart MoneyCard App.”
</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"> 3. Online Transfer </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> An online transfer typically takes one to three <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/business-day.asp">business days</a>, and there is no reloading fee. However, your bank may charge fees on the electronic transfer.
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div>
<h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-subheading__text"> 4. Tax Refund </span> </h3>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> If you electronically file your income taxes, you can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0312/avoid-the-prepaid-tax-refund-debit-cards.aspx">directly deposit your refund</a> onto your Walmart MoneyCard, and no reloading fee applies. You send your card number and mobile phone number to Walmart, which then texts you the direct-deposit information that you enter into your tax forms. The standard Internal Revenue Service (IRS) processing time applies, although <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/efile.asp">e-filing</a> typically allows you to receive a refund more rapidly than filing by mail.<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_21-0"></div>
<span class="heading-toc" id="toc-benefits-of-the-walmart-moneycard"></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"> Benefits of the Walmart MoneyCard </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The MoneyCard offers many of the benefits found on all Visa and MasterCard debit cards, including fraud protection. A free online bill-paying service is also included. You can send money orders, get paper checks, or set recurring monthly payments for bills such as for your auto insurance. These cards also allow you to send funds to friends or family anywhere in the U.S.<span class="ql-inline-citation" data-cite="11"></span><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_24-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> You can also earn <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 by shopping at Walmart.com and via the Walmart app (3% cash back), Walmart fuel stations (2%), and Walmart retail stores (1%). The limit for cash-back rewards is $75 a year.<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>
<span class="heading-toc" id="toc-walmart-moneycard-fees"></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"> Walmart MoneyCard Fees </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The MoneyCard costs $1 and can be purchased at any Walmart store. The card has a $5.94 monthly service fee, which is waived if you had direct deposits totaling $500 or more in the previous month. ATM and teller cash withdrawals cost $2.50, while withdrawals at Walmart stores are free.
</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"> Meanwhile, cash reload costs $3 at Walmart stores and up to $5.95 for other reload locations. Other fees include a 3% foreign transaction fee and $0.50 for balance inquiries at ATMs. There’s also a $5.95 charge for a 12-pack of checks and a $3 fee for card replacement (or $15 for expedited delivery).<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_31-0"></div>
<span class="heading-toc" id="toc-how-to-get-a-walmart-moneycard"></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"> How to Get a Walmart MoneyCard </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Getting a Walmart MoneyCard is easy. You can order one online through the Walmart MoneyCard website, and your card will arrive in two weeks. To avoid waiting for the mail, you can purchase a card directly at any Walmart store.
</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"> You must be age 18 or older and will have to deposit money to your card before you can start using it. Opening the account requires a valid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/ssn.asp">Social Security number</a>, and mobile or email verification and the mobile app are required to be able to access all account features.<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_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-how-do-i-find-the-routing-and-account-numbers-for-a-walmart-moneycard"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do I Find the Routing and Account Numbers for a Walmart MoneyCard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Once your account is registered, you can get your account and routing number by texting “DD” to 37267, logging into the app or your online account, or calling Cardholder Customer Service at 1-877-937-4098. Be aware that the numbers on your card are not the same as your account number.</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-is-the-account-balance-limit-on-a-walmart-moneycard"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the Account Balance Limit on a Walmart MoneyCard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The maximum balance for a Walmart MoneyCard is $7,500. Most competitors have a maximum balance of $3,000.<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_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-can-someone-else-put-money-on-my-walmart-moneycard"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Someone Else Put Money on My Walmart MoneyCard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The cheapest way for someone else to put money on your Walmart MoneyCard is for them to transfer the money from their bank to your MoneyCard using your routing and account numbers. If they can’t do a bank transfer, or if you need money more quickly, they can purchase a MoneyPak at most retailers (including Walmart) for $5.95 and deposit cash into your account that way.<span class="ql-inline-citation" data-cite="4"></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-can-i-deposit-a-check-to-my-walmart-moneycard"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Deposit a Check to My Walmart MoneyCard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, you can deposit a check using the mobile Walmart MoneyCard app on your phone. First, make sure that the check is made out to you, then sign your name on the back of the check and put “For Mobile Deposit Only.” To be able to use the Mobile Check Deposit feature in the app, your account must be in good standing, and you must have had at least four direct deposits within the last two months and at least one <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/point-of-sale.asp">point-of-sale</a> card transaction within the last month.<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_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-what-is-the-limit-for-a-single-direct-deposit-to-a-walmart-moneycard"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the Limit for a Single Direct Deposit to a Walmart MoneyCard?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The maximum amount for a single direct deposit to a Walmart MoneyCard is $3,000. The maximum total account balance is $7,500.<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_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-does-a-walmart-moneycard-have-overdraft-protection"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does a Walmart MoneyCard Have Overdraft Protection?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Yes, if you opt in. The amount of overdraft coverage is dependent on the deposits that you receive. You get $10 of overdraft coverage if you receive a single direct deposit of any amount in your account. You get $100 of overdraft coverage if you receive at least two direct deposits totaling $200+ within a 35-day period. You get $200 of overdraft coverage if you receive at least two direct deposits totaling $400+ within a 35-day period.<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_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"> The Walmart MoneyCard comes with a number of free services and other benefits, especially for frequent Walmart shoppers. It also offers a convenient number of ways to load money onto the card. However, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-prepaid-debit-cards-5071798">other prepaid debit cards</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mobile-banking.asp">mobile banking</a> options offer lower fees, larger ATM networks, and more free services. The Walmart MoneyCard does offer earlier access to deposits than many traditional banks, but with much stricter limits and fees. Research your options before you make a final choice.
</p></div>
|
The Walmart MoneyCard is a debit card that requires no bank account or credit check and therefore avoids [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fees.
The Walmart MoneyCard is one of many [prepaid debit card](https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp) options that have come on the market over the last several years for those who are unable or unwilling to get traditional bank accounts. Available in either Visa or MasterCard versions, the [card can be used at Walmart](https://www.investopedia.com/ask/answers/111015/does-walmart-take-international-credit-cards.asp) and any retailer that accepts Visa or MasterCard.
### Key Takeaways
* The Walmart MoneyCard is Walmart’s low-cost prepaid debit card.
* You can use the Walmart MoneyCard even if you have no bank account.
* Funding the Walmart MoneyCard can be done via direct deposit.
* The MoneyCard can be loaded at store registers, at Walmart MoneyCenters, or with your Internal Revenue Service (IRS) tax refund, among others.
* MoneyCard fees include a $5.94 monthly service fee.
## Loading the Walmart MoneyCard
Money can be added to Walmart MoneyCards via [direct deposit](https://www.investopedia.com/terms/d/directdeposit.asp), Walmart store reload, online transfer, or [tax return](https://www.investopedia.com/terms/t/tax-refund.asp) deposit. Here are those methods in more detail:
### 1. Direct Deposit
Payroll checks or your [government benefits](https://www.investopedia.com/government-assistance-programs-4845368) can be loaded directly onto a MoneyCard through direct deposit. This service is free, and you can opt to deposit all or part of your check. Employers may notify the bank of direct deposits up to two days before the official “payday,” and Walmart will then transfer funds to the card early.
### 2. Walmart Rapid Reload
This option allows you to add money to your card at Walmart locations for a $3 fee. Cash deposits are free using the Walmart MoneyCard app at Walmart stores. For these deposits, you can deposit cash by touching the Deposit tab in the Walmart MoneyCard app and selecting “Deposit Cash using the Walmart MoneyCard App.”
### 3. Online Transfer
An online transfer typically takes one to three [business days](https://www.investopedia.com/terms/b/business-day.asp), and there is no reloading fee. However, your bank may charge fees on the electronic transfer.
### 4. Tax Refund
If you electronically file your income taxes, you can [directly deposit your refund](https://www.investopedia.com/financial-edge/0312/avoid-the-prepaid-tax-refund-debit-cards.aspx) onto your Walmart MoneyCard, and no reloading fee applies. You send your card number and mobile phone number to Walmart, which then texts you the direct-deposit information that you enter into your tax forms. The standard Internal Revenue Service (IRS) processing time applies, although [e-filing](https://www.investopedia.com/terms/e/efile.asp) typically allows you to receive a refund more rapidly than filing by mail.
## Benefits of the Walmart MoneyCard
The MoneyCard offers many of the benefits found on all Visa and MasterCard debit cards, including fraud protection. A free online bill-paying service is also included. You can send money orders, get paper checks, or set recurring monthly payments for bills such as for your auto insurance. These cards also allow you to send funds to friends or family anywhere in the U.S.
You can also earn [cash-back](https://www.investopedia.com/terms/c/cash-back.asp) rewards by shopping at Walmart.com and via the Walmart app (3% cash back), Walmart fuel stations (2%), and Walmart retail stores (1%). The limit for cash-back rewards is $75 a year.
## Walmart MoneyCard Fees
The MoneyCard costs $1 and can be purchased at any Walmart store. The card has a $5.94 monthly service fee, which is waived if you had direct deposits totaling $500 or more in the previous month. ATM and teller cash withdrawals cost $2.50, while withdrawals at Walmart stores are free.
Meanwhile, cash reload costs $3 at Walmart stores and up to $5.95 for other reload locations. Other fees include a 3% foreign transaction fee and $0.50 for balance inquiries at ATMs. There’s also a $5.95 charge for a 12-pack of checks and a $3 fee for card replacement (or $15 for expedited delivery).
## How to Get a Walmart MoneyCard
Getting a Walmart MoneyCard is easy. You can order one online through the Walmart MoneyCard website, and your card will arrive in two weeks. To avoid waiting for the mail, you can purchase a card directly at any Walmart store.
You must be age 18 or older and will have to deposit money to your card before you can start using it. Opening the account requires a valid [Social Security number](https://www.investopedia.com/terms/s/ssn.asp), and mobile or email verification and the mobile app are required to be able to access all account features.
## How Do I Find the Routing and Account Numbers for a Walmart MoneyCard?
Once your account is registered, you can get your account and routing number by texting “DD” to 37267, logging into the app or your online account, or calling Cardholder Customer Service at 1-877-937-4098. Be aware that the numbers on your card are not the same as your account number.
## What is the Account Balance Limit on a Walmart MoneyCard?
The maximum balance for a Walmart MoneyCard is $7,500. Most competitors have a maximum balance of $3,000.
## Can Someone Else Put Money on My Walmart MoneyCard?
The cheapest way for someone else to put money on your Walmart MoneyCard is for them to transfer the money from their bank to your MoneyCard using your routing and account numbers. If they can’t do a bank transfer, or if you need money more quickly, they can purchase a MoneyPak at most retailers (including Walmart) for $5.95 and deposit cash into your account that way.
## Can I Deposit a Check to My Walmart MoneyCard?
Yes, you can deposit a check using the mobile Walmart MoneyCard app on your phone. First, make sure that the check is made out to you, then sign your name on the back of the check and put “For Mobile Deposit Only.” To be able to use the Mobile Check Deposit feature in the app, your account must be in good standing, and you must have had at least four direct deposits within the last two months and at least one [point-of-sale](https://www.investopedia.com/terms/p/point-of-sale.asp) card transaction within the last month.
## What is the Limit for a Single Direct Deposit to a Walmart MoneyCard?
The maximum amount for a single direct deposit to a Walmart MoneyCard is $3,000. The maximum total account balance is $7,500.
## Does a Walmart MoneyCard Have Overdraft Protection?
Yes, if you opt in. The amount of overdraft coverage is dependent on the deposits that you receive. You get $10 of overdraft coverage if you receive a single direct deposit of any amount in your account. You get $100 of overdraft coverage if you receive at least two direct deposits totaling $200+ within a 35-day period. You get $200 of overdraft coverage if you receive at least two direct deposits totaling $400+ within a 35-day period.
## The Bottom Line
The Walmart MoneyCard comes with a number of free services and other benefits, especially for frequent Walmart shoppers. It also offers a convenient number of ways to load money onto the card. However, [other prepaid debit cards](https://www.investopedia.com/best-prepaid-debit-cards-5071798) and [mobile banking](https://www.investopedia.com/terms/m/mobile-banking.asp) options offer lower fees, larger ATM networks, and more free services. The Walmart MoneyCard does offer earlier access to deposits than many traditional banks, but with much stricter limits and fees. Research your options before you make a final choice.
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The Walmart MoneyCard is a debit card that requires no bank account or credit check and therefore avoids overdraft fees.
The Walmart MoneyCard is one of many prepaid debit card options that have come on the market over the last several years for those who are unable or unwilling to get traditional bank accounts. Available in either Visa or MasterCard versions, the card can be used at Walmart and any retailer that accepts Visa or MasterCard.
Key Takeaways
The Walmart MoneyCard is Walmart’s low-cost prepaid debit card.You can use the Walmart MoneyCard even if you have no bank account.Funding the Walmart MoneyCard can be done via direct deposit.The MoneyCard can be loaded at store registers, at Walmart MoneyCenters, or with your Internal Revenue Service (IRS) tax refund, among others.MoneyCard fees include a $5.94 monthly service fee.
Loading the Walmart MoneyCard
Money can be added to Walmart MoneyCards via direct deposit, Walmart store reload, online transfer, or tax return deposit. Here are those methods in more detail:
1. Direct Deposit
Payroll checks or your government benefits can be loaded directly onto a MoneyCard through direct deposit. This service is free, and you can opt to deposit all or part of your check. Employers may notify the bank of direct deposits up to two days before the official “payday,” and Walmart will then transfer funds to the card early.
2. Walmart Rapid Reload
This option allows you to add money to your card at Walmart locations for a $3 fee. Cash deposits are free using the Walmart MoneyCard app at Walmart stores. For these deposits, you can deposit cash by touching the Deposit tab in the Walmart MoneyCard app and selecting “Deposit Cash using the Walmart MoneyCard App.”
3. Online Transfer
An online transfer typically takes one to three business days, and there is no reloading fee. However, your bank may charge fees on the electronic transfer.
4. Tax Refund
If you electronically file your income taxes, you can directly deposit your refund onto your Walmart MoneyCard, and no reloading fee applies. You send your card number and mobile phone number to Walmart, which then texts you the direct-deposit information that you enter into your tax forms. The standard Internal Revenue Service (IRS) processing time applies, although e-filing typically allows you to receive a refund more rapidly than filing by mail.
Benefits of the Walmart MoneyCard
The MoneyCard offers many of the benefits found on all Visa and MasterCard debit cards, including fraud protection. A free online bill-paying service is also included. You can send money orders, get paper checks, or set recurring monthly payments for bills such as for your auto insurance. These cards also allow you to send funds to friends or family anywhere in the U.S.
You can also earn cash-back rewards by shopping at Walmart.com and via the Walmart app (3% cash back), Walmart fuel stations (2%), and Walmart retail stores (1%). The limit for cash-back rewards is $75 a year.
Walmart MoneyCard Fees
The MoneyCard costs $1 and can be purchased at any Walmart store. The card has a $5.94 monthly service fee, which is waived if you had direct deposits totaling $500 or more in the previous month. ATM and teller cash withdrawals cost $2.50, while withdrawals at Walmart stores are free.
Meanwhile, cash reload costs $3 at Walmart stores and up to $5.95 for other reload locations. Other fees include a 3% foreign transaction fee and $0.50 for balance inquiries at ATMs. There’s also a $5.95 charge for a 12-pack of checks and a $3 fee for card replacement (or $15 for expedited delivery).
How to Get a Walmart MoneyCard
Getting a Walmart MoneyCard is easy. You can order one online through the Walmart MoneyCard website, and your card will arrive in two weeks. To avoid waiting for the mail, you can purchase a card directly at any Walmart store.
You must be age 18 or older and will have to deposit money to your card before you can start using it. Opening the account requires a valid Social Security number, and mobile or email verification and the mobile app are required to be able to access all account features.
How Do I Find the Routing and Account Numbers for a Walmart MoneyCard?
Once your account is registered, you can get your account and routing number by texting “DD” to 37267, logging into the app or your online account, or calling Cardholder Customer Service at 1-877-937-4098. Be aware that the numbers on your card are not the same as your account number.
What is the Account Balance Limit on a Walmart MoneyCard?
The maximum balance for a Walmart MoneyCard is $7,500. Most competitors have a maximum balance of $3,000.
Can Someone Else Put Money on My Walmart MoneyCard?
The cheapest way for someone else to put money on your Walmart MoneyCard is for them to transfer the money from their bank to your MoneyCard using your routing and account numbers. If they can’t do a bank transfer, or if you need money more quickly, they can purchase a MoneyPak at most retailers (including Walmart) for $5.95 and deposit cash into your account that way.
Can I Deposit a Check to My Walmart MoneyCard?
Yes, you can deposit a check using the mobile Walmart MoneyCard app on your phone. First, make sure that the check is made out to you, then sign your name on the back of the check and put “For Mobile Deposit Only.” To be able to use the Mobile Check Deposit feature in the app, your account must be in good standing, and you must have had at least four direct deposits within the last two months and at least one point-of-sale card transaction within the last month.
What is the Limit for a Single Direct Deposit to a Walmart MoneyCard?
The maximum amount for a single direct deposit to a Walmart MoneyCard is $3,000. The maximum total account balance is $7,500.
Does a Walmart MoneyCard Have Overdraft Protection?
Yes, if you opt in. The amount of overdraft coverage is dependent on the deposits that you receive. You get $10 of overdraft coverage if you receive a single direct deposit of any amount in your account. You get $100 of overdraft coverage if you receive at least two direct deposits totaling $200+ within a 35-day period. You get $200 of overdraft coverage if you receive at least two direct deposits totaling $400+ within a 35-day period.
The Bottom Line
The Walmart MoneyCard comes with a number of free services and other benefits, especially for frequent Walmart shoppers. It also offers a convenient number of ways to load money onto the card. However, other prepaid debit cards and mobile banking options offer lower fees, larger ATM networks, and more free services. The Walmart MoneyCard does offer earlier access to deposits than many traditional banks, but with much stricter limits and fees. Research your options before you make a final choice.
|
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https://www.investopedia.com/what-happened-to-signature-bank-7370710
|
What Happened to Signature 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"> Signature Bank was shut down on March 12, 2023, after depositors withdrew large sums of money on the heels of the collapse of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676">Silicon Valley Bank (SVB)</a>. Regulators feared continued <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/contagion.asp">contagion</a> in the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank.asp">banking</a> sector and closed Signature Bank to try to contain the panic.
</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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-failure.asp">Bank failures</a> aren’t new. More than 550 banks shut down from 2001 to so far in 2023, according to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic.asp">Federal Deposit Insurance Corp. (FDIC)</a>.<span class="ql-inline-citation" data-cite="1"></span> But Signature’s breakdown stands out because of its connection to the SVB failure and ensuing fears about the health of the banking sector as a whole. At the time, SVB was the biggest bank failure—and Signature the second biggest—since Washington Mutual closed in 2008.<span class="ql-inline-citation" data-cite="2"></span> (Those collapses have since been eclipsed by the failure of First Republic Bank in April 2023.)
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The 2023 failures prompted a controversial rescue that called into question FDIC limits and which banks are “too big to fail.” To learn more, we’ll delve into Signature’s history, the events that led up to its demise, and how it impacts you—and the broader <a data-component="link" data-ordinal="1" 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_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>Signature Bank was shut down by federal regulators on March 12, 2023.</li><li>The bank’s failure resulted from regulator concern about depositors withdrawing large amounts of money after the failure of Silicon Valley Bank (SVB) and the fear of continued contagion.</li><li>Federal regulators said Signature Bank customers would get all deposits back, even amounts over $250,000 that are uninsured by the Federal Deposit Insurance Corp. (FDIC). </li><li>An April 2023 FDIC report blamed Signature's failure on bank mismanagement, a lack of corporate governance, and failure to listen to and respond quickly to the FDIC's recommendations.</li><li>Signature Bank’s failure raised many policy questions around FDIC insurance, and bank and cryptocurrency oversight.</li></ul></div></div></div>
<span class="heading-toc" id="toc-what-was-signature-bank"></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"> What Was Signature Bank? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Signature Bank functioned as an FDIC-insured, New York state-chartered commercial bank, primarily working with privately owned businesses. Signature Bank had clients in middle-market companies but was especially known for catering to law offices, real estate buyers, and cryptocurrency companies. The bank had 40 private client offices across metropolitan New York, Connecticut, California, Nevada, and North Carolina.<span class="ql-inline-citation" data-cite="3"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Signature Bank was listed as the 19th largest bank in the United States by S&P Global, with assets worth $110.36 billion and $88.59 billion in deposits in December 2022.<span class="ql-inline-citation" data-cite="4"></span> It was a powerhouse in New York real estate lending, as the third-largest commercial real estate bank in New York City, primarily working multifamily housing loans, according to real estate data analysis publisher PincusCo.<span class="ql-inline-citation" data-cite="5"></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_13-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Notably, Signature Bank was also the first FDIC-insured bank to create a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>-based digital payments platform approved by the New York State Department of Financial Services (DFS). Its platform, Signet, required a minimum account balance of $250,000; FDIC insurance caps out at $250,000.<span class="ql-inline-citation" data-cite="36"></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_15-0"></div>
<span class="heading-toc" id="toc-history-of-signature-bank"></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"> History of Signature Bank </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> New York City-headquartered Signature Bank began in 2001 with $50 million in assets and “ranked somewhere around the 7,900th-largest U.S.-based commercial bank, based on deposits,” according to a statement by Chairman of the Board Scott Shay. By 2023, Signature Bank had grown to become the 29th largest U.S.-based commercial bank.<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_18-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Shay co-founded Signature Bank alongside Joseph J. DePaolo and John Tamberlane. The bank’s model relied on a network of private client banking teams. Veteran bankers acted as a single point of contact for all client needs.<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_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-note" 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 with-title" id="mntl-sc-block-callout-heading_2-0">Note</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Somewhat ironically, former U.S. Congressman Barney Frank became a member of Signature Bank’s board of directors in 2015. The Democrat co-authored the <a data-component="link" data-ordinal="1" 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> after the 2008 financial crisis, which aimed to reduce risk and increase bank oversight.<span class="ql-inline-citation" data-cite="37"></span></p></div></div></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The bank continued to expand and by 2018 had ventured into digital banking, eventually launching its blockchain payments platform in 2019. In 2019, Signature Bank opened a flagship private client banking office in San Francisco, then continued to grow throughout California. Total digital-related deposits reached $28.7 billion by the end of 2021—almost 30% of the bank’s deposit portfolio.<span class="ql-inline-citation" data-cite="10"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> By 2021, Signature Bank was added to the S&P 500 Index; the bank’s shareholder return ranked top among all financial institutions in the index.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Signature Bank affirmed a commitment to creating positive social impact, including diversity awareness events and time donated to charitable causes. The bank also matched client funds for the Impact Certificate of Deposit (CD) Program supporting sustainable development initiatives.<span class="ql-inline-citation" data-cite="12"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> However, housing activists such as New York’s Association for Neighborhood & Housing Development (ANHD) have long alleged that Signature Bank lent “to landlords with public records of tenant harassment and poor conditions.”<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_30-0"></div>
<span class="heading-toc" id="toc-why-did-signature-bank-fail"></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"> Why Did Signature Bank Fail? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In short, the failure of Silicon Valley Bank led to a Signature <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankrun.asp">bank run</a> on Friday, March 10, 2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured deposits and was exposed to the crypto sector.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> New York state and U.S. federal regulators were also concerned—with 24/7 online banking, plus social media, the run was continuing over the weekend. On Sunday, March 12, 2023, the New York State DFS took possession of the bank “in order to protect depositors” and named the FDIC as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/receiver.asp">receiver</a>.<span class="ql-inline-citation" data-cite="14"></span> They announced that there was a plan to make sure all depositors were protected, even those with uninsured deposits.<span class="ql-inline-citation" data-cite="38"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> In late April, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fdic-signature-bank-7486572">FDIC issued a report on Signature Bank’s failure</a>, concluding that the root cause was "poor management," namely:
</p>
<div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <li><strong>Management failure to understand the risks of its concentration in the crypto sector</strong>: See the “What Did Crypto Have to Do with It?” section later in this article. </li><li><strong>An abnormally large share of uninsured deposits</strong>: Signature Bank reported $79.5 billion in estimated uninsured deposits as of December 2022—meaning about 90% of all its deposits were uninsured. A Congressional Research Service report on the SVB and Signature failures noted that uninsured deposits can lead to widespread bank runs—as uninsured depositors try to avoid losses by withdrawing funds before the money’s gone.<span class="ql-inline-citation" data-cite="16"></span></li><li><strong>Liquidity risk</strong>: The FDIC said the bank's poor governance and risk management made the bank unable to manage its liquidity in a time of stress.<span class="ql-inline-citation" data-cite="43"></span> Although Signature had enough reserves to comply with regulatory requirements, as Vidhura S. Tennekoon, assistant professor of economics at Indiana University, pointed out, only about 5% of its assets were in cash, compared to an industry average of 13%.<span class="ql-inline-citation" data-cite="18"></span><span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="20"></span></li><li><strong>Lack of adequate FDIC oversight</strong>: The report admitted to the FDIC's own shortcomings in conducting certain timely reviews of Signature Bank, blaming a staffing shortage. But it also said the bank didn't respond quickly to concerns and recommendations it did make.<span class="ql-inline-citation" data-cite="44"></span></li>
</ul>
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<span class="heading-toc" id="toc-a-timeline-of-the-collapse"></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"> A Timeline of the Collapse </span> </h2>
<ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0">
<li><strong>Dec. 6, 2022</strong>: Media reports said Signature Bank<strong> </strong>announced at a Goldman Sachs conference that it intended to shed $8 billion to $10 billion of its deposits from the crypto sector because of “issues” in the space, lowering its percentage of total deposits from 23.5% to under 20% and potentially under 15% eventually.<span class="ql-inline-citation" data-cite="21"></span></li>
<li><strong>Jan. 17, 2023</strong>: Signature Bank’s year-end report said the bank had remained “significantly above FDIC ‘well capitalized’ standards.” Yet the report also noted that the past year “resulted in the most difficult deposit environment we have seen in our 22-year history.” Leadership was optimistic. “On the heels of every challenge, Signature Bank emerged stronger, which will be the case this time as well,” Scott A. Shay, Chairman of the Board, said in the report.<span class="ql-inline-citation" data-cite="4"></span> </li>
<li><strong>Jan. 31, 2023</strong>: Signature Bank noted that three credit agencies, Fitch, Kroll, and Moody’s, had affirmed its credit ratings, based on reviews “of its financial stability as well as its business and risk management practices.”<span class="ql-inline-citation" data-cite="22"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span>
<li><strong>March 9, 2023</strong>: Perhaps seeking to reassure investors and regulators, Signature Bank sent out a press release noting solid investment ratings, strong <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>, a high level 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>, and a diversified deposit mix. Signature Bank reiterated “its strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.”<span class="ql-inline-citation" data-cite="23"></span> </li>
<li><strong>March 10, 2023</strong>:<strong> </strong>Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation.<span class="ql-inline-citation" data-cite="39"></span> Signature Bank’s stock price closed at $70 on heavy trading, a drop of 79% from Feb. 10, 2022.<span class="ql-inline-citation" data-cite="25"></span> </li>
<li><strong>March 12, 2023</strong>: New York DFS took possession of Signature Bank to protect depositors and appointed the FDIC as the bank’s receiver. The FDIC in turn transferred all the deposits and nearly all of the assets to Signature Bridge Bank, a full-service bank operated by the FDIC, while it looked for potential bidders for Signature Bank.<span class="ql-inline-citation" data-cite="24"></span></li>
<li><strong>March 19, 2023</strong>:<strong> </strong>The FDIC announced Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp, as Signature Bank’s acquiring institution for almost all deposits and some loan portfolios. Around $60 billion in loans remained in the FDIC receivership, and the FDIC said it would cover about $4 billion in deposits related to digital banking assets.<span class="ql-inline-citation" data-cite="26"></span><br/></li>
</ul>
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<span class="heading-toc" id="toc-making-signature-bank-depositors-whole"></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"> Making Signature Bank Depositors Whole </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> “All depositors of this institution will be made whole,” noted a March 12, 2023, joint statement from Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin Gruenberg.<span class="ql-inline-citation" data-cite="27"></span> The financing was to be made available through a newly created <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bank-term-funding-project-7367897">Bank Term Funding Program (BTFP)</a>, offering loans of up to one year to depository institutions.<span class="ql-inline-citation" data-cite="40"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> Any bank depositors using Signature Bridge Bank automatically became depositors of Flagstar Bank and could recover funds over the $250,000 FDIC insured-deposit limit. But depositors using Signature’s digital-assets banking business will work with the FDIC to recover deposits. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shareholder.asp">Shareholders</a> and certain <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecureddebt.asp">unsecured</a> debtholders will not be “made whole” and will not recover their investments.<span class="ql-inline-citation" data-cite="27"></span><span class="ql-inline-citation" data-cite="28"></span>
</p>
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<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">Important</h3>
<div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>In guaranteeing most of the uninsured deposits, the FDIC invoked a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systemic-risk.asp">systemic risk</a> exception to least-cost resolution, essentially saying that the risk of contagion to the banking sector and the economy as a whole was large enough to justify the cost of the rescue.<span class="ql-inline-citation" data-cite="16"></span></p></div></div></div>
<span class="heading-toc" id="toc-who-paid-for-the-rescue"></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"> Who Paid for the Rescue? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The FDIC estimated the cost of Signature Bank’s failure to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deposit-insurance-fund.asp">Deposit Insurance Fund</a> at around $2.5 billion.<span class="ql-inline-citation" data-cite="26"></span> The Deposit Insurance Fund is the private insurer that guarantees deposits at FDIC-insured institutions.<span class="ql-inline-citation" data-cite="41"></span>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Concerns abounded that the rescue would be similar to unpopular taxpayer-funded bailouts of savings and loan entities in the mid-1980s and the 2008 bailouts to stabilize large banks. But regulators said that instead, the banking industry would pay for the rescue and taxpayers would not foot any of the bill.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> However, this doesn’t mean that regular people won’t end up paying in at least some way. The FDIC has said that if the Deposit Insurance Fund loses money because of the support it’s giving uninsured depositors, U.S. banks will pay a special assessment or fee.<span class="ql-inline-citation" data-cite="27"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Those fees could eventually impact you in the form of higher fees or lower interest rates on deposits—what U.S. Sen. James Lankford, R-Okla., called a “backdoor tax increase.”<span class="ql-inline-citation" data-cite="30"></span>
</p>
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<span class="heading-toc" id="toc-what-did-cryptocurrency-have-to-do-with-it"></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"> What Did Cryptocurrency Have to Do with It? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Signature Bank embraced the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a> industry just before the market’s implosion with the failure of FTX in 2022. By September 2022, nearly a quarter of its deposits were from crypto clients, including the crypto exchange Coinbase Global and USDC issuer Circle Internet Financial Ltd.<span class="ql-inline-citation" data-cite="31"></span> But Signature announced in December 2022 that it would lower those deposits by $8 billion, and it reportedly had shed $1.3 billion in funds from crypto platforms in the first two months of 2023.<span class="ql-inline-citation" data-cite="3"></span><span class="ql-inline-citation" data-cite="21"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> That may not have been enough for depositors who were leaving banks with strong crypto ties, such as SVB and Silvergate Capital. According to news reports, Signature clients from other sectors got nervous when SVB failed, and they pulled out.<span class="ql-inline-citation" data-cite="32"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Regulators never mentioned Signature’s crypto ties when closing the bank. But former Congressman Frank—who, as noted above, was a director at Signature—said he saw the closure as an anti-crypto message by regulators. He told multiple media outlets that the bank was not insolvent and he thought regulators took it over to serve as a warning for U.S. banks to avoid cryptocurrency dealings. New York regulators denied that cryptocurrency was the concern, instead citing a lack of confidence in bank leadership.<span class="ql-inline-citation" data-cite="42"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Bloomberg reported on March 14, 2023, that before the collapse, federal prosecutors and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC)</a> were investigating Signature Bank’s cryptocurrency business, particularly regarding money laundering.<span class="ql-inline-citation" data-cite="33"></span>
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> The SEC didn’t directly comment on that report. On March 12, 2023, SEC Chair Gary Gensler had made a general statement about market stability.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” he said.<span class="ql-inline-citation" data-cite="34"></span>
</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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_72-0"><span class="heading-toc" id="toc-what-is-the-bank-term-funding-program-btfp"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is the Bank Term Funding Program (BTFP)?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The Bank Term Funding Program (BTFP) was created in response to the collapses of Silicon Valley Bank and Signature Bank. This program makes more funding available to banks, credit unions, and other depository institutions, ensuring plentiful cash is on hand if a bank rush occurs. The program gives financial institutions loans of up to one year to bolster the banking system’s capacity. It went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.<span class="ql-inline-citation" data-cite="40"></span></p></div>
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<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-who-owns-signature-bank"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who owns Signature Bank?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>Most of the bank’s assets are owned by Flagstar Bank, a subsidiary of New York Community Bancorp. The rest are owned by Signature Bridge Bank, N.A., which was created by the Federal Deposit Insurance Corp. (FDIC) after the New York State Department of Financial Services (DFS) appointed the FDIC as receiver. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bridge-bank.asp">bridge bank</a> “bridges” the time between when a bank fails and when it can be bought or liquidated. With a board appointed by the FDIC, the bridge bank assumes a failed bank’s deposits and other liabilities and purchases certain assets.</p><p>On March 19, 2023, a portion of Signature Bridge Bank, N.A.’s loans and deposits were taken over by Flagstar Bank, but $60 billion in loans and $4 billion of digital assets banking deposits remained with Signature Bridge Bank, N.A.<span class="ql-inline-citation" data-cite="26"></span><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_75-0"></div>
<div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_76-0"><span class="heading-toc" id="toc-what-is-systemic-risk"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is systemic risk?</h2>
<div class="mntl-sc-block-questionandanswer__answer"><p>The FDIC controversially used a “systemic risk exception” for Signature Bank to make all deposits available to customers—even those beyond the FDIC-insured $250,000 limit. Typically, this exception is invoked to avoid “serious adverse effects on economic conditions or financial stability,” or a risk to the banking or financial system.</p><p>Using this exception allowed the FDIC to avoid finding the “least-cost resolution.” The least-cost resolution means the one that would cost the FDIC and taxpayers the least. In most banking situations, it would only allow the FDIC to protect deposits up to the $250,000 limit.<span class="ql-inline-citation" data-cite="16"></span> </p></div>
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<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_78-0"> <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_79-0"> Signature Bank was the third-largest bank failure in U.S. history and came directly after the collapse of Silicon Valley Bank (SVB). As with SVB, its collapse is partly attributed to fears about a high percentage of uninsured deposits. Depositors were also reportedly concerned about Signature’s high concentration of deposits from cryptocurrency companies amid the crypto market implosion in 2022.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> The failures of both SVB and Signature Bank caused <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-happens-if-my-bank-fails-7378029">fears that panic would spread</a> to the rest of the banking sector and prompted regulators to set up a system to make sure that depositors got the money they had in these institutions, even for amounts way larger than the usual $250,000 FDIC limit.
</p>
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<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Although that action is considered to have halted the widespread contagion of bank runs throughout the industry, it also sparked questions about which banks should be considered too big to fail and which depositors should be considered too important to go uninsured.<br>
</br></p></div>
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Signature Bank was shut down on March 12, 2023, after depositors withdrew large sums of money on the heels of the collapse of [Silicon Valley Bank (SVB)](https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676). Regulators feared continued [contagion](https://www.investopedia.com/terms/c/contagion.asp) in the [banking](https://www.investopedia.com/terms/b/bank.asp) sector and closed Signature Bank to try to contain the panic.
[Bank failures](https://www.investopedia.com/terms/b/bank-failure.asp) aren’t new. More than 550 banks shut down from 2001 to so far in 2023, according to the [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic.asp). But Signature’s breakdown stands out because of its connection to the SVB failure and ensuing fears about the health of the banking sector as a whole. At the time, SVB was the biggest bank failure—and Signature the second biggest—since Washington Mutual closed in 2008. (Those collapses have since been eclipsed by the failure of First Republic Bank in April 2023.)
The 2023 failures prompted a controversial rescue that called into question FDIC limits and which banks are “too big to fail.” To learn more, we’ll delve into Signature’s history, the events that led up to its demise, and how it impacts you—and the broader [economy](https://www.investopedia.com/terms/e/economy.asp).
### Key Takeaways
* Signature Bank was shut down by federal regulators on March 12, 2023.
* The bank’s failure resulted from regulator concern about depositors withdrawing large amounts of money after the failure of Silicon Valley Bank (SVB) and the fear of continued contagion.
* Federal regulators said Signature Bank customers would get all deposits back, even amounts over $250,000 that are uninsured by the Federal Deposit Insurance Corp. (FDIC).
* An April 2023 FDIC report blamed Signature's failure on bank mismanagement, a lack of corporate governance, and failure to listen to and respond quickly to the FDIC's recommendations.
* Signature Bank’s failure raised many policy questions around FDIC insurance, and bank and cryptocurrency oversight.
## What Was Signature Bank?
Signature Bank functioned as an FDIC-insured, New York state-chartered commercial bank, primarily working with privately owned businesses. Signature Bank had clients in middle-market companies but was especially known for catering to law offices, real estate buyers, and cryptocurrency companies. The bank had 40 private client offices across metropolitan New York, Connecticut, California, Nevada, and North Carolina.
Signature Bank was listed as the 19th largest bank in the United States by S&P Global, with assets worth $110.36 billion and $88.59 billion in deposits in December 2022. It was a powerhouse in New York real estate lending, as the third-largest commercial real estate bank in New York City, primarily working multifamily housing loans, according to real estate data analysis publisher PincusCo.
Notably, Signature Bank was also the first FDIC-insured bank to create a [blockchain](https://www.investopedia.com/terms/b/blockchain.asp)-based digital payments platform approved by the New York State Department of Financial Services (DFS). Its platform, Signet, required a minimum account balance of $250,000; FDIC insurance caps out at $250,000.
## History of Signature Bank
New York City-headquartered Signature Bank began in 2001 with $50 million in assets and “ranked somewhere around the 7,900th-largest U.S.-based commercial bank, based on deposits,” according to a statement by Chairman of the Board Scott Shay. By 2023, Signature Bank had grown to become the 29th largest U.S.-based commercial bank.
Shay co-founded Signature Bank alongside Joseph J. DePaolo and John Tamberlane. The bank’s model relied on a network of private client banking teams. Veteran bankers acted as a single point of contact for all client needs.
### Note
Somewhat ironically, former U.S. Congressman Barney Frank became a member of Signature Bank’s board of directors in 2015. The Democrat co-authored the [Dodd-Frank Wall Street Reform and Consumer Protection Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp) after the 2008 financial crisis, which aimed to reduce risk and increase bank oversight.
The bank continued to expand and by 2018 had ventured into digital banking, eventually launching its blockchain payments platform in 2019. In 2019, Signature Bank opened a flagship private client banking office in San Francisco, then continued to grow throughout California. Total digital-related deposits reached $28.7 billion by the end of 2021—almost 30% of the bank’s deposit portfolio.
By 2021, Signature Bank was added to the S&P 500 Index; the bank’s shareholder return ranked top among all financial institutions in the index.
Signature Bank affirmed a commitment to creating positive social impact, including diversity awareness events and time donated to charitable causes. The bank also matched client funds for the Impact Certificate of Deposit (CD) Program supporting sustainable development initiatives.
However, housing activists such as New York’s Association for Neighborhood & Housing Development (ANHD) have long alleged that Signature Bank lent “to landlords with public records of tenant harassment and poor conditions.”
## Why Did Signature Bank Fail?
In short, the failure of Silicon Valley Bank led to a Signature [bank run](https://www.investopedia.com/terms/b/bankrun.asp) on Friday, March 10, 2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured deposits and was exposed to the crypto sector.
New York state and U.S. federal regulators were also concerned—with 24/7 online banking, plus social media, the run was continuing over the weekend. On Sunday, March 12, 2023, the New York State DFS took possession of the bank “in order to protect depositors” and named the FDIC as [receiver](https://www.investopedia.com/terms/r/receiver.asp). They announced that there was a plan to make sure all depositors were protected, even those with uninsured deposits.
In late April, the [FDIC issued a report on Signature Bank’s failure](https://www.investopedia.com/fdic-signature-bank-7486572), concluding that the root cause was "poor management," namely:
* **Management failure to understand the risks of its concentration in the crypto sector**: See the “What Did Crypto Have to Do with It?” section later in this article.
* **An abnormally large share of uninsured deposits**: Signature Bank reported $79.5 billion in estimated uninsured deposits as of December 2022—meaning about 90% of all its deposits were uninsured. A Congressional Research Service report on the SVB and Signature failures noted that uninsured deposits can lead to widespread bank runs—as uninsured depositors try to avoid losses by withdrawing funds before the money’s gone.
* **Liquidity risk**: The FDIC said the bank's poor governance and risk management made the bank unable to manage its liquidity in a time of stress. Although Signature had enough reserves to comply with regulatory requirements, as Vidhura S. Tennekoon, assistant professor of economics at Indiana University, pointed out, only about 5% of its assets were in cash, compared to an industry average of 13%.
* **Lack of adequate FDIC oversight**: The report admitted to the FDIC's own shortcomings in conducting certain timely reviews of Signature Bank, blaming a staffing shortage. But it also said the bank didn't respond quickly to concerns and recommendations it did make.
## A Timeline of the Collapse
* **Dec. 6, 2022**: Media reports said Signature Bankannounced at a Goldman Sachs conference that it intended to shed $8 billion to $10 billion of its deposits from the crypto sector because of “issues” in the space, lowering its percentage of total deposits from 23.5% to under 20% and potentially under 15% eventually.
* **Jan. 17, 2023**: Signature Bank’s year-end report said the bank had remained “significantly above FDIC ‘well capitalized’ standards.” Yet the report also noted that the past year “resulted in the most difficult deposit environment we have seen in our 22-year history.” Leadership was optimistic. “On the heels of every challenge, Signature Bank emerged stronger, which will be the case this time as well,” Scott A. Shay, Chairman of the Board, said in the report.
* **Jan. 31, 2023**: Signature Bank noted that three credit agencies, Fitch, Kroll, and Moody’s, had affirmed its credit ratings, based on reviews “of its financial stability as well as its business and risk management practices.”
* **March 9, 2023**: Perhaps seeking to reassure investors and regulators, Signature Bank sent out a press release noting solid investment ratings, strong [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), a high level of [capital](https://www.investopedia.com/terms/c/capital.asp), and a diversified deposit mix. Signature Bank reiterated “its strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.”
* **March 10, 2023**:Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation. Signature Bank’s stock price closed at $70 on heavy trading, a drop of 79% from Feb. 10, 2022.
* **March 12, 2023**: New York DFS took possession of Signature Bank to protect depositors and appointed the FDIC as the bank’s receiver. The FDIC in turn transferred all the deposits and nearly all of the assets to Signature Bridge Bank, a full-service bank operated by the FDIC, while it looked for potential bidders for Signature Bank.
* **March 19, 2023**:The FDIC announced Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp, as Signature Bank’s acquiring institution for almost all deposits and some loan portfolios. Around $60 billion in loans remained in the FDIC receivership, and the FDIC said it would cover about $4 billion in deposits related to digital banking assets.
## Making Signature Bank Depositors Whole
“All depositors of this institution will be made whole,” noted a March 12, 2023, joint statement from Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin Gruenberg. The financing was to be made available through a newly created [Bank Term Funding Program (BTFP)](https://www.investopedia.com/bank-term-funding-project-7367897), offering loans of up to one year to depository institutions.
Any bank depositors using Signature Bridge Bank automatically became depositors of Flagstar Bank and could recover funds over the $250,000 FDIC insured-deposit limit. But depositors using Signature’s digital-assets banking business will work with the FDIC to recover deposits. [Shareholders](https://www.investopedia.com/terms/s/shareholder.asp) and certain [unsecured](https://www.investopedia.com/terms/u/unsecureddebt.asp) debtholders will not be “made whole” and will not recover their investments.
### Important
In guaranteeing most of the uninsured deposits, the FDIC invoked a [systemic risk](https://www.investopedia.com/terms/s/systemic-risk.asp) exception to least-cost resolution, essentially saying that the risk of contagion to the banking sector and the economy as a whole was large enough to justify the cost of the rescue.
## Who Paid for the Rescue?
The FDIC estimated the cost of Signature Bank’s failure to the [Deposit Insurance Fund](https://www.investopedia.com/terms/d/deposit-insurance-fund.asp) at around $2.5 billion. The Deposit Insurance Fund is the private insurer that guarantees deposits at FDIC-insured institutions.
Concerns abounded that the rescue would be similar to unpopular taxpayer-funded bailouts of savings and loan entities in the mid-1980s and the 2008 bailouts to stabilize large banks. But regulators said that instead, the banking industry would pay for the rescue and taxpayers would not foot any of the bill.
However, this doesn’t mean that regular people won’t end up paying in at least some way. The FDIC has said that if the Deposit Insurance Fund loses money because of the support it’s giving uninsured depositors, U.S. banks will pay a special assessment or fee.
Those fees could eventually impact you in the form of higher fees or lower interest rates on deposits—what U.S. Sen. James Lankford, R-Okla., called a “backdoor tax increase.”
## What Did Cryptocurrency Have to Do with It?
Signature Bank embraced the [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) industry just before the market’s implosion with the failure of FTX in 2022. By September 2022, nearly a quarter of its deposits were from crypto clients, including the crypto exchange Coinbase Global and USDC issuer Circle Internet Financial Ltd. But Signature announced in December 2022 that it would lower those deposits by $8 billion, and it reportedly had shed $1.3 billion in funds from crypto platforms in the first two months of 2023.
That may not have been enough for depositors who were leaving banks with strong crypto ties, such as SVB and Silvergate Capital. According to news reports, Signature clients from other sectors got nervous when SVB failed, and they pulled out.
Regulators never mentioned Signature’s crypto ties when closing the bank. But former Congressman Frank—who, as noted above, was a director at Signature—said he saw the closure as an anti-crypto message by regulators. He told multiple media outlets that the bank was not insolvent and he thought regulators took it over to serve as a warning for U.S. banks to avoid cryptocurrency dealings. New York regulators denied that cryptocurrency was the concern, instead citing a lack of confidence in bank leadership.
Bloomberg reported on March 14, 2023, that before the collapse, federal prosecutors and the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) were investigating Signature Bank’s cryptocurrency business, particularly regarding money laundering.
The SEC didn’t directly comment on that report. On March 12, 2023, SEC Chair Gary Gensler had made a general statement about market stability.
“Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” he said.
## What is the Bank Term Funding Program (BTFP)?
The Bank Term Funding Program (BTFP) was created in response to the collapses of Silicon Valley Bank and Signature Bank. This program makes more funding available to banks, credit unions, and other depository institutions, ensuring plentiful cash is on hand if a bank rush occurs. The program gives financial institutions loans of up to one year to bolster the banking system’s capacity. It went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.
## Who owns Signature Bank?
Most of the bank’s assets are owned by Flagstar Bank, a subsidiary of New York Community Bancorp. The rest are owned by Signature Bridge Bank, N.A., which was created by the Federal Deposit Insurance Corp. (FDIC) after the New York State Department of Financial Services (DFS) appointed the FDIC as receiver. A [bridge bank](https://www.investopedia.com/terms/b/bridge-bank.asp) “bridges” the time between when a bank fails and when it can be bought or liquidated. With a board appointed by the FDIC, the bridge bank assumes a failed bank’s deposits and other liabilities and purchases certain assets.
On March 19, 2023, a portion of Signature Bridge Bank, N.A.’s loans and deposits were taken over by Flagstar Bank, but $60 billion in loans and $4 billion of digital assets banking deposits remained with Signature Bridge Bank, N.A.
## What is systemic risk?
The FDIC controversially used a “systemic risk exception” for Signature Bank to make all deposits available to customers—even those beyond the FDIC-insured $250,000 limit. Typically, this exception is invoked to avoid “serious adverse effects on economic conditions or financial stability,” or a risk to the banking or financial system.
Using this exception allowed the FDIC to avoid finding the “least-cost resolution.” The least-cost resolution means the one that would cost the FDIC and taxpayers the least. In most banking situations, it would only allow the FDIC to protect deposits up to the $250,000 limit.
## The Bottom Line
Signature Bank was the third-largest bank failure in U.S. history and came directly after the collapse of Silicon Valley Bank (SVB). As with SVB, its collapse is partly attributed to fears about a high percentage of uninsured deposits. Depositors were also reportedly concerned about Signature’s high concentration of deposits from cryptocurrency companies amid the crypto market implosion in 2022.
The failures of both SVB and Signature Bank caused [fears that panic would spread](https://www.investopedia.com/what-happens-if-my-bank-fails-7378029) to the rest of the banking sector and prompted regulators to set up a system to make sure that depositors got the money they had in these institutions, even for amounts way larger than the usual $250,000 FDIC limit.
Although that action is considered to have halted the widespread contagion of bank runs throughout the industry, it also sparked questions about which banks should be considered too big to fail and which depositors should be considered too important to go uninsured.
|
Signature Bank was shut down on March 12, 2023, after depositors withdrew large sums of money on the heels of the collapse of Silicon Valley Bank (SVB). Regulators feared continued contagion in the banking sector and closed Signature Bank to try to contain the panic.
Bank failures aren’t new. More than 550 banks shut down from 2001 to so far in 2023, according to the Federal Deposit Insurance Corp. (FDIC). But Signature’s breakdown stands out because of its connection to the SVB failure and ensuing fears about the health of the banking sector as a whole. At the time, SVB was the biggest bank failure—and Signature the second biggest—since Washington Mutual closed in 2008. (Those collapses have since been eclipsed by the failure of First Republic Bank in April 2023.)
The 2023 failures prompted a controversial rescue that called into question FDIC limits and which banks are “too big to fail.” To learn more, we’ll delve into Signature’s history, the events that led up to its demise, and how it impacts you—and the broader economy.
Key Takeaways
Signature Bank was shut down by federal regulators on March 12, 2023.The bank’s failure resulted from regulator concern about depositors withdrawing large amounts of money after the failure of Silicon Valley Bank (SVB) and the fear of continued contagion.Federal regulators said Signature Bank customers would get all deposits back, even amounts over $250,000 that are uninsured by the Federal Deposit Insurance Corp. (FDIC). An April 2023 FDIC report blamed Signature's failure on bank mismanagement, a lack of corporate governance, and failure to listen to and respond quickly to the FDIC's recommendations.Signature Bank’s failure raised many policy questions around FDIC insurance, and bank and cryptocurrency oversight.
What Was Signature Bank?
Signature Bank functioned as an FDIC-insured, New York state-chartered commercial bank, primarily working with privately owned businesses. Signature Bank had clients in middle-market companies but was especially known for catering to law offices, real estate buyers, and cryptocurrency companies. The bank had 40 private client offices across metropolitan New York, Connecticut, California, Nevada, and North Carolina.
Signature Bank was listed as the 19th largest bank in the United States by S&P Global, with assets worth $110.36 billion and $88.59 billion in deposits in December 2022. It was a powerhouse in New York real estate lending, as the third-largest commercial real estate bank in New York City, primarily working multifamily housing loans, according to real estate data analysis publisher PincusCo.
Notably, Signature Bank was also the first FDIC-insured bank to create a blockchain-based digital payments platform approved by the New York State Department of Financial Services (DFS). Its platform, Signet, required a minimum account balance of $250,000; FDIC insurance caps out at $250,000.
History of Signature Bank
New York City-headquartered Signature Bank began in 2001 with $50 million in assets and “ranked somewhere around the 7,900th-largest U.S.-based commercial bank, based on deposits,” according to a statement by Chairman of the Board Scott Shay. By 2023, Signature Bank had grown to become the 29th largest U.S.-based commercial bank.
Shay co-founded Signature Bank alongside Joseph J. DePaolo and John Tamberlane. The bank’s model relied on a network of private client banking teams. Veteran bankers acted as a single point of contact for all client needs.
Note
Somewhat ironically, former U.S. Congressman Barney Frank became a member of Signature Bank’s board of directors in 2015. The Democrat co-authored the Dodd-Frank Wall Street Reform and Consumer Protection Act after the 2008 financial crisis, which aimed to reduce risk and increase bank oversight.
The bank continued to expand and by 2018 had ventured into digital banking, eventually launching its blockchain payments platform in 2019. In 2019, Signature Bank opened a flagship private client banking office in San Francisco, then continued to grow throughout California. Total digital-related deposits reached $28.7 billion by the end of 2021—almost 30% of the bank’s deposit portfolio.
By 2021, Signature Bank was added to the S&P 500 Index; the bank’s shareholder return ranked top among all financial institutions in the index.
Signature Bank affirmed a commitment to creating positive social impact, including diversity awareness events and time donated to charitable causes. The bank also matched client funds for the Impact Certificate of Deposit (CD) Program supporting sustainable development initiatives.
However, housing activists such as New York’s Association for Neighborhood & Housing Development (ANHD) have long alleged that Signature Bank lent “to landlords with public records of tenant harassment and poor conditions.”
Why Did Signature Bank Fail?
In short, the failure of Silicon Valley Bank led to a Signature bank run on Friday, March 10, 2023. Depositors panicked after SVB failed because Signature had high amounts of uninsured deposits and was exposed to the crypto sector.
New York state and U.S. federal regulators were also concerned—with 24/7 online banking, plus social media, the run was continuing over the weekend. On Sunday, March 12, 2023, the New York State DFS took possession of the bank “in order to protect depositors” and named the FDIC as receiver. They announced that there was a plan to make sure all depositors were protected, even those with uninsured deposits.
In late April, the FDIC issued a report on Signature Bank’s failure, concluding that the root cause was "poor management," namely:
Management failure to understand the risks of its concentration in the crypto sector: See the “What Did Crypto Have to Do with It?” section later in this article. An abnormally large share of uninsured deposits: Signature Bank reported $79.5 billion in estimated uninsured deposits as of December 2022—meaning about 90% of all its deposits were uninsured. A Congressional Research Service report on the SVB and Signature failures noted that uninsured deposits can lead to widespread bank runs—as uninsured depositors try to avoid losses by withdrawing funds before the money’s gone.Liquidity risk: The FDIC said the bank's poor governance and risk management made the bank unable to manage its liquidity in a time of stress. Although Signature had enough reserves to comply with regulatory requirements, as Vidhura S. Tennekoon, assistant professor of economics at Indiana University, pointed out, only about 5% of its assets were in cash, compared to an industry average of 13%.Lack of adequate FDIC oversight: The report admitted to the FDIC's own shortcomings in conducting certain timely reviews of Signature Bank, blaming a staffing shortage. But it also said the bank didn't respond quickly to concerns and recommendations it did make.
A Timeline of the Collapse
Dec. 6, 2022: Media reports said Signature Bank announced at a Goldman Sachs conference that it intended to shed $8 billion to $10 billion of its deposits from the crypto sector because of “issues” in the space, lowering its percentage of total deposits from 23.5% to under 20% and potentially under 15% eventually.
Jan. 17, 2023: Signature Bank’s year-end report said the bank had remained “significantly above FDIC ‘well capitalized’ standards.” Yet the report also noted that the past year “resulted in the most difficult deposit environment we have seen in our 22-year history.” Leadership was optimistic. “On the heels of every challenge, Signature Bank emerged stronger, which will be the case this time as well,” Scott A. Shay, Chairman of the Board, said in the report.
Jan. 31, 2023: Signature Bank noted that three credit agencies, Fitch, Kroll, and Moody’s, had affirmed its credit ratings, based on reviews “of its financial stability as well as its business and risk management practices.”
March 9, 2023: Perhaps seeking to reassure investors and regulators, Signature Bank sent out a press release noting solid investment ratings, strong liquidity, a high level of capital, and a diversified deposit mix. Signature Bank reiterated “its strong, well-diversified financial position and limited digital-asset related deposit balances in the wake of industry developments.”
March 10, 2023: Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation. Signature Bank’s stock price closed at $70 on heavy trading, a drop of 79% from Feb. 10, 2022.
March 12, 2023: New York DFS took possession of Signature Bank to protect depositors and appointed the FDIC as the bank’s receiver. The FDIC in turn transferred all the deposits and nearly all of the assets to Signature Bridge Bank, a full-service bank operated by the FDIC, while it looked for potential bidders for Signature Bank.
March 19, 2023: The FDIC announced Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp, as Signature Bank’s acquiring institution for almost all deposits and some loan portfolios. Around $60 billion in loans remained in the FDIC receivership, and the FDIC said it would cover about $4 billion in deposits related to digital banking assets.
Making Signature Bank Depositors Whole
“All depositors of this institution will be made whole,” noted a March 12, 2023, joint statement from Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin Gruenberg. The financing was to be made available through a newly created Bank Term Funding Program (BTFP), offering loans of up to one year to depository institutions.
Any bank depositors using Signature Bridge Bank automatically became depositors of Flagstar Bank and could recover funds over the $250,000 FDIC insured-deposit limit. But depositors using Signature’s digital-assets banking business will work with the FDIC to recover deposits. Shareholders and certain unsecured debtholders will not be “made whole” and will not recover their investments.
Important
In guaranteeing most of the uninsured deposits, the FDIC invoked a systemic risk exception to least-cost resolution, essentially saying that the risk of contagion to the banking sector and the economy as a whole was large enough to justify the cost of the rescue.
Who Paid for the Rescue?
The FDIC estimated the cost of Signature Bank’s failure to the Deposit Insurance Fund at around $2.5 billion. The Deposit Insurance Fund is the private insurer that guarantees deposits at FDIC-insured institutions.
Concerns abounded that the rescue would be similar to unpopular taxpayer-funded bailouts of savings and loan entities in the mid-1980s and the 2008 bailouts to stabilize large banks. But regulators said that instead, the banking industry would pay for the rescue and taxpayers would not foot any of the bill.
However, this doesn’t mean that regular people won’t end up paying in at least some way. The FDIC has said that if the Deposit Insurance Fund loses money because of the support it’s giving uninsured depositors, U.S. banks will pay a special assessment or fee.
Those fees could eventually impact you in the form of higher fees or lower interest rates on deposits—what U.S. Sen. James Lankford, R-Okla., called a “backdoor tax increase.”
What Did Cryptocurrency Have to Do with It?
Signature Bank embraced the cryptocurrency industry just before the market’s implosion with the failure of FTX in 2022. By September 2022, nearly a quarter of its deposits were from crypto clients, including the crypto exchange Coinbase Global and USDC issuer Circle Internet Financial Ltd. But Signature announced in December 2022 that it would lower those deposits by $8 billion, and it reportedly had shed $1.3 billion in funds from crypto platforms in the first two months of 2023.
That may not have been enough for depositors who were leaving banks with strong crypto ties, such as SVB and Silvergate Capital. According to news reports, Signature clients from other sectors got nervous when SVB failed, and they pulled out.
Regulators never mentioned Signature’s crypto ties when closing the bank. But former Congressman Frank—who, as noted above, was a director at Signature—said he saw the closure as an anti-crypto message by regulators. He told multiple media outlets that the bank was not insolvent and he thought regulators took it over to serve as a warning for U.S. banks to avoid cryptocurrency dealings. New York regulators denied that cryptocurrency was the concern, instead citing a lack of confidence in bank leadership.
Bloomberg reported on March 14, 2023, that before the collapse, federal prosecutors and the Securities and Exchange Commission (SEC) were investigating Signature Bank’s cryptocurrency business, particularly regarding money laundering.
The SEC didn’t directly comment on that report. On March 12, 2023, SEC Chair Gary Gensler had made a general statement about market stability.
“Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” he said.
What is the Bank Term Funding Program (BTFP)?
The Bank Term Funding Program (BTFP) was created in response to the collapses of Silicon Valley Bank and Signature Bank. This program makes more funding available to banks, credit unions, and other depository institutions, ensuring plentiful cash is on hand if a bank rush occurs. The program gives financial institutions loans of up to one year to bolster the banking system’s capacity. It went into effect on March 12, 2023, and will be in effect until at least March 11, 2024.
Who owns Signature Bank?
Most of the bank’s assets are owned by Flagstar Bank, a subsidiary of New York Community Bancorp. The rest are owned by Signature Bridge Bank, N.A., which was created by the Federal Deposit Insurance Corp. (FDIC) after the New York State Department of Financial Services (DFS) appointed the FDIC as receiver. A bridge bank “bridges” the time between when a bank fails and when it can be bought or liquidated. With a board appointed by the FDIC, the bridge bank assumes a failed bank’s deposits and other liabilities and purchases certain assets.On March 19, 2023, a portion of Signature Bridge Bank, N.A.’s loans and deposits were taken over by Flagstar Bank, but $60 billion in loans and $4 billion of digital assets banking deposits remained with Signature Bridge Bank, N.A.
What is systemic risk?
The FDIC controversially used a “systemic risk exception” for Signature Bank to make all deposits available to customers—even those beyond the FDIC-insured $250,000 limit. Typically, this exception is invoked to avoid “serious adverse effects on economic conditions or financial stability,” or a risk to the banking or financial system.Using this exception allowed the FDIC to avoid finding the “least-cost resolution.” The least-cost resolution means the one that would cost the FDIC and taxpayers the least. In most banking situations, it would only allow the FDIC to protect deposits up to the $250,000 limit.
The Bottom Line
Signature Bank was the third-largest bank failure in U.S. history and came directly after the collapse of Silicon Valley Bank (SVB). As with SVB, its collapse is partly attributed to fears about a high percentage of uninsured deposits. Depositors were also reportedly concerned about Signature’s high concentration of deposits from cryptocurrency companies amid the crypto market implosion in 2022.
The failures of both SVB and Signature Bank caused fears that panic would spread to the rest of the banking sector and prompted regulators to set up a system to make sure that depositors got the money they had in these institutions, even for amounts way larger than the usual $250,000 FDIC limit.
Although that action is considered to have halted the widespread contagion of bank runs throughout the industry, it also sparked questions about which banks should be considered too big to fail and which depositors should be considered too important to go uninsured.
|
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https://www.investopedia.com/canada-goose-sells-more-winter-coats-in-north-america-and-china-and-shares-jump-8649481
|
Canada Goose Sells More Winter Coats in North America and China, and Stock Jumps
|
<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>Shares of Canada Goose Holdings soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.</li><li>Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.</li><li>Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings.</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 Canada Goose Holdings (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOS">GOOS</a>) soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.
</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 company reported fiscal 2024 fourth-quarter adjusted <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>) of 19 Canadian cents ($0.14), with revenue rising 22.1% to C$358.0 million. Both were better than forecasts.<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>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.
</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossprofit.asp">Gross profit</a> climbed 22% to C$233.0 million, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossmargin.asp">gross margin</a> came in at 65.1%, up from 64.9% a year ago.
</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/c/ceo.asp">Chief Executive Officer (CEO</a>) Dani Reiss said the performance was above the company’s guidance even while it was “navigating a difficult 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"> Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings. The company slashed its corporate workforce by 10% in August 2023, with an additional 17% reduction in March.
</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"> Canada Goose shares were trading up 17.3% at $13.44 as of 12:38 p.m. ET Thursday.<br/>
</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"> <em>Update—May 16, 2024: This article was updated to include key takeaways and the latest share price information.</em>
</p></div>
|
### Key Takeaways
* Shares of Canada Goose Holdings soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.
* Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.
* Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings.
Shares of Canada Goose Holdings ([GOOS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOS)) soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.
The company reported fiscal 2024 fourth-quarter adjusted [earnings per share (EPS](https://www.investopedia.com/terms/e/eps.asp)) of 19 Canadian cents ($0.14), with revenue rising 22.1% to C$358.0 million. Both were better than forecasts.
Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.
[Gross profit](https://www.investopedia.com/terms/g/grossprofit.asp) climbed 22% to C$233.0 million, and [gross margin](https://www.investopedia.com/terms/g/grossmargin.asp) came in at 65.1%, up from 64.9% a year ago.
[Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) Dani Reiss said the performance was above the company’s guidance even while it was “navigating a difficult environment.”
Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings. The company slashed its corporate workforce by 10% in August 2023, with an additional 17% reduction in March.
Canada Goose shares were trading up 17.3% at $13.44 as of 12:38 p.m. ET Thursday.
*Update—May 16, 2024: This article was updated to include key takeaways and the latest share price information.*
|
Key Takeaways
Shares of Canada Goose Holdings soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings.
Shares of Canada Goose Holdings (GOOS) soared in intraday trading Thursday after the maker of fashion winter outerwear posted better-than-expected results as demand rebounded in North America and grew strongly in China.
The company reported fiscal 2024 fourth-quarter adjusted earnings per share (EPS) of 19 Canadian cents ($0.14), with revenue rising 22.1% to C$358.0 million. Both were better than forecasts.
Sales in North America jumped 24.5% to C$152.8 million after declining 13.6% in the previous quarter. Greater China sales climbed 29.7% to C$128.4 million.
Gross profit climbed 22% to C$233.0 million, and gross margin came in at 65.1%, up from 64.9% a year ago.
Chief Executive Officer (CEO) Dani Reiss said the performance was above the company’s guidance even while it was “navigating a difficult environment.”
Canada Goose noted that layoffs during the year generated about C$20 million in productivity improvements and cost savings. The company slashed its corporate workforce by 10% in August 2023, with an additional 17% reduction in March.
Canada Goose shares were trading up 17.3% at $13.44 as of 12:38 p.m. ET Thursday.
Update—May 16, 2024: This article was updated to include key takeaways and the latest share price information.
|
[
[
"GOOS",
"https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOS"
],
[
"earnings per share (EPS",
"https://www.investopedia.com/terms/e/eps.asp"
],
[
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],
[
"gross margin",
"https://www.investopedia.com/terms/g/grossmargin.asp"
],
[
"Chief Executive Officer (CEO",
"https://www.investopedia.com/terms/c/ceo.asp"
]
] |
https://www.investopedia.com/us-economy-news-today-april-29-8640375
|
US Economy News Today: Don't Hold Your Breath For Interest Rate Cuts This Week
|
<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, we look ahead to the Federal Reserve's meeting this week.
</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-2024-04-29t152757499z"></span>
<h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Federal Reserve's Two-Day Meeting Starts Tomorrow</strong></p></h2>
<div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">April 29, 2024 11:27 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-29-8640375#toc-2024-04-29t152757499z" 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"> The Federal Reserve's two-day meeting starts tomorrow and if you're waiting for a rate cut, you'll likely be left waiting.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Officials at the Federal Reserve have been looking for proof that inflation was vanquished before cutting the central bank’s key interest rate, which influences borrowing costs on all kinds of loans. Instead, over the past three months, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/federal-reserve-preferred-inflation-measure-heated-up-march-8639440">price increases have flared up</a> again.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The Federal Open Market Committee, the central bank’s policy body, is likely to leave the fed funds rate unchanged when it wraps up its two-day meeting on Wednesday.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The Fed will also likely send the message that it plans to keep squeezing inflation and the economy with high interest rates for longer until inflation is under control.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The Federal Reserve’s war on inflation has been stuck in a stalemate all year long. In turn, hope for rate cuts in the coming months has dimmed. The Fed has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695">kept its benchmark interest rate</a> at a range of 5.25% to 5.5% since July.
</p>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Read more about what to expect from the Fed's meeting this week <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-may-2024-meeting-preview-8639782">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></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, we look ahead to the Federal Reserve's meeting this week.
## **Federal Reserve's Two-Day Meeting Starts Tomorrow**
April 29, 2024 11:27 AM EDT
The Federal Reserve's two-day meeting starts tomorrow and if you're waiting for a rate cut, you'll likely be left waiting.
Officials at the Federal Reserve have been looking for proof that inflation was vanquished before cutting the central bank’s key interest rate, which influences borrowing costs on all kinds of loans. Instead, over the past three months, [price increases have flared up](https://www.investopedia.com/federal-reserve-preferred-inflation-measure-heated-up-march-8639440) again.
The Federal Open Market Committee, the central bank’s policy body, is likely to leave the fed funds rate unchanged when it wraps up its two-day meeting on Wednesday.
The Fed will also likely send the message that it plans to keep squeezing inflation and the economy with high interest rates for longer until inflation is under control.
The Federal Reserve’s war on inflation has been stuck in a stalemate all year long. In turn, hope for rate cuts in the coming months has dimmed. The Fed has [kept its benchmark interest rate](https://www.investopedia.com/fed-interest-rate-decision-january-2024-8553695) at a range of 5.25% to 5.5% since July.
Read more about what to expect from the Fed's meeting this week [here](https://www.investopedia.com/fed-may-2024-meeting-preview-8639782).
|
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, we look ahead to the Federal Reserve's meeting this week.
Federal Reserve's Two-Day Meeting Starts Tomorrow
April 29, 2024 11:27 AM EDT
The Federal Reserve's two-day meeting starts tomorrow and if you're waiting for a rate cut, you'll likely be left waiting.
Officials at the Federal Reserve have been looking for proof that inflation was vanquished before cutting the central bank’s key interest rate, which influences borrowing costs on all kinds of loans. Instead, over the past three months, price increases have flared up again.
The Federal Open Market Committee, the central bank’s policy body, is likely to leave the fed funds rate unchanged when it wraps up its two-day meeting on Wednesday.
The Fed will also likely send the message that it plans to keep squeezing inflation and the economy with high interest rates for longer until inflation is under control.
The Federal Reserve’s war on inflation has been stuck in a stalemate all year long. In turn, hope for rate cuts in the coming months has dimmed. The Fed has kept its benchmark interest rate at a range of 5.25% to 5.5% since July.
Read more about what to expect from the Fed's meeting this week here.
|
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https://www.investopedia.com/terms/d/deathput.asp
|
Death Put: Meaning, Pros and Cons, 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-death-put"></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 Death Put? </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A death put is an option added to a bond that guarantees that the heirs of a deceased bondholder can sell it back to the issuer at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parvalue.asp">par value</a>. Another term for a death put is a survivor's option.
</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 death put, or survivor's option, allows a bondholder's beneficiaries to sell back the bond to the issuer at par value if the bondholder dies before maturity.</li><li>A death put effectively protects the bondholder's estate from interest rate risk.</li><li>A bond issuer may include a death put to make it more attractive to the buyer, although the holder may have to accept a lower interest rate in return.</li></ul></div></div></div>
<span class="heading-toc" id="toc-understanding-death-put"></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 Death Put </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Issuers may include a death put to make their bonds more attractive to long-term investors, but these bonds may also carry a lower yield since the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putbond.asp">embedded put option</a> benefits the bondholder.
</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 with any option, the death put gives the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bondholder.asp">bondholder's</a> estate the right, but not the obligation, to sell the bond back to the original issuer at face value in the event of the bondholder's death or legal incapacitation.
</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 death put is similar to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put option</a> on a stock or other asset, in that the holder has the choice to exercise it if certain conditions are met. In this case, that condition is the death or the legal incapacitation of the bondholder. It is an optional <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redemption.asp">redemption</a> feature sold with the bond allowing the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiary</a> of an estate to sell the bond back to the issuer. Proceeds from the sale become part of the estate funds.
</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"> Typically, the prices of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp">fixed-income</a> debt instruments and interest rates have an inverse relationship. Fixed-income investments return periodic, regular income. As interest rates increase, the open market price of fixed-income debt instruments will decrease. The death put is valuable for the bondholder's estate when interest rates are higher than they were at the time of original purchase. Normally, a bond's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon-rate.asp">coupon rate</a> is predicated on the prevailing interest rates, so any changes in the market rates will have an effect on the value of the bond.
</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"> Bond issuers may include the death put feature to make them more attractive to the bond buyer, although the holder may have to accept a lower <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> in return. These types of redemption features put a floor under the price to protect the bondholder. Usually, it is protection from events that can have an adverse effect on the bond's value, like <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestraterisk.asp">interest rate risk</a>, but in this case, it is protection from interest rate risk if a very specific event—the bondholder's death—occurs.
</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-death-put-benefits-and-caveats"></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"> Death Put Benefits and Caveats </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The main benefit for the bondholder is that interest rate risk at the time of death is eliminated. Higher interest rates will not hurt the value of the bonds at the time of the bondholder's death.
</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 interest rates are lower than the coupon rate when the bondholder dies, then the price of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bond</a> will be higher. Therefore, the estate can go into the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/open-market.asp">open market</a> to sell the bonds and receive a premium above the price that was paid (par value), just as with any bond.
</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, on the other hand, interest rates are higher than the coupon rate, then the market value of the bond will be below par. This is when the estate can exercise the death put option, should they choose to, to sell the bond back to the issuer at par.
</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"> Given the specialized nature of the death put, the bondholder might find it difficult to sell it while they are alive. The main problem is that the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondarymarket.asp">secondary market</a>, which is where a non-standardized asset such as this is usually traded, will be limited.
</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"> There is one other caveat: a call (or early redemption) feature could be included in the bond's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indenture.asp">indenture</a> contract. Early redemption allows the issuer to buy back (or call) the bond before <a data-component="link" data-ordinal="2" 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_27-0"></div>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Typically, early redemption happens because interest rates fell enough to make refinancing the debt a good strategy. In this case, the bondholder who already accepted a lower interest rate to start with (buying the death put) will lose the bonds and have to reinvest the proceeds at a lower interest rate.
</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-death-put-example"></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"> Death Put Example </span> </h2>
<p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Assume an <a class="CMY_Link CMY_Valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investor.asp">investor</a> takes the option of having a death put on a $1,000 par value bond they purchase. The coupon rate is 3%, paid annually, and the bond matures in 20 years.
</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"> Five years later, the bondholder passes away. Rates on similar bonds are now yielding 5%, which means the purchased bond will be worth less than $1,000. This is because people will sell the 3% coupon bond in favor of buying a 5% coupon bond. The 3% coupon bond will fall in price until the return on the bond (below par), plus the coupon, equals 5%. At that point, new buyers will step in to prevent the price from dropping further because the <a class="CMY_Link CMY_Valid" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yield.asp">yield</a> (coupon plus capital gain) equals 5%, which is the going rate in the market.
</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"> This is the type of situation that works out well for the death put holder. The face value is below $1,000, yet the bond can be redeemed for $1,000.
</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"> If the opposite scenario occurred, and the coupon rate on similar bonds was now 2%, the 3% bond would be trading above $1,000 because it would be in demand for its higher coupon rate. Therefore, the death put is of no use. The heirs are better off selling the bond in the open market for more than $1,000.
</p></div>
|
## What Is Death Put?
A death put is an option added to a bond that guarantees that the heirs of a deceased bondholder can sell it back to the issuer at [par value](https://www.investopedia.com/terms/p/parvalue.asp). Another term for a death put is a survivor's option.
### Key Takeaways
* A death put, or survivor's option, allows a bondholder's beneficiaries to sell back the bond to the issuer at par value if the bondholder dies before maturity.
* A death put effectively protects the bondholder's estate from interest rate risk.
* A bond issuer may include a death put to make it more attractive to the buyer, although the holder may have to accept a lower interest rate in return.
## Understanding Death Put
Issuers may include a death put to make their bonds more attractive to long-term investors, but these bonds may also carry a lower yield since the [embedded put option](https://www.investopedia.com/terms/p/putbond.asp) benefits the bondholder.
As with any option, the death put gives the [bondholder's](https://www.investopedia.com/terms/b/bondholder.asp) estate the right, but not the obligation, to sell the bond back to the original issuer at face value in the event of the bondholder's death or legal incapacitation.
A death put is similar to a [put option](https://www.investopedia.com/terms/p/putoption.asp) on a stock or other asset, in that the holder has the choice to exercise it if certain conditions are met. In this case, that condition is the death or the legal incapacitation of the bondholder. It is an optional [redemption](https://www.investopedia.com/terms/r/redemption.asp) feature sold with the bond allowing the [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) of an estate to sell the bond back to the issuer. Proceeds from the sale become part of the estate funds.
Typically, the prices of [fixed-income](https://www.investopedia.com/terms/f/fixedincome.asp) debt instruments and interest rates have an inverse relationship. Fixed-income investments return periodic, regular income. As interest rates increase, the open market price of fixed-income debt instruments will decrease. The death put is valuable for the bondholder's estate when interest rates are higher than they were at the time of original purchase. Normally, a bond's [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp) is predicated on the prevailing interest rates, so any changes in the market rates will have an effect on the value of the bond.
Bond issuers may include the death put feature to make them more attractive to the bond buyer, although the holder may have to accept a lower [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) in return. These types of redemption features put a floor under the price to protect the bondholder. Usually, it is protection from events that can have an adverse effect on the bond's value, like [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp), but in this case, it is protection from interest rate risk if a very specific event—the bondholder's death—occurs.
## Death Put Benefits and Caveats
The main benefit for the bondholder is that interest rate risk at the time of death is eliminated. Higher interest rates will not hurt the value of the bonds at the time of the bondholder's death.
If interest rates are lower than the coupon rate when the bondholder dies, then the price of the [bond](https://www.investopedia.com/terms/b/bond.asp) will be higher. Therefore, the estate can go into the [open market](https://www.investopedia.com/terms/o/open-market.asp) to sell the bonds and receive a premium above the price that was paid (par value), just as with any bond.
If, on the other hand, interest rates are higher than the coupon rate, then the market value of the bond will be below par. This is when the estate can exercise the death put option, should they choose to, to sell the bond back to the issuer at par.
Given the specialized nature of the death put, the bondholder might find it difficult to sell it while they are alive. The main problem is that the [secondary market](https://www.investopedia.com/terms/s/secondarymarket.asp), which is where a non-standardized asset such as this is usually traded, will be limited.
There is one other caveat: a call (or early redemption) feature could be included in the bond's [indenture](https://www.investopedia.com/terms/i/indenture.asp) contract. Early redemption allows the issuer to buy back (or call) the bond before [maturity](https://www.investopedia.com/terms/m/maturity.asp).
Typically, early redemption happens because interest rates fell enough to make refinancing the debt a good strategy. In this case, the bondholder who already accepted a lower interest rate to start with (buying the death put) will lose the bonds and have to reinvest the proceeds at a lower interest rate.
## Death Put Example
Assume an [investor](https://www.investopedia.com/terms/i/investor.asp) takes the option of having a death put on a $1,000 par value bond they purchase. The coupon rate is 3%, paid annually, and the bond matures in 20 years.
Five years later, the bondholder passes away. Rates on similar bonds are now yielding 5%, which means the purchased bond will be worth less than $1,000. This is because people will sell the 3% coupon bond in favor of buying a 5% coupon bond. The 3% coupon bond will fall in price until the return on the bond (below par), plus the coupon, equals 5%. At that point, new buyers will step in to prevent the price from dropping further because the [yield](https://www.investopedia.com/terms/y/yield.asp) (coupon plus capital gain) equals 5%, which is the going rate in the market.
This is the type of situation that works out well for the death put holder. The face value is below $1,000, yet the bond can be redeemed for $1,000.
If the opposite scenario occurred, and the coupon rate on similar bonds was now 2%, the 3% bond would be trading above $1,000 because it would be in demand for its higher coupon rate. Therefore, the death put is of no use. The heirs are better off selling the bond in the open market for more than $1,000.
|
What Is Death Put?
A death put is an option added to a bond that guarantees that the heirs of a deceased bondholder can sell it back to the issuer at par value. Another term for a death put is a survivor's option.
Key Takeaways
A death put, or survivor's option, allows a bondholder's beneficiaries to sell back the bond to the issuer at par value if the bondholder dies before maturity.A death put effectively protects the bondholder's estate from interest rate risk.A bond issuer may include a death put to make it more attractive to the buyer, although the holder may have to accept a lower interest rate in return.
Understanding Death Put
Issuers may include a death put to make their bonds more attractive to long-term investors, but these bonds may also carry a lower yield since the embedded put option benefits the bondholder.
As with any option, the death put gives the bondholder's estate the right, but not the obligation, to sell the bond back to the original issuer at face value in the event of the bondholder's death or legal incapacitation.
A death put is similar to a put option on a stock or other asset, in that the holder has the choice to exercise it if certain conditions are met. In this case, that condition is the death or the legal incapacitation of the bondholder. It is an optional redemption feature sold with the bond allowing the beneficiary of an estate to sell the bond back to the issuer. Proceeds from the sale become part of the estate funds.
Typically, the prices of fixed-income debt instruments and interest rates have an inverse relationship. Fixed-income investments return periodic, regular income. As interest rates increase, the open market price of fixed-income debt instruments will decrease. The death put is valuable for the bondholder's estate when interest rates are higher than they were at the time of original purchase. Normally, a bond's coupon rate is predicated on the prevailing interest rates, so any changes in the market rates will have an effect on the value of the bond.
Bond issuers may include the death put feature to make them more attractive to the bond buyer, although the holder may have to accept a lower interest rate in return. These types of redemption features put a floor under the price to protect the bondholder. Usually, it is protection from events that can have an adverse effect on the bond's value, like interest rate risk, but in this case, it is protection from interest rate risk if a very specific event—the bondholder's death—occurs.
Death Put Benefits and Caveats
The main benefit for the bondholder is that interest rate risk at the time of death is eliminated. Higher interest rates will not hurt the value of the bonds at the time of the bondholder's death.
If interest rates are lower than the coupon rate when the bondholder dies, then the price of the bond will be higher. Therefore, the estate can go into the open market to sell the bonds and receive a premium above the price that was paid (par value), just as with any bond.
If, on the other hand, interest rates are higher than the coupon rate, then the market value of the bond will be below par. This is when the estate can exercise the death put option, should they choose to, to sell the bond back to the issuer at par.
Given the specialized nature of the death put, the bondholder might find it difficult to sell it while they are alive. The main problem is that the secondary market, which is where a non-standardized asset such as this is usually traded, will be limited.
There is one other caveat: a call (or early redemption) feature could be included in the bond's indenture contract. Early redemption allows the issuer to buy back (or call) the bond before maturity.
Typically, early redemption happens because interest rates fell enough to make refinancing the debt a good strategy. In this case, the bondholder who already accepted a lower interest rate to start with (buying the death put) will lose the bonds and have to reinvest the proceeds at a lower interest rate.
Death Put Example
Assume an investor takes the option of having a death put on a $1,000 par value bond they purchase. The coupon rate is 3%, paid annually, and the bond matures in 20 years.
Five years later, the bondholder passes away. Rates on similar bonds are now yielding 5%, which means the purchased bond will be worth less than $1,000. This is because people will sell the 3% coupon bond in favor of buying a 5% coupon bond. The 3% coupon bond will fall in price until the return on the bond (below par), plus the coupon, equals 5%. At that point, new buyers will step in to prevent the price from dropping further because the yield (coupon plus capital gain) equals 5%, which is the going rate in the market.
This is the type of situation that works out well for the death put holder. The face value is below $1,000, yet the bond can be redeemed for $1,000.
If the opposite scenario occurred, and the coupon rate on similar bonds was now 2%, the 3% bond would be trading above $1,000 because it would be in demand for its higher coupon rate. Therefore, the death put is of no use. The heirs are better off selling the bond in the open market for more than $1,000.
|
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] |
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