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https://www.investopedia.com/articles/pf/09/best-price-on-a-new-car.asp	How to Get the Best Price on a New Car	<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 a new car can be a difficult process. There are many options out there, and varying prices online and at different dealerships. There are also oftentimes multiple different payment options and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financing.asp" rel="noopener noreferrer">financing</a> choices. All of this can make <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394" rel="noopener noreferrer">buying a new car</a> an overwhelming decision. </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"> When shopping for a new car, you want to make sure that you get the best price, and there are certain ways to do so. But forget about spending hours <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negotiation.asp" rel="noopener noreferrer">negotiating</a> with salespeople. If you use these tips, you can get the best price before you even enter the showroom and remove some of the stress that comes with making such a big decision. </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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761" rel="noopener noreferrer">Shopping for a new car</a> can be stressful and confusing with a ton of options and different sellers.</li> <li>The best way to snag a great deal is to be informed, do your research, and know what that car's market value is.</li> <li>Some sellers have wiggle room—don't be shy to negotiate and play one seller against another.</li> <li>Cash is king. Ask if they can pass the savings from not using a credit card or loan on to you.</li> </ul></div></div></div> <span class="heading-toc" id="toc-the-best-way-to-get-a-deal-on-a-new-car"></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 Best Way to Get a Deal on a New Car </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> If you walk into a dealership and ask for the best price, you won't get it. Salespeople will sit you in an office and negotiate with you for an hour before giving you something resembling a real price. Even if you believe you've been successful in reaching a fair price using this approach, you'll never know for sure without comparison shopping. Going through this negotiation process with several dealers would take hours. </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 many buyers don't realize is that every car dealership has a back door that nearly always gives you the no-nonsense price of a car instantly. This back door is the Internet sales department or fleet sales department. You can contact an Internet salesperson for each dealership by using the phone numbers, email addresses, or contact forms found on every dealer's website. If you want to get quotes from more than one dealer, go to the manufacturer's website and "build" the vehicle you want (choosing the specs, color, and so on), and then request quotes from all the dealers in your area. </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 Internet approach is almost always cheaper and easier than shopping in person. Every dealership is actually in direct competition with many other dealerships in the area. When using the Internet to obtain price quotes, you're telling the dealership that you're comparison shopping and that the regular pricing games won't work on you. For this reason, an Internet salesperson will often give up the best price with no negotiation at all. </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"> When talking on the phone with salespeople, many of them will ask you to come to the dealership, because this gives them more leverage in convincing you to buy. At this stage, don't agree to go to any dealership and just continue collecting quotes. As you compile your dealer responses, you'll notice that quotes can fluctuate by more than a thousand dollars. Be sure to tell higher-quoting dealerships that you know of a better deal. They might not lower the price, but it's always worth a shot. Using this technique, you can get multiple quotes easily and find the true price of your target car within an hour. It's also worth using an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761" rel="noopener noreferrer">auto loan calculator</a> to determine what a price quote will look like as a monthly payment based on your credit score. </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-get-one-dealership-to-beat-anothers-price"></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"> Get One Dealership to Beat Another's Price </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Many dealerships maintain a policy to beat any other dealership's price. Usually, dealers will only beat a price by a small margin and will ask you to come to the dealership so they can close the deal. For this reason, you don't normally want to request a dealer to beat a price until you are ready to buy. When you are ready, and if you are confident that you have a rock-bottom quote, you can start asking dealers to beat the lowest quote. Try to get hard figures on the best price over the phone if possible. Ideally, you want to know the "out-the-door" price with all taxes and fees included. Otherwise, an unscrupulous dealer could try to add additional charges at the last minute. </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-pay-cash"></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"> Pay Cash </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Most customers don't realize that financing is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitcentre.asp">profit center</a> for car dealerships.<span class="ql-inline-citation" data-cite="1"></span> A finance manager is often a commissioned salesperson. Financing a new car purchase through a dealership often involves large initial "financing charges," which are pure dealership profit. A finance manager can also manipulate interest rates and other <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loan</a> terms to squeeze additional profit out of a deal. </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"> With so many complex terms, it can be very difficult to ensure you're getting a good deal on financing. If you're a monthly payment buyer, dealers can play costly games with you, but if you're a cash buyer, you can set an exact price on a car. If you can't pay cash, finance your loan outside of the dealership, where you can shop for the best <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">rates</a> and terms in a competitive market. </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-no-extras"></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"> No Extras </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Just when you think you've settled your car deal, you'll likely be hit with another sales proposition for extended <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/warranty.asp" rel="noopener noreferrer">warranties</a> and more. Do not buy anything except the car, even if it seems like an incredible deal at the time. Savvy dealerships will try to make money at every stage of a deal. When you are paying a large sum of cash, an extra few hundred dollars doesn't seem like as much money as it actually is. You need to guard against making bad decisions when so much money is on the table. </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"> To avoid spending more than you intended, get an "out-the-door" price from your salesperson before you come in to close the deal, and bring a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certifiedcheck.asp" rel="noopener noreferrer">certified check</a> for that exact amount. Do not pay with anything but that check. Consider leaving all other forms of payment at home to avoid the temptation of buying extras. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></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 Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Getting the best price on a new car doesn't have to mean hours of stressful negotiating. When you use the Internet to compare prices, pay cash for your car, and don't fall for the extras the dealership offers, you can shop like a pro and save thousands. </p></div>	Buying a new car can be a difficult process. There are many options out there, and varying prices online and at different dealerships. There are also oftentimes multiple different payment options and [financing](https://www.investopedia.com/terms/f/financing.asp) choices. All of this can make [buying a new car](https://www.investopedia.com/best-auto-loan-rates-4846394) an overwhelming decision. When shopping for a new car, you want to make sure that you get the best price, and there are certain ways to do so. But forget about spending hours [negotiating](https://www.investopedia.com/terms/n/negotiation.asp) with salespeople. If you use these tips, you can get the best price before you even enter the showroom and remove some of the stress that comes with making such a big decision. ### Key Takeaways * [Shopping for a new car](https://www.investopedia.com/car-loan-calculator-5084761) can be stressful and confusing with a ton of options and different sellers. * The best way to snag a great deal is to be informed, do your research, and know what that car's market value is. * Some sellers have wiggle room—don't be shy to negotiate and play one seller against another. * Cash is king. Ask if they can pass the savings from not using a credit card or loan on to you. ## The Best Way to Get a Deal on a New Car If you walk into a dealership and ask for the best price, you won't get it. Salespeople will sit you in an office and negotiate with you for an hour before giving you something resembling a real price. Even if you believe you've been successful in reaching a fair price using this approach, you'll never know for sure without comparison shopping. Going through this negotiation process with several dealers would take hours. What many buyers don't realize is that every car dealership has a back door that nearly always gives you the no-nonsense price of a car instantly. This back door is the Internet sales department or fleet sales department. You can contact an Internet salesperson for each dealership by using the phone numbers, email addresses, or contact forms found on every dealer's website. If you want to get quotes from more than one dealer, go to the manufacturer's website and "build" the vehicle you want (choosing the specs, color, and so on), and then request quotes from all the dealers in your area. The Internet approach is almost always cheaper and easier than shopping in person. Every dealership is actually in direct competition with many other dealerships in the area. When using the Internet to obtain price quotes, you're telling the dealership that you're comparison shopping and that the regular pricing games won't work on you. For this reason, an Internet salesperson will often give up the best price with no negotiation at all. When talking on the phone with salespeople, many of them will ask you to come to the dealership, because this gives them more leverage in convincing you to buy. At this stage, don't agree to go to any dealership and just continue collecting quotes. As you compile your dealer responses, you'll notice that quotes can fluctuate by more than a thousand dollars. Be sure to tell higher-quoting dealerships that you know of a better deal. They might not lower the price, but it's always worth a shot. Using this technique, you can get multiple quotes easily and find the true price of your target car within an hour. It's also worth using an [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761) to determine what a price quote will look like as a monthly payment based on your credit score. ## Get One Dealership to Beat Another's Price Many dealerships maintain a policy to beat any other dealership's price. Usually, dealers will only beat a price by a small margin and will ask you to come to the dealership so they can close the deal. For this reason, you don't normally want to request a dealer to beat a price until you are ready to buy. When you are ready, and if you are confident that you have a rock-bottom quote, you can start asking dealers to beat the lowest quote. Try to get hard figures on the best price over the phone if possible. Ideally, you want to know the "out-the-door" price with all taxes and fees included. Otherwise, an unscrupulous dealer could try to add additional charges at the last minute. ## Pay Cash Most customers don't realize that financing is a [profit center](https://www.investopedia.com/terms/p/profitcentre.asp) for car dealerships. A finance manager is often a commissioned salesperson. Financing a new car purchase through a dealership often involves large initial "financing charges," which are pure dealership profit. A finance manager can also manipulate interest rates and other [loan](https://www.investopedia.com/terms/l/loan.asp) terms to squeeze additional profit out of a deal. With so many complex terms, it can be very difficult to ensure you're getting a good deal on financing. If you're a monthly payment buyer, dealers can play costly games with you, but if you're a cash buyer, you can set an exact price on a car. If you can't pay cash, finance your loan outside of the dealership, where you can shop for the best [rates](https://www.investopedia.com/terms/i/interestrate.asp) and terms in a competitive market. ## No Extras Just when you think you've settled your car deal, you'll likely be hit with another sales proposition for extended [warranties](https://www.investopedia.com/terms/w/warranty.asp) and more. Do not buy anything except the car, even if it seems like an incredible deal at the time. Savvy dealerships will try to make money at every stage of a deal. When you are paying a large sum of cash, an extra few hundred dollars doesn't seem like as much money as it actually is. You need to guard against making bad decisions when so much money is on the table. To avoid spending more than you intended, get an "out-the-door" price from your salesperson before you come in to close the deal, and bring a [certified check](https://www.investopedia.com/terms/c/certifiedcheck.asp) for that exact amount. Do not pay with anything but that check. Consider leaving all other forms of payment at home to avoid the temptation of buying extras. ## The Bottom Line Getting the best price on a new car doesn't have to mean hours of stressful negotiating. When you use the Internet to compare prices, pay cash for your car, and don't fall for the extras the dealership offers, you can shop like a pro and save thousands.	Buying a new car can be a difficult process. There are many options out there, and varying prices online and at different dealerships. There are also oftentimes multiple different payment options and financing choices. All of this can make buying a new car an overwhelming decision. When shopping for a new car, you want to make sure that you get the best price, and there are certain ways to do so. But forget about spending hours negotiating with salespeople. If you use these tips, you can get the best price before you even enter the showroom and remove some of the stress that comes with making such a big decision. Key Takeaways Shopping for a new car can be stressful and confusing with a ton of options and different sellers. The best way to snag a great deal is to be informed, do your research, and know what that car's market value is. Some sellers have wiggle room—don't be shy to negotiate and play one seller against another. Cash is king. Ask if they can pass the savings from not using a credit card or loan on to you. The Best Way to Get a Deal on a New Car If you walk into a dealership and ask for the best price, you won't get it. Salespeople will sit you in an office and negotiate with you for an hour before giving you something resembling a real price. Even if you believe you've been successful in reaching a fair price using this approach, you'll never know for sure without comparison shopping. Going through this negotiation process with several dealers would take hours. What many buyers don't realize is that every car dealership has a back door that nearly always gives you the no-nonsense price of a car instantly. This back door is the Internet sales department or fleet sales department. You can contact an Internet salesperson for each dealership by using the phone numbers, email addresses, or contact forms found on every dealer's website. If you want to get quotes from more than one dealer, go to the manufacturer's website and "build" the vehicle you want (choosing the specs, color, and so on), and then request quotes from all the dealers in your area. The Internet approach is almost always cheaper and easier than shopping in person. Every dealership is actually in direct competition with many other dealerships in the area. When using the Internet to obtain price quotes, you're telling the dealership that you're comparison shopping and that the regular pricing games won't work on you. For this reason, an Internet salesperson will often give up the best price with no negotiation at all. When talking on the phone with salespeople, many of them will ask you to come to the dealership, because this gives them more leverage in convincing you to buy. At this stage, don't agree to go to any dealership and just continue collecting quotes. As you compile your dealer responses, you'll notice that quotes can fluctuate by more than a thousand dollars. Be sure to tell higher-quoting dealerships that you know of a better deal. They might not lower the price, but it's always worth a shot. Using this technique, you can get multiple quotes easily and find the true price of your target car within an hour. It's also worth using an auto loan calculator to determine what a price quote will look like as a monthly payment based on your credit score. Get One Dealership to Beat Another's Price Many dealerships maintain a policy to beat any other dealership's price. Usually, dealers will only beat a price by a small margin and will ask you to come to the dealership so they can close the deal. For this reason, you don't normally want to request a dealer to beat a price until you are ready to buy. When you are ready, and if you are confident that you have a rock-bottom quote, you can start asking dealers to beat the lowest quote. Try to get hard figures on the best price over the phone if possible. Ideally, you want to know the "out-the-door" price with all taxes and fees included. Otherwise, an unscrupulous dealer could try to add additional charges at the last minute. Pay Cash Most customers don't realize that financing is a profit center for car dealerships. A finance manager is often a commissioned salesperson. Financing a new car purchase through a dealership often involves large initial "financing charges," which are pure dealership profit. A finance manager can also manipulate interest rates and other loan terms to squeeze additional profit out of a deal. With so many complex terms, it can be very difficult to ensure you're getting a good deal on financing. If you're a monthly payment buyer, dealers can play costly games with you, but if you're a cash buyer, you can set an exact price on a car. If you can't pay cash, finance your loan outside of the dealership, where you can shop for the best rates and terms in a competitive market. No Extras Just when you think you've settled your car deal, you'll likely be hit with another sales proposition for extended warranties and more. Do not buy anything except the car, even if it seems like an incredible deal at the time. Savvy dealerships will try to make money at every stage of a deal. When you are paying a large sum of cash, an extra few hundred dollars doesn't seem like as much money as it actually is. You need to guard against making bad decisions when so much money is on the table. To avoid spending more than you intended, get an "out-the-door" price from your salesperson before you come in to close the deal, and bring a certified check for that exact amount. Do not pay with anything but that check. Consider leaving all other forms of payment at home to avoid the temptation of buying extras. The Bottom Line Getting the best price on a new car doesn't have to mean hours of stressful negotiating. When you use the Internet to compare prices, pay cash for your car, and don't fall for the extras the dealership offers, you can shop like a pro and save thousands.	[ [ "financing", "https://www.investopedia.com/terms/f/financing.asp" ], [ "buying a new car", "https://www.investopedia.com/best-auto-loan-rates-4846394" ], [ "negotiating", "https://www.investopedia.com/terms/n/negotiation.asp" ], [ "Shopping for a new car", "https://www.investopedia.com/car-loan-calculator-5084761" ], [ "auto loan calculator", "https://www.investopedia.com/car-loan-calculator-5084761" ], [ "profit center", "https://www.investopedia.com/terms/p/profitcentre.asp" ], [ "loan", "https://www.investopedia.com/terms/l/loan.asp" ], [ "rates", "https://www.investopedia.com/terms/i/interestrate.asp" ], [ "warranties", "https://www.investopedia.com/terms/w/warranty.asp" ], [ "certified check", "https://www.investopedia.com/terms/c/certifiedcheck.asp" ] ]
https://www.investopedia.com/chase-announces-new-5-percent-freedom-categories-for-q4-2022-6665720	Chase Announces New 5% Freedom Categories for Q4 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"> Today, Chase announced new 5% cash-back categories for its Chase Freedom and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/chase-freedom-flex-review-5078011">Chase Freedom Flex</a> credit cards. Throughout the fourth quarter of 2022, cardholders with either card who activate the promotion can earn 5% cash back on up to $1,500 spent through PayPal and at Walmart. </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>Chase has announced new 5% Freedom bonus categories for October through December 2022.</li><li>Cardholders can earn up to $75 in rewards when they spend up to $1,500 at Walmart and via PayPal.</li><li>Activate the bonus by Dec. 14, 2022, to earn the bonus rate for the entire quarter.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-to-maximize-your-5-freedom-or-freedom-flex-bonus"></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 Maximize Your 5% Freedom or Freedom Flex Bonus </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In the third quarter of 2022, Chase offered its 5% rewards rate on four separate categories, and while that's down to only two in the fourth quarter, there are arguably more opportunities to maximize the bonus. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The Walmart category includes both in-store and online purchases, making it easy to rack up bonus rewards on your holiday shopping. </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"> More beneficial, though, is the PayPal category. Freedom and Freedom Flex cardholders will be able to earn 5% cash back with any retailer that accepts PayPal as a payment method—more than 30 million merchants use the payment platform.<span class="ql-inline-citation" data-cite="1"></span> Just be sure to link your card to your PayPal account and select it as your payment option. </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"> If you already have a Chase Freedom or Freedom Flex credit card, you should receive an email asking you to activate the promotion. You can typically do this with just one click. Alternatively, you can activate it by logging in to your online account or the Chase mobile app, calling customer service or visiting a local Chase branch.<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"> Note that you'll need to activate by Dec. 14, 2022, but when you do, you'll receive the bonus rewards rate on all eligible purchases made during the promotional period. </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>	Today, Chase announced new 5% cash-back categories for its Chase Freedom and [Chase Freedom Flex](https://www.investopedia.com/chase-freedom-flex-review-5078011) credit cards. Throughout the fourth quarter of 2022, cardholders with either card who activate the promotion can earn 5% cash back on up to $1,500 spent through PayPal and at Walmart. ### Key Takeaways * Chase has announced new 5% Freedom bonus categories for October through December 2022. * Cardholders can earn up to $75 in rewards when they spend up to $1,500 at Walmart and via PayPal. * Activate the bonus by Dec. 14, 2022, to earn the bonus rate for the entire quarter. ## How to Maximize Your 5% Freedom or Freedom Flex Bonus In the third quarter of 2022, Chase offered its 5% rewards rate on four separate categories, and while that's down to only two in the fourth quarter, there are arguably more opportunities to maximize the bonus. The Walmart category includes both in-store and online purchases, making it easy to rack up bonus rewards on your holiday shopping. More beneficial, though, is the PayPal category. Freedom and Freedom Flex cardholders will be able to earn 5% cash back with any retailer that accepts PayPal as a payment method—more than 30 million merchants use the payment platform. Just be sure to link your card to your PayPal account and select it as your payment option. If you already have a Chase Freedom or Freedom Flex credit card, you should receive an email asking you to activate the promotion. You can typically do this with just one click. Alternatively, you can activate it by logging in to your online account or the Chase mobile app, calling customer service or visiting a local Chase branch. Note that you'll need to activate by Dec. 14, 2022, but when you do, you'll receive the bonus rewards rate on all eligible purchases made during the promotional period. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Today, Chase announced new 5% cash-back categories for its Chase Freedom and Chase Freedom Flex credit cards. Throughout the fourth quarter of 2022, cardholders with either card who activate the promotion can earn 5% cash back on up to $1,500 spent through PayPal and at Walmart. Key Takeaways Chase has announced new 5% Freedom bonus categories for October through December 2022.Cardholders can earn up to $75 in rewards when they spend up to $1,500 at Walmart and via PayPal.Activate the bonus by Dec. 14, 2022, to earn the bonus rate for the entire quarter. How to Maximize Your 5% Freedom or Freedom Flex Bonus In the third quarter of 2022, Chase offered its 5% rewards rate on four separate categories, and while that's down to only two in the fourth quarter, there are arguably more opportunities to maximize the bonus. The Walmart category includes both in-store and online purchases, making it easy to rack up bonus rewards on your holiday shopping. More beneficial, though, is the PayPal category. Freedom and Freedom Flex cardholders will be able to earn 5% cash back with any retailer that accepts PayPal as a payment method—more than 30 million merchants use the payment platform. Just be sure to link your card to your PayPal account and select it as your payment option. If you already have a Chase Freedom or Freedom Flex credit card, you should receive an email asking you to activate the promotion. You can typically do this with just one click. Alternatively, you can activate it by logging in to your online account or the Chase mobile app, calling customer service or visiting a local Chase branch. Note that you'll need to activate by Dec. 14, 2022, but when you do, you'll receive the bonus rewards rate on all eligible purchases made during the promotional period. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "Chase Freedom Flex", "https://www.investopedia.com/chase-freedom-flex-review-5078011" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/personal-finance/6-different-types-checking-accounts/	What Are the 6 Different Types of Checking Accounts?	<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"> Checking accounts are an important part of the banking system. These deposit accounts give consumers a place to deposit their money, make transfers, write checks, pay bills, and do other routine banking transactions. </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 money in checking accounts is safe, as accounts are insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC); however, with so many different options available, how do you know <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/complete-guide-checking-accounts/">which account is right for you</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_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>Checking accounts are an important part of the banking system, giving consumers a place to do routine banking transactions. </li><li>Before you open a checking account, you should know your options and consider things such as monthly balances, fees, interest, and convenience.</li><li>Regular checking accounts are the most common, giving you all the features you’d expect from a checking account.</li><li>Premium accounts offer many perks but often require you to keep high balances.</li><li>Free checking accounts may not come with a monthly service charge, but they still incur fees for other services, such as overdrafts or out-of-network ATM usage.</li></ul></div></div></div> <span class="heading-toc" id="toc-know-your-situation"></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"> Know Your Situation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Before you open a checking account, you should know your options. After all, not all checking accounts are created alike. The same applies to your financial situation—it’s unique to you, so your checking account should complement it. Here are a few things you’ll need to think about before you head into the bank to open up your account. </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"> Monthly Balance </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> How much you plan on keeping on average every month will help you decide which type of checking account to open up. Will this balance be consistent throughout the lifetime of the account? Or will you only have a large balance at certain times during the year? Some accounts come with minimum balance requirements—which justify some of their perks—so you should keep that in mind. </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"> Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Consider the fees associated with each type of account. You can avoid monthly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/service-charge.asp">service charges</a> if you maintain a certain balance every month. Check to see if an account you’re interested in charges extra for things such as debit transactions and in-branch transactions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Couples can open joint checking accounts to manage their joint finances and expenses.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Maybe you can avoid certain fees by having automatic payments deducted for bills from your account or by setting up <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/directdeposit.asp">direct deposits</a>. Knowing about the bank and its fee structures for each account can mean the difference between saving a lot of money or spending hundreds of unnecessary dollars in fees each year. </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"> Interest </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Although you may not collect much, some checking accounts do pay interest. If you want to earn a little more—remember, that’s a little more—you can find a bank that gives you interest along with a place from which you can do your everyday banking. Interest is generally calculated on a daily basis and deposited directly into the checking account at the end of each month. </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"> Convenience </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If you’re the kind of person who prefers personal interaction, you’ll probably want a checking account at a bank that has a lot of branches; however, if you can do without, you’ll fare well with an online bank. </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"> These institutions don’t have very many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brickandmortar.asp">brick-and-mortar</a> locations—some don’t have any at all—but they offer the convenience of online and mobile banking with a debit card. Because they don’t offer teller service, many of these banks allow you to use different banks’ <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/atm.asp">automated teller machines</a> (ATMs) as well, which makes cash withdrawals <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-checking-accounts-with-no-atm-fees-5079489">easier and cheaper</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"> Now that we’ve outlined some of the basic considerations that go into choosing a checking account, here’s a list of some of the different types offered by most banks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></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_30-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Types of Checking Accounts" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/dTEwc1CWMpELUeuBI06y0RCXeXY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/dTEwc1CWMpELUeuBI06y0RCXeXY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg" data-srcset="https://www.investopedia.com/thmb/DTThyFz0etMQ_P0u_mEag5Hu-po=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Types of Checking Accounts" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/dTEwc1CWMpELUeuBI06y0RCXeXY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg" srcset="https://www.investopedia.com/thmb/DTThyFz0etMQ_P0u_mEag5Hu-po=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Eliana Rodgers</p></span> </figcaption></figure> <span class="heading-toc" id="toc-regular-checking-accounts"></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"> Regular Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A regular checking account simply lets you do all the things you’d expect from a checking account: deposit and withdraw money from an ATM, write checks, pay bills, and make purchases using a debit card. You may have to pay a monthly fee for the privilege of being an account holder, but many banks waive the fee if you keep enough money in your account. </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"> A regular checking account usually pays little or no interest on your balance. So if you’re looking for a little income, you may consider opening up a companion savings account to your checking account. </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-premium-checking-accounts"></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"> Premium Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> If you have a five-figure sum or more to keep in a checking account, a premium checking account <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/052715/premium-checking-account-worth-it.asp">may be right for you</a>. Having that high balance in your account should allow you to avoid paying a monthly fee and provide perks such as ATM fee reimbursements, free checks, and earning a little bit of interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>A premium checking account may not be your best option, even if you can easily meet the minimum balance requirement.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> You may also receive discounts on other services from the bank, such as a slightly lower mortgage interest rate or free financial advice. Still, that doesn’t mean a premium checking account is your best option, even if you can easily meet the minimum balance requirement. </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 extra perks definitely sound great, but other options could work out even better. For example, you may earn a higher return on your excess cash while still keeping it accessible for emergencies by putting it in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/042716/money-market-account-vs-highinterest-checking-account-which-better.asp">money market account</a>, government bonds, or a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/certificateofdeposit.asp">certificate of deposit</a> (CD). </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"> Most people only need to keep high balances in their checking accounts if they have large, regular outflows, such as a high mortgage payment, large student loan payment, estimated tax payments, and/or hefty insurance premiums. As for the discounted services and free advice, you may get a better rate on services or better advice from another institution. </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-interest-bearing-checking-accounts"></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"> Interest-Bearing Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/current-account-savings-account.asp">Interest-bearing checking accounts</a> give you a small return every month for the balance in your account. Some accounts pay a flat interest rate regardless of your balance, while others pay more on higher balances. </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 interest rate will almost certainly be below the inflation rate, but it might be comparable to what some savings accounts pay, giving you the best of both worlds—unlimited transactions and monthly interest payments—in a single account; however, you may not come out ahead with an interest-bearing checking account if its fees are too high. You may be better off with a free checking account, even if it pays less or no interest. </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-free-checking-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"> Free Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Free checking means that the account doesn’t charge a recurring fee, such as a monthly maintenance fee, and doesn’t have a minimum balance requirement to avoid a fee. Nevertheless, that doesn’t mean that every single service associated with the checking account will be free. </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"> You may still have to pay for other services, including out-of-network ATM fees, check fees, overdraft fees, stop payment fees, and foreign transaction fees. These accounts may not pay any interest, as you’re already getting the benefit of not paying a monthly fee. That said, some free checking accounts do pay interest. </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-low-balance-checking-accounts"></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"> Low-Balance Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Low-balance checking accounts, sometimes called “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeline_account.asp">lifeline accounts</a>,” are for customers who can only maintain a small balance but want to receive banking services. In exchange for allowing you to keep an account with a very low or no minimum balance requirement, the bank may require you to do other things that save it money, such as writing only a limited number of checks each month and receiving monthly statements electronically instead of by mail. </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"> Some of these accounts may not even have check-writing privileges—permitting only online or debit-card payments—and may not allow overdrafts. Rather than let you go below a $0 balance, they will decline any transaction that exceeds your available balance. </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-second-chance-checking-accounts"></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"> Second-Chance Checking Accounts </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> If a bank has closed your checking account in the past because of an unpaid negative balance and you’re ready to start over, a second-chance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/checking-accounts-4689732">checking account</a> may give you that opportunity. In exchange, you may have to pay a monthly fee of up to $20, and your account may have restrictions that other checking accounts don’t have, such as not allowing overdrafts. </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"> These accounts are available in all 50 states through banks and credit unions. Once you’ve maintained your account in good standing for a certain period—perhaps a year—you may become eligible for a regular checking account. </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"> How will a bank know if you’ve had a checking account closed in the past? Just as credit card issuers look at your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a> before letting you open an account, banks look at <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.chexsystems.com/web/chexsystems/consumerdebit/otherpage/RequestYourScore/!ut/p/z1/04_Sj9CPykssy0xPLMnMz0vMAfIjo8zizQIsPN2NLAx8DDyc3AwcXYPMnM28_YwMvAz0w8EKDBxdHA1Ngg18_J3dzYEKXCycHf2cjAwMDPSjSNLvHuAPUuDrZxEc6gPUb06cfjwKQPoNcABHkP4oiBI8PkBVgMWJhCwpyA0NjTDI9AQAuVm4dw!!/dz/d5/L2dBISEvZ0FBIS9nQSEh/" rel="sponsored nofollow">ChexSystems</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.earlywarning.com/consumer-information">Early Warning Services</a> reports before letting you open an account. </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"> If banks are denying your checking account applications and you don’t know why, order copies of your bank credit reports and review them for errors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_71-0"><span class="heading-toc" id="toc-what-are-the-different-types-of-checking-accounts"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Different Types of Checking Accounts?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Banks offer many different checking accounts to cater to the diversity in their clientele. Customers have many options to choose from that best suit their needs. The different types of checking accounts include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-student-bank-account-7643916">student accounts</a>, premium accounts, basic accounts, senior accounts, business accounts, rewards accounts, and interest accounts.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_72-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_73-0"><span class="heading-toc" id="toc-what-is-a-checking-account-used-for"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Checking Account Used for?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A checking account is a place where a person can store their cash safely and securely with ease of access to the funds when needed. The money in a checking account can be used to pay for bills, expenses, and anything where cash is required; this can be done via physical checks or a debit card that usually comes with an account.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_75-0"><span class="heading-toc" id="toc-do-checking-accounts-pay-interest"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Checking Accounts Pay Interest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Usually, checking accounts don't pay interest as the money in the account is meant to be used readily and for daily transactions; however, some checking accounts do pay interest. Savings accounts are more readily used for earning interest.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Whatever your financial situation, there’s a checking account for you—as long as you don’t have a history of fraud and meet basic account-opening requirements such as proof of identity. If you’re looking for a specific feature, such as an account for someone who always has a low balance or an account that pays interest, start by looking for accounts specifically marketed toward people with those requirements. </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"> Always keep in mind that checking account names are just marketing labels. A free checking account might serve you just as well as a low-balance checking account, and an interest-bearing checking account may pay more than a premium checking account. </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"> Changing checking accounts is a time-consuming chore, so choose carefully and try to get an account you’ll be happy with for years. In the case of a second-chance account, choose a bank where you can see yourself staying with for the long term. </p></div>	Checking accounts are an important part of the banking system. These deposit accounts give consumers a place to deposit their money, make transfers, write checks, pay bills, and do other routine banking transactions. The money in checking accounts is safe, as accounts are insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC); however, with so many different options available, how do you know [which account is right for you](https://www.investopedia.com/personal-finance/complete-guide-checking-accounts/)? ### Key Takeaways * Checking accounts are an important part of the banking system, giving consumers a place to do routine banking transactions. * Before you open a checking account, you should know your options and consider things such as monthly balances, fees, interest, and convenience. * Regular checking accounts are the most common, giving you all the features you’d expect from a checking account. * Premium accounts offer many perks but often require you to keep high balances. * Free checking accounts may not come with a monthly service charge, but they still incur fees for other services, such as overdrafts or out-of-network ATM usage. ## Know Your Situation Before you open a checking account, you should know your options. After all, not all checking accounts are created alike. The same applies to your financial situation—it’s unique to you, so your checking account should complement it. Here are a few things you’ll need to think about before you head into the bank to open up your account. ### Monthly Balance How much you plan on keeping on average every month will help you decide which type of checking account to open up. Will this balance be consistent throughout the lifetime of the account? Or will you only have a large balance at certain times during the year? Some accounts come with minimum balance requirements—which justify some of their perks—so you should keep that in mind. ### Fees Consider the fees associated with each type of account. You can avoid monthly [service charges](https://www.investopedia.com/terms/s/service-charge.asp) if you maintain a certain balance every month. Check to see if an account you’re interested in charges extra for things such as debit transactions and in-branch transactions. ### Couples can open joint checking accounts to manage their joint finances and expenses. Maybe you can avoid certain fees by having automatic payments deducted for bills from your account or by setting up [direct deposits](https://www.investopedia.com/terms/d/directdeposit.asp). Knowing about the bank and its fee structures for each account can mean the difference between saving a lot of money or spending hundreds of unnecessary dollars in fees each year. ### Interest Although you may not collect much, some checking accounts do pay interest. If you want to earn a little more—remember, that’s a little more—you can find a bank that gives you interest along with a place from which you can do your everyday banking. Interest is generally calculated on a daily basis and deposited directly into the checking account at the end of each month. ### Convenience If you’re the kind of person who prefers personal interaction, you’ll probably want a checking account at a bank that has a lot of branches; however, if you can do without, you’ll fare well with an online bank. These institutions don’t have very many [brick-and-mortar](https://www.investopedia.com/terms/b/brickandmortar.asp) locations—some don’t have any at all—but they offer the convenience of online and mobile banking with a debit card. Because they don’t offer teller service, many of these banks allow you to use different banks’ [automated teller machines](https://www.investopedia.com/terms/a/atm.asp) (ATMs) as well, which makes cash withdrawals [easier and cheaper](https://www.investopedia.com/best-checking-accounts-with-no-atm-fees-5079489). Now that we’ve outlined some of the basic considerations that go into choosing a checking account, here’s a list of some of the different types offered by most banks. ![Types of Checking Accounts]() ![Types of Checking Accounts](https://www.investopedia.com/thmb/dTEwc1CWMpELUeuBI06y0RCXeXY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/6-different-types-checking-accounts-final-a70ce75bdd3148bb8d82381e7c847142.jpg) Investopedia / Eliana Rodgers ## Regular Checking Accounts A regular checking account simply lets you do all the things you’d expect from a checking account: deposit and withdraw money from an ATM, write checks, pay bills, and make purchases using a debit card. You may have to pay a monthly fee for the privilege of being an account holder, but many banks waive the fee if you keep enough money in your account. A regular checking account usually pays little or no interest on your balance. So if you’re looking for a little income, you may consider opening up a companion savings account to your checking account. ## Premium Checking Accounts If you have a five-figure sum or more to keep in a checking account, a premium checking account [may be right for you](https://www.investopedia.com/articles/personal-finance/052715/premium-checking-account-worth-it.asp). Having that high balance in your account should allow you to avoid paying a monthly fee and provide perks such as ATM fee reimbursements, free checks, and earning a little bit of interest. ### A premium checking account may not be your best option, even if you can easily meet the minimum balance requirement. You may also receive discounts on other services from the bank, such as a slightly lower mortgage interest rate or free financial advice. Still, that doesn’t mean a premium checking account is your best option, even if you can easily meet the minimum balance requirement. The extra perks definitely sound great, but other options could work out even better. For example, you may earn a higher return on your excess cash while still keeping it accessible for emergencies by putting it in a [money market account](https://www.investopedia.com/articles/personal-finance/042716/money-market-account-vs-highinterest-checking-account-which-better.asp), government bonds, or a [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp) (CD). Most people only need to keep high balances in their checking accounts if they have large, regular outflows, such as a high mortgage payment, large student loan payment, estimated tax payments, and/or hefty insurance premiums. As for the discounted services and free advice, you may get a better rate on services or better advice from another institution. ## Interest-Bearing Checking Accounts [Interest-bearing checking accounts](https://www.investopedia.com/terms/c/current-account-savings-account.asp) give you a small return every month for the balance in your account. Some accounts pay a flat interest rate regardless of your balance, while others pay more on higher balances. The interest rate will almost certainly be below the inflation rate, but it might be comparable to what some savings accounts pay, giving you the best of both worlds—unlimited transactions and monthly interest payments—in a single account; however, you may not come out ahead with an interest-bearing checking account if its fees are too high. You may be better off with a free checking account, even if it pays less or no interest. ## Free Checking Accounts Free checking means that the account doesn’t charge a recurring fee, such as a monthly maintenance fee, and doesn’t have a minimum balance requirement to avoid a fee. Nevertheless, that doesn’t mean that every single service associated with the checking account will be free. You may still have to pay for other services, including out-of-network ATM fees, check fees, overdraft fees, stop payment fees, and foreign transaction fees. These accounts may not pay any interest, as you’re already getting the benefit of not paying a monthly fee. That said, some free checking accounts do pay interest. ## Low-Balance Checking Accounts Low-balance checking accounts, sometimes called “[lifeline accounts](https://www.investopedia.com/terms/l/lifeline_account.asp),” are for customers who can only maintain a small balance but want to receive banking services. In exchange for allowing you to keep an account with a very low or no minimum balance requirement, the bank may require you to do other things that save it money, such as writing only a limited number of checks each month and receiving monthly statements electronically instead of by mail. Some of these accounts may not even have check-writing privileges—permitting only online or debit-card payments—and may not allow overdrafts. Rather than let you go below a $0 balance, they will decline any transaction that exceeds your available balance. ## Second-Chance Checking Accounts If a bank has closed your checking account in the past because of an unpaid negative balance and you’re ready to start over, a second-chance [checking account](https://www.investopedia.com/checking-accounts-4689732) may give you that opportunity. In exchange, you may have to pay a monthly fee of up to $20, and your account may have restrictions that other checking accounts don’t have, such as not allowing overdrafts. These accounts are available in all 50 states through banks and credit unions. Once you’ve maintained your account in good standing for a certain period—perhaps a year—you may become eligible for a regular checking account. How will a bank know if you’ve had a checking account closed in the past? Just as credit card issuers look at your [credit report](https://www.investopedia.com/terms/c/creditreport.asp) before letting you open an account, banks look at [ChexSystems](https://www.chexsystems.com/web/chexsystems/consumerdebit/otherpage/RequestYourScore/!ut/p/z1/04_Sj9CPykssy0xPLMnMz0vMAfIjo8zizQIsPN2NLAx8DDyc3AwcXYPMnM28_YwMvAz0w8EKDBxdHA1Ngg18_J3dzYEKXCycHf2cjAwMDPSjSNLvHuAPUuDrZxEc6gPUb06cfjwKQPoNcABHkP4oiBI8PkBVgMWJhCwpyA0NjTDI9AQAuVm4dw!!/dz/d5/L2dBISEvZ0FBIS9nQSEh/) and [Early Warning Services](https://www.earlywarning.com/consumer-information) reports before letting you open an account. If banks are denying your checking account applications and you don’t know why, order copies of your bank credit reports and review them for errors. ## What Are the Different Types of Checking Accounts? Banks offer many different checking accounts to cater to the diversity in their clientele. Customers have many options to choose from that best suit their needs. The different types of checking accounts include [student accounts](https://www.investopedia.com/what-is-a-student-bank-account-7643916), premium accounts, basic accounts, senior accounts, business accounts, rewards accounts, and interest accounts. ## What Is a Checking Account Used for? A checking account is a place where a person can store their cash safely and securely with ease of access to the funds when needed. The money in a checking account can be used to pay for bills, expenses, and anything where cash is required; this can be done via physical checks or a debit card that usually comes with an account. ## Do Checking Accounts Pay Interest? Usually, checking accounts don't pay interest as the money in the account is meant to be used readily and for daily transactions; however, some checking accounts do pay interest. Savings accounts are more readily used for earning interest. ## The Bottom Line Whatever your financial situation, there’s a checking account for you—as long as you don’t have a history of fraud and meet basic account-opening requirements such as proof of identity. If you’re looking for a specific feature, such as an account for someone who always has a low balance or an account that pays interest, start by looking for accounts specifically marketed toward people with those requirements. Always keep in mind that checking account names are just marketing labels. A free checking account might serve you just as well as a low-balance checking account, and an interest-bearing checking account may pay more than a premium checking account. Changing checking accounts is a time-consuming chore, so choose carefully and try to get an account you’ll be happy with for years. In the case of a second-chance account, choose a bank where you can see yourself staying with for the long term.	Checking accounts are an important part of the banking system. These deposit accounts give consumers a place to deposit their money, make transfers, write checks, pay bills, and do other routine banking transactions. The money in checking accounts is safe, as accounts are insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC); however, with so many different options available, how do you know which account is right for you? Key Takeaways Checking accounts are an important part of the banking system, giving consumers a place to do routine banking transactions. Before you open a checking account, you should know your options and consider things such as monthly balances, fees, interest, and convenience.Regular checking accounts are the most common, giving you all the features you’d expect from a checking account.Premium accounts offer many perks but often require you to keep high balances.Free checking accounts may not come with a monthly service charge, but they still incur fees for other services, such as overdrafts or out-of-network ATM usage. Know Your Situation Before you open a checking account, you should know your options. After all, not all checking accounts are created alike. The same applies to your financial situation—it’s unique to you, so your checking account should complement it. Here are a few things you’ll need to think about before you head into the bank to open up your account. Monthly Balance How much you plan on keeping on average every month will help you decide which type of checking account to open up. Will this balance be consistent throughout the lifetime of the account? Or will you only have a large balance at certain times during the year? Some accounts come with minimum balance requirements—which justify some of their perks—so you should keep that in mind. Fees Consider the fees associated with each type of account. You can avoid monthly service charges if you maintain a certain balance every month. Check to see if an account you’re interested in charges extra for things such as debit transactions and in-branch transactions. Couples can open joint checking accounts to manage their joint finances and expenses. Maybe you can avoid certain fees by having automatic payments deducted for bills from your account or by setting up direct deposits. Knowing about the bank and its fee structures for each account can mean the difference between saving a lot of money or spending hundreds of unnecessary dollars in fees each year. Interest Although you may not collect much, some checking accounts do pay interest. If you want to earn a little more—remember, that’s a little more—you can find a bank that gives you interest along with a place from which you can do your everyday banking. Interest is generally calculated on a daily basis and deposited directly into the checking account at the end of each month. Convenience If you’re the kind of person who prefers personal interaction, you’ll probably want a checking account at a bank that has a lot of branches; however, if you can do without, you’ll fare well with an online bank. These institutions don’t have very many brick-and-mortar locations—some don’t have any at all—but they offer the convenience of online and mobile banking with a debit card. Because they don’t offer teller service, many of these banks allow you to use different banks’ automated teller machines (ATMs) as well, which makes cash withdrawals easier and cheaper. Now that we’ve outlined some of the basic considerations that go into choosing a checking account, here’s a list of some of the different types offered by most banks. Investopedia / Eliana Rodgers Regular Checking Accounts A regular checking account simply lets you do all the things you’d expect from a checking account: deposit and withdraw money from an ATM, write checks, pay bills, and make purchases using a debit card. You may have to pay a monthly fee for the privilege of being an account holder, but many banks waive the fee if you keep enough money in your account. A regular checking account usually pays little or no interest on your balance. So if you’re looking for a little income, you may consider opening up a companion savings account to your checking account. Premium Checking Accounts If you have a five-figure sum or more to keep in a checking account, a premium checking account may be right for you. Having that high balance in your account should allow you to avoid paying a monthly fee and provide perks such as ATM fee reimbursements, free checks, and earning a little bit of interest. A premium checking account may not be your best option, even if you can easily meet the minimum balance requirement. You may also receive discounts on other services from the bank, such as a slightly lower mortgage interest rate or free financial advice. Still, that doesn’t mean a premium checking account is your best option, even if you can easily meet the minimum balance requirement. The extra perks definitely sound great, but other options could work out even better. For example, you may earn a higher return on your excess cash while still keeping it accessible for emergencies by putting it in a money market account, government bonds, or a certificate of deposit (CD). Most people only need to keep high balances in their checking accounts if they have large, regular outflows, such as a high mortgage payment, large student loan payment, estimated tax payments, and/or hefty insurance premiums. As for the discounted services and free advice, you may get a better rate on services or better advice from another institution. Interest-Bearing Checking Accounts Interest-bearing checking accounts give you a small return every month for the balance in your account. Some accounts pay a flat interest rate regardless of your balance, while others pay more on higher balances. The interest rate will almost certainly be below the inflation rate, but it might be comparable to what some savings accounts pay, giving you the best of both worlds—unlimited transactions and monthly interest payments—in a single account; however, you may not come out ahead with an interest-bearing checking account if its fees are too high. You may be better off with a free checking account, even if it pays less or no interest. Free Checking Accounts Free checking means that the account doesn’t charge a recurring fee, such as a monthly maintenance fee, and doesn’t have a minimum balance requirement to avoid a fee. Nevertheless, that doesn’t mean that every single service associated with the checking account will be free. You may still have to pay for other services, including out-of-network ATM fees, check fees, overdraft fees, stop payment fees, and foreign transaction fees. These accounts may not pay any interest, as you’re already getting the benefit of not paying a monthly fee. That said, some free checking accounts do pay interest. Low-Balance Checking Accounts Low-balance checking accounts, sometimes called “lifeline accounts,” are for customers who can only maintain a small balance but want to receive banking services. In exchange for allowing you to keep an account with a very low or no minimum balance requirement, the bank may require you to do other things that save it money, such as writing only a limited number of checks each month and receiving monthly statements electronically instead of by mail. Some of these accounts may not even have check-writing privileges—permitting only online or debit-card payments—and may not allow overdrafts. Rather than let you go below a $0 balance, they will decline any transaction that exceeds your available balance. Second-Chance Checking Accounts If a bank has closed your checking account in the past because of an unpaid negative balance and you’re ready to start over, a second-chance checking account may give you that opportunity. In exchange, you may have to pay a monthly fee of up to $20, and your account may have restrictions that other checking accounts don’t have, such as not allowing overdrafts. These accounts are available in all 50 states through banks and credit unions. Once you’ve maintained your account in good standing for a certain period—perhaps a year—you may become eligible for a regular checking account. How will a bank know if you’ve had a checking account closed in the past? Just as credit card issuers look at your credit report before letting you open an account, banks look at ChexSystems and Early Warning Services reports before letting you open an account. If banks are denying your checking account applications and you don’t know why, order copies of your bank credit reports and review them for errors. What Are the Different Types of Checking Accounts? Banks offer many different checking accounts to cater to the diversity in their clientele. Customers have many options to choose from that best suit their needs. The different types of checking accounts include student accounts, premium accounts, basic accounts, senior accounts, business accounts, rewards accounts, and interest accounts. What Is a Checking Account Used for? A checking account is a place where a person can store their cash safely and securely with ease of access to the funds when needed. The money in a checking account can be used to pay for bills, expenses, and anything where cash is required; this can be done via physical checks or a debit card that usually comes with an account. Do Checking Accounts Pay Interest? Usually, checking accounts don't pay interest as the money in the account is meant to be used readily and for daily transactions; however, some checking accounts do pay interest. Savings accounts are more readily used for earning interest. The Bottom Line Whatever your financial situation, there’s a checking account for you—as long as you don’t have a history of fraud and meet basic account-opening requirements such as proof of identity. If you’re looking for a specific feature, such as an account for someone who always has a low balance or an account that pays interest, start by looking for accounts specifically marketed toward people with those requirements. Always keep in mind that checking account names are just marketing labels. A free checking account might serve you just as well as a low-balance checking account, and an interest-bearing checking account may pay more than a premium checking account. Changing checking accounts is a time-consuming chore, so choose carefully and try to get an account you’ll be happy with for years. In the case of a second-chance account, choose a bank where you can see yourself staying with for the long term.	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https://www.investopedia.com/articles/personal-finance/070915/personal-loans-vs-car-loans-how-they-differ.asp	Personal Loans vs. Car Loans: 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"> Personal loans and car loans are two common financing options for major purchases, but a car loan is often better for buying a car. </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 main difference between a personal loan versus <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-loan-rates-4846394">a car loan</a> is that a personal loan is typically unsecured, meaning it has no collateral. An auto loan is usually backed by the car, so the lender has lower risk if you default on the loan. Auto loans generally have lower interest rates. A personal loan can be used for many different purposes, including buying a car, whereas a car loan is only for buying vehicles. </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 personal loan can be used for many different purposes, whereas a car loan is strictly for purchasing a vehicle.</li><li>A personal loan can be secured with an asset, but it is more commonly unsecured.</li><li>A car loan is secured with the vehicle you purchase, so it can be repossessed in the event of a default.</li><li>Both car loans and personal loans are generally fixed-rate installment loans that have set terms and regular monthly payments.</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="Personal Loans vs. Car Loans" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/4doNjYi8kycOO4RJeNhzZkcNkFw=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/tg-1qAkjrGO6z3dS4ETwcSBIPFk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg" data-srcset="https://www.investopedia.com/thmb/V0YZE-dr9F4E7KTWEOg3SahyYzM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg 750w" data-tracking-container="true" height="800" id="mntl-sc-block-image_1-0" width="1200"/> <noscript> <img alt="Personal Loans vs. Car Loans" class="img--noscript universal-image__image" height="800" sizes="750px" src="https://www.investopedia.com/thmb/tg-1qAkjrGO6z3dS4ETwcSBIPFk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg" srcset="https://www.investopedia.com/thmb/V0YZE-dr9F4E7KTWEOg3SahyYzM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg 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>Investopedia / Sabrina Jiang</p></span> </figcaption></figure> <span class="heading-toc" id="toc-personal-loans"></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"> Personal Loans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loans-4689729">personal loan</a> provides you with funds from a lending institution like a bank in a lump sum. A benefit of this type of loan is that you can <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/benefits-personal-loan-7485277">use the money at your discretion</a>. Such spending can include paying for a vacation, wedding, or home improvement project. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Most personal loans are unsecured. However, a personal loan can be secured against an asset, such as a vehicle or home. If a personal loan is secured, 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> can seize your asset to recover its losses if you don't repay the loan. </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>You can use a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-calculator-5082130">personal loan calculator</a> to determine how interest rates and loan terms will affect what you'll pay for each month.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_16-0"> <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>No restrictions on how funds are spent</p></li> <li><p>Flexibility in payment structure (short versus long term)</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>Interest rates likely to be higher than on car loans</p></li> <li><p>Tougher lending requirements</p></li> <li><p>Consumers with poor credit scores likely won’t qualify</p><p> </p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_18-0"> <span class="mntl-sc-block-subheading__text"> How Interest Rates Work on Personal Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Generally, unsecured loans have higher interest rates than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-secured-personal-loans-5114143">comparable secured loans</a> with collateral.<span class="ql-inline-citation" data-cite="9"></span> Unsecured personal loans also come with more stringent approval requirements, so you’ll need credit if you want lower rates. If your credit history is poor, you may not get approved for a personal loan. </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"> 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> will influence both the loan amount and the interest rate. The better your credit score, the more likely you are to qualify for larger loans with lower interest rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_23-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_24-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Interest rates on personal loans are generally fixed, but personal loans can also have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/07/fixed-variable.asp">variable interest rates</a>.</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"> The Terms for Personal Loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Personal loans have a set <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repayment.asp">repayment</a> period, such as 12 months or 36 months.<span class="ql-inline-citation" data-cite="10"></span> Longer loan terms will lower your monthly repayment, but you’ll be paying more interest over the term of the loan. Conversely, shorter loan terms mean higher monthly repayments, but incur less interest overall, since you are paying off the principal faster. </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-car-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"> Car Loans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> A car loan is secured with the vehicle you purchase. If you default on your repayments, the lender can seize your car to try to recoup its losses. Much like with a mortgage, the lender retains ownership over the asset until you make the final payment. </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"> Car loans are paid off in fixed monthly installments with varying terms and interest rates. One common car loan term is five years. </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>Try using an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761">auto loan calculator</a> to determine what interest rate and loan term would best suit your needs. With these tools, you can estimate monthly payments and ensure they would fit into your budget.</p></div></div></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"> Interest Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Given that the lender has the collateral of the car backing the loan, the loan is considered lower risk. So, you will generally get a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/061615/how-interest-rates-work-car-loans.asp">lower interest rate</a> than you would on a personal loan. Interest rates are also fixed, so you will know what to expect with your monthly payments. </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-comparisonlist mntl-block" id="mntl-sc-block_38-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_39-0"> <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>Usually a lower interest rate than on a personal loan</p></li> <li><p>Easier to get with mediocre credit history</p></li> <li><p>Often offered at dealerships</p></li> <li><p>Fixed payments offer predictability</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>You don’t have title to the car until the final repayment is made</p></li> <li><p>A deposit may be required to secure the loan</p></li> <li><p>You can only use a car loan to buy a car</p></li> </ul> </div> </div></div> <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"> The Terms </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Car loans are often fixed at 36, 48, 60, or 72 months. Other term lengths are possible as well. And like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A less-than-average <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> won’t necessarily prevent you from getting a car loan. </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"> There are a variety of ways to get car loans. Before signing up for a dealer loan, shop around for car loans from your bank or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a>, which can often give you better deals.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-can-you-use-a-personal-loan-to-buy-a-car"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Use a Personal Loan to Buy a Car?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you get a large enough personal loan, you can use it to buy a car, since funds from a personal loan can be used for any purpose. However, you can likely get much lower interest rates on an auto loan.</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-is-it-better-to-get-a-personal-loan-to-pay-for-a-car"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is it Better to Get a Personal Loan to Pay for a Car?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Generally, it's better to get an auto loan to pay for a car because they typically have lower interest rates. Because your car serves as collateral for a loan, lenders consider the loan a lower risk. Lower interest rates save you money in the long-term. If you can get a personal loan with a lower interest rate than a car loan, it may be better to get a personal loan to pay for a car.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-how-long-does-it-take-to-get-a-personal-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does it Take to Get a Personal Loan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can typically get a personal loan within one to five business days. In some cases, you can apply online and receive the funding the same day. Applying for a personal loan is a straightforward process. You can fill out an application online or at a bank branch.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> When it comes to buying a new car, you have several financing options. Go beyond a dealership's financing offer and shop around for various loans to ensure you get the best interest rate. In most cases, an auto loan that uses your car as collateral will provide the lowest interest rates. But explore your options in using personal loans as well. </p></div>	Personal loans and car loans are two common financing options for major purchases, but a car loan is often better for buying a car. The main difference between a personal loan versus [a car loan](https://www.investopedia.com/best-auto-loan-rates-4846394) is that a personal loan is typically unsecured, meaning it has no collateral. An auto loan is usually backed by the car, so the lender has lower risk if you default on the loan. Auto loans generally have lower interest rates. A personal loan can be used for many different purposes, including buying a car, whereas a car loan is only for buying vehicles. ### Key Takeaways * A personal loan can be used for many different purposes, whereas a car loan is strictly for purchasing a vehicle. * A personal loan can be secured with an asset, but it is more commonly unsecured. * A car loan is secured with the vehicle you purchase, so it can be repossessed in the event of a default. * Both car loans and personal loans are generally fixed-rate installment loans that have set terms and regular monthly payments. ![Personal Loans vs. Car Loans]() ![Personal Loans vs. Car Loans](https://www.investopedia.com/thmb/tg-1qAkjrGO6z3dS4ETwcSBIPFk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-070915-personal-loans-vs-car-loans-how-they-differ-v2-f8faff14abb1488d869f4026c406a86c.jpg) Investopedia / Sabrina Jiang ## Personal Loans A [personal loan](https://www.investopedia.com/personal-loans-4689729) provides you with funds from a lending institution like a bank in a lump sum. A benefit of this type of loan is that you can [use the money at your discretion](https://www.investopedia.com/benefits-personal-loan-7485277). Such spending can include paying for a vacation, wedding, or home improvement project. Most personal loans are unsecured. However, a personal loan can be secured against an asset, such as a vehicle or home. If a personal loan is secured, the [lender](https://www.investopedia.com/terms/l/lender.asp) can seize your asset to recover its losses if you don't repay the loan. ### You can use a [personal loan calculator](https://www.investopedia.com/personal-loan-calculator-5082130) to determine how interest rates and loan terms will affect what you'll pay for each month. Pros * No restrictions on how funds are spent * Flexibility in payment structure (short versus long term) Cons * Interest rates likely to be higher than on car loans * Tougher lending requirements * Consumers with poor credit scores likely won’t qualify ### How Interest Rates Work on Personal Loans Generally, unsecured loans have higher interest rates than [comparable secured loans](https://www.investopedia.com/best-secured-personal-loans-5114143) with collateral. Unsecured personal loans also come with more stringent approval requirements, so you’ll need credit if you want lower rates. If your credit history is poor, you may not get approved for a personal loan. Your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) will influence both the loan amount and the interest rate. The better your credit score, the more likely you are to qualify for larger loans with lower interest rates. ### Interest rates on personal loans are generally fixed, but personal loans can also have [variable interest rates](https://www.investopedia.com/ask/answers/07/fixed-variable.asp). ### The Terms for Personal Loans Personal loans have a set [repayment](https://www.investopedia.com/terms/r/repayment.asp) period, such as 12 months or 36 months. Longer loan terms will lower your monthly repayment, but you’ll be paying more interest over the term of the loan. Conversely, shorter loan terms mean higher monthly repayments, but incur less interest overall, since you are paying off the principal faster. ## Car Loans A car loan is secured with the vehicle you purchase. If you default on your repayments, the lender can seize your car to try to recoup its losses. Much like with a mortgage, the lender retains ownership over the asset until you make the final payment. Car loans are paid off in fixed monthly installments with varying terms and interest rates. One common car loan term is five years. ### Try using an [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761) to determine what interest rate and loan term would best suit your needs. With these tools, you can estimate monthly payments and ensure they would fit into your budget. ### Interest Rates Given that the lender has the collateral of the car backing the loan, the loan is considered lower risk. So, you will generally get a [lower interest rate](https://www.investopedia.com/articles/personal-finance/061615/how-interest-rates-work-car-loans.asp) than you would on a personal loan. Interest rates are also fixed, so you will know what to expect with your monthly payments. Pros * Usually a lower interest rate than on a personal loan * Easier to get with mediocre credit history * Often offered at dealerships * Fixed payments offer predictability Cons * You don’t have title to the car until the final repayment is made * A deposit may be required to secure the loan * You can only use a car loan to buy a car ### The Terms Car loans are often fixed at 36, 48, 60, or 72 months. Other term lengths are possible as well. And like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A less-than-average [credit history](https://www.investopedia.com/terms/c/credit-history.asp) won’t necessarily prevent you from getting a car loan. There are a variety of ways to get car loans. Before signing up for a dealer loan, shop around for car loans from your bank or [credit union](https://www.investopedia.com/terms/c/creditunion.asp), which can often give you better deals. ## Can You Use a Personal Loan to Buy a Car? If you get a large enough personal loan, you can use it to buy a car, since funds from a personal loan can be used for any purpose. However, you can likely get much lower interest rates on an auto loan. ## Is it Better to Get a Personal Loan to Pay for a Car? Generally, it's better to get an auto loan to pay for a car because they typically have lower interest rates. Because your car serves as collateral for a loan, lenders consider the loan a lower risk. Lower interest rates save you money in the long-term. If you can get a personal loan with a lower interest rate than a car loan, it may be better to get a personal loan to pay for a car. ## How Long Does it Take to Get a Personal Loan? You can typically get a personal loan within one to five business days. In some cases, you can apply online and receive the funding the same day. Applying for a personal loan is a straightforward process. You can fill out an application online or at a bank branch. ## The Bottom Line When it comes to buying a new car, you have several financing options. Go beyond a dealership's financing offer and shop around for various loans to ensure you get the best interest rate. In most cases, an auto loan that uses your car as collateral will provide the lowest interest rates. But explore your options in using personal loans as well.	Personal loans and car loans are two common financing options for major purchases, but a car loan is often better for buying a car. The main difference between a personal loan versus a car loan is that a personal loan is typically unsecured, meaning it has no collateral. An auto loan is usually backed by the car, so the lender has lower risk if you default on the loan. Auto loans generally have lower interest rates. A personal loan can be used for many different purposes, including buying a car, whereas a car loan is only for buying vehicles. Key Takeaways A personal loan can be used for many different purposes, whereas a car loan is strictly for purchasing a vehicle.A personal loan can be secured with an asset, but it is more commonly unsecured.A car loan is secured with the vehicle you purchase, so it can be repossessed in the event of a default.Both car loans and personal loans are generally fixed-rate installment loans that have set terms and regular monthly payments. Investopedia / Sabrina Jiang Personal Loans A personal loan provides you with funds from a lending institution like a bank in a lump sum. A benefit of this type of loan is that you can use the money at your discretion. Such spending can include paying for a vacation, wedding, or home improvement project. Most personal loans are unsecured. However, a personal loan can be secured against an asset, such as a vehicle or home. If a personal loan is secured, the lender can seize your asset to recover its losses if you don't repay the loan. You can use a personal loan calculator to determine how interest rates and loan terms will affect what you'll pay for each month. Pros No restrictions on how funds are spent Flexibility in payment structure (short versus long term) Cons Interest rates likely to be higher than on car loans Tougher lending requirements Consumers with poor credit scores likely won’t qualify How Interest Rates Work on Personal Loans Generally, unsecured loans have higher interest rates than comparable secured loans with collateral. Unsecured personal loans also come with more stringent approval requirements, so you’ll need credit if you want lower rates. If your credit history is poor, you may not get approved for a personal loan. Your credit score will influence both the loan amount and the interest rate. The better your credit score, the more likely you are to qualify for larger loans with lower interest rates. Interest rates on personal loans are generally fixed, but personal loans can also have variable interest rates. The Terms for Personal Loans Personal loans have a set repayment period, such as 12 months or 36 months. Longer loan terms will lower your monthly repayment, but you’ll be paying more interest over the term of the loan. Conversely, shorter loan terms mean higher monthly repayments, but incur less interest overall, since you are paying off the principal faster. Car Loans A car loan is secured with the vehicle you purchase. If you default on your repayments, the lender can seize your car to try to recoup its losses. Much like with a mortgage, the lender retains ownership over the asset until you make the final payment. Car loans are paid off in fixed monthly installments with varying terms and interest rates. One common car loan term is five years. Try using an auto loan calculator to determine what interest rate and loan term would best suit your needs. With these tools, you can estimate monthly payments and ensure they would fit into your budget. Interest Rates Given that the lender has the collateral of the car backing the loan, the loan is considered lower risk. So, you will generally get a lower interest rate than you would on a personal loan. Interest rates are also fixed, so you will know what to expect with your monthly payments. Pros Usually a lower interest rate than on a personal loan Easier to get with mediocre credit history Often offered at dealerships Fixed payments offer predictability Cons You don’t have title to the car until the final repayment is made A deposit may be required to secure the loan You can only use a car loan to buy a car The Terms Car loans are often fixed at 36, 48, 60, or 72 months. Other term lengths are possible as well. And like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A less-than-average credit history won’t necessarily prevent you from getting a car loan. There are a variety of ways to get car loans. Before signing up for a dealer loan, shop around for car loans from your bank or credit union, which can often give you better deals. Can You Use a Personal Loan to Buy a Car? If you get a large enough personal loan, you can use it to buy a car, since funds from a personal loan can be used for any purpose. However, you can likely get much lower interest rates on an auto loan. Is it Better to Get a Personal Loan to Pay for a Car? Generally, it's better to get an auto loan to pay for a car because they typically have lower interest rates. Because your car serves as collateral for a loan, lenders consider the loan a lower risk. Lower interest rates save you money in the long-term. If you can get a personal loan with a lower interest rate than a car loan, it may be better to get a personal loan to pay for a car. How Long Does it Take to Get a Personal Loan? You can typically get a personal loan within one to five business days. In some cases, you can apply online and receive the funding the same day. Applying for a personal loan is a straightforward process. You can fill out an application online or at a bank branch. The Bottom Line When it comes to buying a new car, you have several financing options. Go beyond a dealership's financing offer and shop around for various loans to ensure you get the best interest rate. In most cases, an auto loan that uses your car as collateral will provide the lowest interest rates. But explore your options in using personal loans as well.	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https://www.investopedia.com/pay-off-car-loan-faster-7483249	How to Pay Off a Car Loan Faster	<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"> Some of the best ways to pay off a car loan include making extra payments, applying windfalls of cash to your loan, and auto loan refinancing. </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"> Buying a new car is expensive, which is why many buyers take out a car loan to help them afford the cost over time. But car loans carry <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>, which can reach the double digits depending on 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>.<span class="ql-inline-citation" data-cite="1"></span> As a result, you end up paying more for the car the longer you have the loan. So, many people want to learn how to pay off their car loans faster. </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 your car loan is taking up a significant amount of your budget and causing you stress, paying it off faster can allow you to save a substantial amount of money. Learn more about the various strategies for how to pay off your car loan faster. </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>Approximately 80% of new cars and 40% of used cars are purchased with auto loans.<span class="ql-inline-citation" data-cite="2"></span></li> <li>The average amount financed for new cars increased to $41,445 in 2022, up 17% from 2020.<span class="ql-inline-citation" data-cite="3"></span> </li> <li><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> can be in the double digits, causing monthly payments to increase. </li> <li>Making extra payments and refinancing could help you save thousands.</li> </ul></div></div></div> <span class="heading-toc" id="toc-5-tips-to-pay-off-your-car-loan-faster"></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"> 5 Tips to Pay Off Your Car Loan Faster </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> By paying off your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0611/-6-ways-to-cut-the-cost-of-your-car-loan.aspx">car loan</a> early, you’ll enjoy the following benefits: </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>You’ll save money on interest.</li> <li>You can apply the amount of your car payment to other goals, such as your retirement or a down payment on a house. </li> <li>You’ll have a 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>, making it easier to qualify for a mortgage or other forms of credit.</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"> You can accelerate your repayment with these five tips: </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"> 1. Sign Up for Automatic Payments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Some lenders offer interest rate discounts if you sign up for <a class="pseudoStyle" 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>. The autopay discount can often reduce your rate by 0.25%. That discount may sound small, but over time, it can pay off. More of your payments go toward the loan <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> rather than interest, and you can save money. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Use an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/car-loan-calculator-5084761">auto loan calculator</a> to see how interest rate discounts can help you save money.</p></div></div></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"> 2. Apply Unexpected Influxes of Cash </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> You may get unexpected bonuses or other windfalls throughout the year. Applying that influx of cash toward your car loan as a lump-sum payment can pay off a substantial chunk of your debt and allow you to save more money over time. </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"> For example, let’s say you had a $40,000 loan at an annual percentage rate (APR) of 8.00%. With a six-year term, your monthly payment would be $701.33. </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"> Now let’s say you received a tax refund for $2,500. If you applied the entire refund to the loan, you would pay off your loan five months faster. And you would save $1,445.16 in interest charges. </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"> 3. Switch to Biweekly Payments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> One of the best ways to pay off a car loan faster is to make biweekly payments instead of monthly payments. To do so, split your current payment amount in two, and pay that amount every two weeks. </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"> How does that help you? There are 52 weeks in a year. By making payments every two weeks, you end up making 26 payments, or the equivalent of 13 monthly payments. You basically make an extra payment each year with this strategy. </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 had $40,000 at 8.00% APR and a six-year term, switching to biweekly payments would allow you to save $1,153.16 in interest over the life of your loan. And you would pay off your loan two months sooner. </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 can use an online biweekly payment calculator to determine how much you can save by making payments every two weeks. </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"> 4. Round Up Your Car Payments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Another easy way to pay off your car loan faster is to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dealing-with-upside-down-car-loan-7484134">round up your monthly payment</a>. Rounding up your payment by $25 or $50 can make a significant difference. </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"> With $40,000 at 8.00% APR and a six-year term, your monthly payment would be $701.33. Increase it by $25 to $726.33, and you would pay off your loan three months sooner and save $484 in interest. </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"> Increase it by $50, bringing the payment to $751.33, and you would pay off the loan six months faster and save $925. </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"> 5. Refinance Your Car Loan </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> If you have a car loan with a high interest rate, you could save money and get rid of your debt faster by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-refinance-a-car-loan-7368491">refinancing your loan</a> to one with a lower rate. If you have better credit than you did when you took out the original loan, you could qualify for a new loan with better terms than you have now. </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"> For example, let’s say you refinanced your $40,000 loan at 8.00% APR over six years to a new loan at 6.00% APR with a five-year term. Due to the shorter loan term on the new loan, your payment would increase to $773. But the tradeoff is that you would pay off the loan a year sooner and save more than $4,000 in interest. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_49-0"> <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> <tbody data-check="-1"> <tr> <td> </td> <td><b>Original Car Loan</b></td> <td><b>Refinanced Car Loan</b></td> </tr> <tr> <td>Loan Amount</td> <td>$40,000</td> <td>$40,000</td> </tr> <tr> <td>Repayment Term</td> <td>Six Years</td> <td>Five Years</td> </tr> <tr> <td>Payment Amount</td> <td>$701.33</td> <td>$773.31</td> </tr> <tr> <td>APR</td> <td>8.00%</td> <td>6.00%</td> </tr> <tr> <td>Total Interest</td> <td>$10,495.73</td> <td>$6,398.72</td> </tr> <tr> <td>Total Repaid</td> <td>$50,495.72</td> <td>$46,398.72</td> </tr> </tbody> </table> </div></figure> <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"> Savings: <strong>$4,097</strong><br/> </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 can use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-auto-refinance-loans-5069118">auto loan refinancing</a> to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-lower-your-car-payment-4685810">lower your car payment</a> by selecting a longer loan term, but longer terms will cause you to pay more in interest. </p> <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-should-you-pay-off-your-car-loan-faster"></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"> Should You Pay Off Your Car Loan Faster? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Although paying off a car loan early can be a good idea, it’s not the best choice for everyone. Depending on your circumstances, making the minimum payments may be a better option. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <span class="heading-toc" id="toc-when-you-may-consider-paying-off-your-car-loan-faster"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> When You May Consider Paying Off Your Car Loan Faster </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <li><strong>You have a high interest rate</strong>: If you have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-a-good-interest-rate-on-a-car-5176189">higher interest rate</a>, such as 7% or higher, interest can accrue rapidly on the loan. Making extra payments and paying off the loan faster can be wise because it will allow you to save more money. </li> <li><strong>Your debt causes you stress</strong>: For some people, any debt can be stressful. If having no debt is important to you, paying it off early can be worth it for the peace of mind. </li> </ul> <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-when-it-may-not-be-a-good-idea-to-pay-off-your-debt-faster"></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"> When It May Not Be a Good Idea to Pay Off Your Debt Faster </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> <li><strong>You have a prepayment penalty</strong>: In some states, lenders can charge you an added fee if you pay off the loan early. These fees, commonly referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prepaymentpenalty.asp">prepayment penalties</a>, can be costly and reduce the value of paying off a loan ahead of schedule.<span class="ql-inline-citation" data-cite="6"></span></li> <li><strong>You have other high-interest debt</strong>: If you have other debt with higher interest rates, such as credit card debt, paying off those accounts first will help you save more money. </li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-does-it-hurt-your-credit-to-pay-off-a-car-loan-early"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does it hurt your credit to pay off a car loan early?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>When you pay off a car loan, it can impact your credit. That’s because paying off the loan may affect your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-mix.asp">credit mix</a>. If the loan was your only form of installment debt, your credit mix is impacted, and your score will decrease. However, the dip is usually small, and your credit score can recover quickly.<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_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-if-i-pay-extra-on-my-car-loan-does-it-go-to-principal-or-interest"></span> <h2 class="mntl-sc-block-questionandanswer__question">If I pay extra on my car loan, does it go to principal or interest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In most cases, lenders apply any extra payments to the accrued interest first. However, you can ask that your lender apply the extra payment amount to the principal instead.<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_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-are-the-disadvantages-of-paying-off-a-car-loan-early"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the disadvantages of paying off a car loan early?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Paying off debt can be advantageous, but there are some drawbacks to keep in mind: </p><ul><li>Some lenders charge prepayment penalties.</li><li>It takes up money that you could apply to other debt or goals.</li><li>Your credit score may decrease when the loan is paid off. </li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> With rising car prices and high interest rates, paying off your car loan early can help you save money. The best way to pay off a car loan involves extra payments, signing up for autopay, and refinancing to a loan with a lower interest rate. </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"> But before you pay off your debt, make sure you consider the drawbacks of paying off the loan early. Check your loan agreement carefully to see what fees may apply. </p></div>	Some of the best ways to pay off a car loan include making extra payments, applying windfalls of cash to your loan, and auto loan refinancing. Buying a new car is expensive, which is why many buyers take out a car loan to help them afford the cost over time. But car loans carry [interest](https://www.investopedia.com/terms/i/interest.asp), which can reach the double digits depending on your [credit score](https://www.investopedia.com/terms/c/credit_score.asp). As a result, you end up paying more for the car the longer you have the loan. So, many people want to learn how to pay off their car loans faster. If your car loan is taking up a significant amount of your budget and causing you stress, paying it off faster can allow you to save a substantial amount of money. Learn more about the various strategies for how to pay off your car loan faster. ### Key Takeaways * Approximately 80% of new cars and 40% of used cars are purchased with auto loans. * The average amount financed for new cars increased to $41,445 in 2022, up 17% from 2020. * [Interest rates](https://www.investopedia.com/terms/i/interestrate.asp) can be in the double digits, causing monthly payments to increase. * Making extra payments and refinancing could help you save thousands. ## 5 Tips to Pay Off Your Car Loan Faster By paying off your [car loan](https://www.investopedia.com/financial-edge/0611/-6-ways-to-cut-the-cost-of-your-car-loan.aspx) early, you’ll enjoy the following benefits: * You’ll save money on interest. * You can apply the amount of your car payment to other goals, such as your retirement or a down payment on a house. * You’ll have a lower [debt-to-income (DTI) ratio](https://www.investopedia.com/terms/d/dti.asp), making it easier to qualify for a mortgage or other forms of credit. You can accelerate your repayment with these five tips: ### 1. Sign Up for Automatic Payments Some lenders offer interest rate discounts if you sign up for [automatic payments](https://www.investopedia.com/terms/a/automatic-bill-payment.asp). The autopay discount can often reduce your rate by 0.25%. That discount may sound small, but over time, it can pay off. More of your payments go toward the loan [principal](https://www.investopedia.com/terms/p/principal.asp) rather than interest, and you can save money. ### Use an [auto loan calculator](https://www.investopedia.com/car-loan-calculator-5084761) to see how interest rate discounts can help you save money. ### 2. Apply Unexpected Influxes of Cash You may get unexpected bonuses or other windfalls throughout the year. Applying that influx of cash toward your car loan as a lump-sum payment can pay off a substantial chunk of your debt and allow you to save more money over time. For example, let’s say you had a $40,000 loan at an annual percentage rate (APR) of 8.00%. With a six-year term, your monthly payment would be $701.33. Now let’s say you received a tax refund for $2,500. If you applied the entire refund to the loan, you would pay off your loan five months faster. And you would save $1,445.16 in interest charges. ### 3. Switch to Biweekly Payments One of the best ways to pay off a car loan faster is to make biweekly payments instead of monthly payments. To do so, split your current payment amount in two, and pay that amount every two weeks. How does that help you? There are 52 weeks in a year. By making payments every two weeks, you end up making 26 payments, or the equivalent of 13 monthly payments. You basically make an extra payment each year with this strategy. If you had $40,000 at 8.00% APR and a six-year term, switching to biweekly payments would allow you to save $1,153.16 in interest over the life of your loan. And you would pay off your loan two months sooner. You can use an online biweekly payment calculator to determine how much you can save by making payments every two weeks. ### 4. Round Up Your Car Payments Another easy way to pay off your car loan faster is to [round up your monthly payment](https://www.investopedia.com/dealing-with-upside-down-car-loan-7484134). Rounding up your payment by $25 or $50 can make a significant difference. With $40,000 at 8.00% APR and a six-year term, your monthly payment would be $701.33. Increase it by $25 to $726.33, and you would pay off your loan three months sooner and save $484 in interest. Increase it by $50, bringing the payment to $751.33, and you would pay off the loan six months faster and save $925. ### 5. Refinance Your Car Loan If you have a car loan with a high interest rate, you could save money and get rid of your debt faster by [refinancing your loan](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491) to one with a lower rate. If you have better credit than you did when you took out the original loan, you could qualify for a new loan with better terms than you have now. For example, let’s say you refinanced your $40,000 loan at 8.00% APR over six years to a new loan at 6.00% APR with a five-year term. Due to the shorter loan term on the new loan, your payment would increase to $773. But the tradeoff is that you would pay off the loan a year sooner and save more than $4,000 in interest. \| \| Original Car Loan \| Refinanced Car Loan \| \| --- \| --- \| --- \| \| Loan Amount \| $40,000 \| $40,000 \| \| Repayment Term \| Six Years \| Five Years \| \| Payment Amount \| $701.33 \| $773.31 \| \| APR \| 8.00% \| 6.00% \| \| Total Interest \| $10,495.73 \| $6,398.72 \| \| Total Repaid \| $50,495.72 \| $46,398.72 \| Savings: $4,097 You can use [auto loan refinancing](https://www.investopedia.com/best-auto-refinance-loans-5069118) to [lower your car payment](https://www.investopedia.com/how-to-lower-your-car-payment-4685810) by selecting a longer loan term, but longer terms will cause you to pay more in interest. ## Should You Pay Off Your Car Loan Faster? Although paying off a car loan early can be a good idea, it’s not the best choice for everyone. Depending on your circumstances, making the minimum payments may be a better option. ## When You May Consider Paying Off Your Car Loan Faster * You have a high interest rate: If you have a [higher interest rate](https://www.investopedia.com/what-is-a-good-interest-rate-on-a-car-5176189), such as 7% or higher, interest can accrue rapidly on the loan. Making extra payments and paying off the loan faster can be wise because it will allow you to save more money. * Your debt causes you stress: For some people, any debt can be stressful. If having no debt is important to you, paying it off early can be worth it for the peace of mind. ## When It May Not Be a Good Idea to Pay Off Your Debt Faster * You have a prepayment penalty: In some states, lenders can charge you an added fee if you pay off the loan early. These fees, commonly referred to as [prepayment penalties](https://www.investopedia.com/terms/p/prepaymentpenalty.asp), can be costly and reduce the value of paying off a loan ahead of schedule. * You have other high-interest debt: If you have other debt with higher interest rates, such as credit card debt, paying off those accounts first will help you save more money. ## Does it hurt your credit to pay off a car loan early? When you pay off a car loan, it can impact your credit. That’s because paying off the loan may affect your [credit mix](https://www.investopedia.com/terms/c/credit-mix.asp). If the loan was your only form of installment debt, your credit mix is impacted, and your score will decrease. However, the dip is usually small, and your credit score can recover quickly. ## If I pay extra on my car loan, does it go to principal or interest? In most cases, lenders apply any extra payments to the accrued interest first. However, you can ask that your lender apply the extra payment amount to the principal instead. ## What are the disadvantages of paying off a car loan early? Paying off debt can be advantageous, but there are some drawbacks to keep in mind: * Some lenders charge prepayment penalties. * It takes up money that you could apply to other debt or goals. * Your credit score may decrease when the loan is paid off. ## The Bottom Line With rising car prices and high interest rates, paying off your car loan early can help you save money. The best way to pay off a car loan involves extra payments, signing up for autopay, and refinancing to a loan with a lower interest rate. But before you pay off your debt, make sure you consider the drawbacks of paying off the loan early. Check your loan agreement carefully to see what fees may apply.	Some of the best ways to pay off a car loan include making extra payments, applying windfalls of cash to your loan, and auto loan refinancing. Buying a new car is expensive, which is why many buyers take out a car loan to help them afford the cost over time. But car loans carry interest, which can reach the double digits depending on your credit score. As a result, you end up paying more for the car the longer you have the loan. So, many people want to learn how to pay off their car loans faster. If your car loan is taking up a significant amount of your budget and causing you stress, paying it off faster can allow you to save a substantial amount of money. Learn more about the various strategies for how to pay off your car loan faster. Key Takeaways Approximately 80% of new cars and 40% of used cars are purchased with auto loans. The average amount financed for new cars increased to $41,445 in 2022, up 17% from 2020. Interest rates can be in the double digits, causing monthly payments to increase. Making extra payments and refinancing could help you save thousands. 5 Tips to Pay Off Your Car Loan Faster By paying off your car loan early, you’ll enjoy the following benefits: You’ll save money on interest. You can apply the amount of your car payment to other goals, such as your retirement or a down payment on a house. You’ll have a lower debt-to-income (DTI) ratio, making it easier to qualify for a mortgage or other forms of credit. You can accelerate your repayment with these five tips: 1. Sign Up for Automatic Payments Some lenders offer interest rate discounts if you sign up for automatic payments. The autopay discount can often reduce your rate by 0.25%. That discount may sound small, but over time, it can pay off. More of your payments go toward the loan principal rather than interest, and you can save money. Use an auto loan calculator to see how interest rate discounts can help you save money. 2. Apply Unexpected Influxes of Cash You may get unexpected bonuses or other windfalls throughout the year. Applying that influx of cash toward your car loan as a lump-sum payment can pay off a substantial chunk of your debt and allow you to save more money over time. For example, let’s say you had a $40,000 loan at an annual percentage rate (APR) of 8.00%. With a six-year term, your monthly payment would be $701.33. Now let’s say you received a tax refund for $2,500. If you applied the entire refund to the loan, you would pay off your loan five months faster. And you would save $1,445.16 in interest charges. 3. Switch to Biweekly Payments One of the best ways to pay off a car loan faster is to make biweekly payments instead of monthly payments. To do so, split your current payment amount in two, and pay that amount every two weeks. How does that help you? There are 52 weeks in a year. By making payments every two weeks, you end up making 26 payments, or the equivalent of 13 monthly payments. You basically make an extra payment each year with this strategy. If you had $40,000 at 8.00% APR and a six-year term, switching to biweekly payments would allow you to save $1,153.16 in interest over the life of your loan. And you would pay off your loan two months sooner. You can use an online biweekly payment calculator to determine how much you can save by making payments every two weeks. 4. Round Up Your Car Payments Another easy way to pay off your car loan faster is to round up your monthly payment. Rounding up your payment by $25 or $50 can make a significant difference. With $40,000 at 8.00% APR and a six-year term, your monthly payment would be $701.33. Increase it by $25 to $726.33, and you would pay off your loan three months sooner and save $484 in interest. Increase it by $50, bringing the payment to $751.33, and you would pay off the loan six months faster and save $925. 5. Refinance Your Car Loan If you have a car loan with a high interest rate, you could save money and get rid of your debt faster by refinancing your loan to one with a lower rate. If you have better credit than you did when you took out the original loan, you could qualify for a new loan with better terms than you have now. For example, let’s say you refinanced your $40,000 loan at 8.00% APR over six years to a new loan at 6.00% APR with a five-year term. Due to the shorter loan term on the new loan, your payment would increase to $773. But the tradeoff is that you would pay off the loan a year sooner and save more than $4,000 in interest. Original Car Loan Refinanced Car Loan Loan Amount $40,000 $40,000 Repayment Term Six Years Five Years Payment Amount $701.33 $773.31 APR 8.00% 6.00% Total Interest $10,495.73 $6,398.72 Total Repaid $50,495.72 $46,398.72 Savings: $4,097 You can use auto loan refinancing to lower your car payment by selecting a longer loan term, but longer terms will cause you to pay more in interest. Should You Pay Off Your Car Loan Faster? Although paying off a car loan early can be a good idea, it’s not the best choice for everyone. Depending on your circumstances, making the minimum payments may be a better option. When You May Consider Paying Off Your Car Loan Faster You have a high interest rate: If you have a higher interest rate, such as 7% or higher, interest can accrue rapidly on the loan. Making extra payments and paying off the loan faster can be wise because it will allow you to save more money. Your debt causes you stress: For some people, any debt can be stressful. If having no debt is important to you, paying it off early can be worth it for the peace of mind. When It May Not Be a Good Idea to Pay Off Your Debt Faster You have a prepayment penalty: In some states, lenders can charge you an added fee if you pay off the loan early. These fees, commonly referred to as prepayment penalties, can be costly and reduce the value of paying off a loan ahead of schedule. You have other high-interest debt: If you have other debt with higher interest rates, such as credit card debt, paying off those accounts first will help you save more money. Does it hurt your credit to pay off a car loan early? When you pay off a car loan, it can impact your credit. That’s because paying off the loan may affect your credit mix. If the loan was your only form of installment debt, your credit mix is impacted, and your score will decrease. However, the dip is usually small, and your credit score can recover quickly. If I pay extra on my car loan, does it go to principal or interest? In most cases, lenders apply any extra payments to the accrued interest first. However, you can ask that your lender apply the extra payment amount to the principal instead. What are the disadvantages of paying off a car loan early? Paying off debt can be advantageous, but there are some drawbacks to keep in mind: Some lenders charge prepayment penalties.It takes up money that you could apply to other debt or goals.Your credit score may decrease when the loan is paid off. The Bottom Line With rising car prices and high interest rates, paying off your car loan early can help you save money. The best way to pay off a car loan involves extra payments, signing up for autopay, and refinancing to a loan with a lower interest rate. But before you pay off your debt, make sure you consider the drawbacks of paying off the loan early. Check your loan agreement carefully to see what fees may apply.	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https://www.investopedia.com/mortgage-rates-jump-back-up-on-inflation-news-8639370	Mortgage Rates Jump Back Up on Inflation News	<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"> Triggered by unwelcome inflation data released yesterday morning, 30-year mortgage rates took a big step higher Thursday. Climbing more than a tenth of a percentage point, the 30-year average is back up to 7.60%. Averages for virtually all <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">mortgage types</a> jumped—most of them 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> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_3-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:75.8%;"> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 26, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/DP4zjceiP__BGBC2Ga4St8AyAXw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/DP4zjceiP__BGBC2Ga4St8AyAXw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png" data-srcset="https://www.investopedia.com/thmb/y3Sbu91jbm3ZcbJ3wmHEeyAN5aM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png 750w" data-tracking-container="true" height="1880" id="mntl-sc-block-image_1-0" width="2480"/> <noscript> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 26, 2024" class="img--noscript universal-image__image" height="1880" sizes="750px" src="https://www.investopedia.com/thmb/DP4zjceiP__BGBC2Ga4St8AyAXw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png" srcset="https://www.investopedia.com/thmb/y3Sbu91jbm3ZcbJ3wmHEeyAN5aM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png 750w" width="2480"/> </noscript> </div> </div> </figure> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_4-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Mortgage Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.60%</td> <td>8.01%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.51%</td> <td>7.69%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.32%</td> <td>7.33%</td> </tr> <tr> <td>15-Year Fixed</td> <td>7.00%</td> <td>7.29%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.88%</td> <td>8.03%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> 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_7-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_8-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_11-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> After a modest three-day dip, rates on 30-year mortgages shot up 11 basis points Thursday, reacting to the inflation news. That pushes the flagship average back up to 7.60%—just a few points shy of last week's 7.65% reading that marked the average's most expensive level since November. </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"> Thirty-year rates are significantly elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit 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_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_18-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/zc5eb/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="30-Year Mortgage Rates Since June 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> New purchase 15-year mortgage rates added 15 basis points Thursday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and has now repeated that. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> After holding steady for two weeks, Thursday's jumbo 30-year average tacked on another eighth of a basis point. That raises the average to 7.32%, its priciest level since late October. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% 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_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Every new purchase average but one saw notable increases Thursday, with most rising by double-digit basis points. The biggest gain was seen in FHA 30-year rates, whose average surged 27 basis points. The only one that declined, meanwhile, was 5/6 adjustable-rate loans, which saw rates decrease by a minor 4 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.60%</td> <td>+0.11</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.51%</td> <td>+0.27</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.12%</td> <td>+0.04</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.32%</td> <td>+0.12</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.49%</td> <td>+0.12</td> </tr> <tr> <td>15-Year Fixed</td> <td>7.00%</td> <td>+0.15</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>7.03%</td> <td>+0.11</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>7.14%</td> <td>+0.11</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.89%</td> <td>+0.13</td> </tr> <tr> <td>10/6 ARM</td> <td>7.94%</td> <td>+0.08</td> </tr> <tr> <td>7/6 ARM</td> <td>8.00%</td> <td>+0.12</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.95%</td> <td>+0.12</td> </tr> <tr> <td>5/6 ARM</td> <td>7.88%</td> <td>-0.04</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>7.05%</td> <td>+0.13</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_28-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/BiEY8/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading jumped another 7 basis points to 7.17%, 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.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> All refinancing averages gained ground Thursday. The 30-year refi average shot up 18 basis points, stretching the gap between 30-year new purchase and refi rates to 41 basis points. The 15-year refi average jumped 20 points, while the jumbo 30-year refi average climbed 13 basis points. </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"> Thursday's biggest refi rate increases were seen for 20-year and 10-year fixed-rate loans, rising 22 and 21 basis points, respectively, while several adjustable-rate refi averages saw minor gains of just a few points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_40-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style="width: 172px;"></colgroup> <colgroup span="1" style="width: 166px;"></colgroup> <colgroup span="1" style="width: 123px;"></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>8.01%</td> <td>+0.18</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.69%</td> <td>+0.14</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.67%</td> <td>+0.09</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.33%</td> <td>+0.13</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.84%</td> <td>+0.22</td> </tr> <tr> <td>15-Year Fixed</td> <td>7.29%</td> <td>+0.20</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>7.19%</td> <td>+0.09</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>7.16%</td> <td>+0.13</td> </tr> <tr> <td>10-Year Fixed</td> <td>7.18%</td> <td>+0.21</td> </tr> <tr> <td>10/6 ARM</td> <td>8.16%</td> <td>+0.02</td> </tr> <tr> <td>7/6 ARM</td> <td>8.12%</td> <td>+0.05</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>7.05%</td> <td>+0.13</td> </tr> <tr> <td>5/6 ARM</td> <td>8.03%</td> <td>+0.04</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>7.05%</td> <td>+0.13</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or 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 Thursday were Mississippi, Rhode Island, and Iowa, while the states with the highest average rates were Minnesota, Idaho, Oregon, and Washington. </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/9NqNI/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Mortgage Rates by State"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The Fed has been maintaining the federal funds rate at its current level since July, with a fifth consecutive rate hold announced on March 20.<span class="ql-inline-citation" data-cite="5"></span> Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and reliably, it has said it is hesitant to start cutting rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Still, Fed committee members do collectively expect to reduce rates in 2024. The March 20 meeting included the latest installment of the Fed's "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dot-plot-4581755">dot plot</a>" forecast, which showed that the median expectation among the 19 Fed members is for three rate decreases—totaling 0.75 percentage points—by year's end. The dot plot also shows similar expected rate cuts in 2025 and 2026.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The Fed will hold six more meetings this year, with the next one scheduled to conclude May 1.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>	Triggered by unwelcome inflation data released yesterday morning, 30-year mortgage rates took a big step higher Thursday. Climbing more than a tenth of a percentage point, the 30-year average is back up to 7.60%. Averages for virtually all [mortgage types](https://www.investopedia.com/mortgage-rates-5094943) jumped—most of them by double-digit basis points. ![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 26, 2024]() ![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 26, 2024](https://www.investopedia.com/thmb/DP4zjceiP__BGBC2Ga4St8AyAXw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-26-d2a2d7b8f6544ba8be01b67f56dcc1d1.png) \| National Averages of Lenders' Best Mortgage Rates \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase \| Refinance \| \| 30-Year Fixed \| 7.60% \| 8.01% \| \| FHA 30-Year Fixed \| 7.51% \| 7.69% \| \| Jumbo 30-Year Fixed \| 7.32% \| 7.33% \| \| 15-Year Fixed \| 7.00% \| 7.29% \| \| 5/6 ARM \| 7.88% \| 8.03% \| 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. 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 a modest three-day dip, rates on 30-year mortgages shot up 11 basis points Thursday, reacting to the inflation news. That pushes the flagship average back up to 7.60%—just a few points shy of last week's 7.65% reading that marked the average's most expensive level since November. Thirty-year rates are significantly elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit a historic 23-year peak of 8.45%. New purchase 15-year mortgage rates added 15 basis points Thursday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and has now repeated that. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. After holding steady for two weeks, Thursday's jumbo 30-year average tacked on another eighth of a basis point. That raises the average to 7.32%, its priciest level since late October. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years. Every new purchase average but one saw notable increases Thursday, with most rising by double-digit basis points. The biggest gain was seen in FHA 30-year rates, whose average surged 27 basis points. The only one that declined, meanwhile, was 5/6 adjustable-rate loans, which saw rates decrease by a minor 4 basis points. \| National Averages of Lenders' Best Rates - New Purchase \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase Rates \| Daily Change \| \| 30-Year Fixed \| 7.60% \| +0.11 \| \| FHA 30-Year Fixed \| 7.51% \| +0.27 \| \| VA 30-Year Fixed \| 7.12% \| +0.04 \| \| Jumbo 30-Year Fixed \| 7.32% \| +0.12 \| \| 20-Year Fixed \| 7.49% \| +0.12 \| \| 15-Year Fixed \| 7.00% \| +0.15 \| \| FHA 15-Year Fixed \| 7.03% \| +0.11 \| \| Jumbo 15-Year Fixed \| 7.14% \| +0.11 \| \| 10-Year Fixed \| 6.89% \| +0.13 \| \| 10/6 ARM \| 7.94% \| +0.08 \| \| 7/6 ARM \| 8.00% \| +0.12 \| \| Jumbo 7/6 ARM \| 6.95% \| +0.12 \| \| 5/6 ARM \| 7.88% \| -0.04 \| \| Jumbo 5/6 ARM \| 7.05% \| +0.13 \| ## The Weekly Freddie Mac Average Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading jumped another 7 basis points to 7.17%, 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 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 All refinancing averages gained ground Thursday. The 30-year refi average shot up 18 basis points, stretching the gap between 30-year new purchase and refi rates to 41 basis points. The 15-year refi average jumped 20 points, while the jumbo 30-year refi average climbed 13 basis points. Thursday's biggest refi rate increases were seen for 20-year and 10-year fixed-rate loans, rising 22 and 21 basis points, respectively, while several adjustable-rate refi averages saw minor gains of just a few points. \| National Averages of Lenders' Best Rates - Refinance \| \| \| \| --- \| --- \| --- \| \| Loan Type \| Refinance Rates \| Daily Change \| \| 30-Year Fixed \| 8.01% \| +0.18 \| \| FHA 30-Year Fixed \| 7.69% \| +0.14 \| \| VA 30-Year Fixed \| 7.67% \| +0.09 \| \| Jumbo 30-Year Fixed \| 7.33% \| +0.13 \| \| 20-Year Fixed \| 7.84% \| +0.22 \| \| 15-Year Fixed \| 7.29% \| +0.20 \| \| FHA 15-Year Fixed \| 7.19% \| +0.09 \| \| Jumbo 15-Year Fixed \| 7.16% \| +0.13 \| \| 10-Year Fixed \| 7.18% \| +0.21 \| \| 10/6 ARM \| 8.16% \| +0.02 \| \| 7/6 ARM \| 8.12% \| +0.05 \| \| Jumbo 7/6 ARM \| 7.05% \| +0.13 \| \| 5/6 ARM \| 8.03% \| +0.04 \| \| Jumbo 5/6 ARM \| 7.05% \| +0.13 \| 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 Thursday were Mississippi, Rhode Island, and Iowa, while the states with the highest average rates were Minnesota, Idaho, Oregon, and Washington. ## 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 one scheduled to conclude 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.	Triggered by unwelcome inflation data released yesterday morning, 30-year mortgage rates took a big step higher Thursday. Climbing more than a tenth of a percentage point, the 30-year average is back up to 7.60%. Averages for virtually all mortgage types jumped—most of them by double-digit basis points. National Averages of Lenders' Best Mortgage Rates Loan Type New Purchase Refinance 30-Year Fixed 7.60% 8.01% FHA 30-Year Fixed 7.51% 7.69% Jumbo 30-Year Fixed 7.32% 7.33% 15-Year Fixed 7.00% 7.29% 5/6 ARM 7.88% 8.03% 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. 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 a modest three-day dip, rates on 30-year mortgages shot up 11 basis points Thursday, reacting to the inflation news. That pushes the flagship average back up to 7.60%—just a few points shy of last week's 7.65% reading that marked the average's most expensive level since November. Thirty-year rates are significantly elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit a historic 23-year peak of 8.45%. New purchase 15-year mortgage rates added 15 basis points Thursday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and has now repeated that. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. After holding steady for two weeks, Thursday's jumbo 30-year average tacked on another eighth of a basis point. That raises the average to 7.32%, its priciest level since late October. Though daily historical jumbo rates are not available before 2009, it's estimated the 7.52% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years. Every new purchase average but one saw notable increases Thursday, with most rising by double-digit basis points. The biggest gain was seen in FHA 30-year rates, whose average surged 27 basis points. The only one that declined, meanwhile, was 5/6 adjustable-rate loans, which saw rates decrease by a minor 4 basis points. National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.60% +0.11 FHA 30-Year Fixed 7.51% +0.27 VA 30-Year Fixed 7.12% +0.04 Jumbo 30-Year Fixed 7.32% +0.12 20-Year Fixed 7.49% +0.12 15-Year Fixed 7.00% +0.15 FHA 15-Year Fixed 7.03% +0.11 Jumbo 15-Year Fixed 7.14% +0.11 10-Year Fixed 6.89% +0.13 10/6 ARM 7.94% +0.08 7/6 ARM 8.00% +0.12 Jumbo 7/6 ARM 6.95% +0.12 5/6 ARM 7.88% -0.04 Jumbo 5/6 ARM 7.05% +0.13 The Weekly Freddie Mac Average Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. This week's reading jumped another 7 basis points to 7.17%, 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 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 All refinancing averages gained ground Thursday. The 30-year refi average shot up 18 basis points, stretching the gap between 30-year new purchase and refi rates to 41 basis points. The 15-year refi average jumped 20 points, while the jumbo 30-year refi average climbed 13 basis points. Thursday's biggest refi rate increases were seen for 20-year and 10-year fixed-rate loans, rising 22 and 21 basis points, respectively, while several adjustable-rate refi averages saw minor gains of just a few points. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 8.01% +0.18 FHA 30-Year Fixed 7.69% +0.14 VA 30-Year Fixed 7.67% +0.09 Jumbo 30-Year Fixed 7.33% +0.13 20-Year Fixed 7.84% +0.22 15-Year Fixed 7.29% +0.20 FHA 15-Year Fixed 7.19% +0.09 Jumbo 15-Year Fixed 7.16% +0.13 10-Year Fixed 7.18% +0.21 10/6 ARM 8.16% +0.02 7/6 ARM 8.12% +0.05 Jumbo 7/6 ARM 7.05% +0.13 5/6 ARM 8.03% +0.04 Jumbo 5/6 ARM 7.05% +0.13 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 Thursday were Mississippi, Rhode Island, and Iowa, while the states with the highest average rates were Minnesota, Idaho, Oregon, and Washington. 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 one scheduled to conclude 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.	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https://www.investopedia.com/30-year-mortgage-rates-come-down-for-a-second-day-8611153	30-Year Mortgage Rates Come Down for a Second Day	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Rates on 30-year mortgages edged a bit lower Tuesday, adding to Monday's bigger decline. That further shaves off some of last week's three-day climb to the mid-7% range, and drops the flagship average to 7.34%. Almost all other loan types, both new purchase and refi, moved lower or held steady. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-square figure-high-res" id="mntl-sc-block_3-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:83.8%;"> <img alt="Line graph showing the last 90 days of the 30-year mortgage rate average for new purchase loans - March 20, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/KbSI3bIYDJkuqwAvh1KbmISRg7w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/KbSI3bIYDJkuqwAvh1KbmISRg7w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.png" data-srcset="https://www.investopedia.com/thmb/2TEqrGfNdQ5JnrGTg6DoISbI2v0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.png 750w" data-tracking-container="true" height="2080" id="mntl-sc-block-image_1-0" width="2480"/> <noscript> <img alt="Line graph showing the last 90 days of the 30-year mortgage rate average for new purchase loans - March 20, 2024" class="img--noscript universal-image__image" height="2080" sizes="750px" src="https://www.investopedia.com/thmb/KbSI3bIYDJkuqwAvh1KbmISRg7w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.png" srcset="https://www.investopedia.com/thmb/2TEqrGfNdQ5JnrGTg6DoISbI2v0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.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_4-0"> Rates vary widely across lenders, so it's always smart to shop around for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-rates-5094943">your best mortgage option</a> and compare rates regularly, no matter the type of home loan you're seeking. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_6-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.34%</td> <td>7.85%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.33%</td> <td>7.79%</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>6.67%</td> <td>6.85%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.74%</td> <td>7.80%</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_7-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_8-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <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_10-0"> <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_11-0"> Rates on 30-year new purchase mortgages fell another 2 basis points Tuesday, after a 9-point drop Monday. That's welcome news after the flagship average added 34 points over the second half of last week. The current average is now down to 7.34%. </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"> Given that 30-year rates sank into 6% territory at the start of February, current rates are still elevated. But they're dramatically cheaper than 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_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_15-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/tnAF0/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="History of 30y average since Jun 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_18-0"><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_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Rates on 15-year new purchase loans also declined Tuesday, subtracting 6 basis points to drop the average to 6.67%. Though current rates are significantly pricier than the seven-month low of 6.10% we saw just before the new year, they're still much more affordable than last fall's 7.59% average—a peak since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Jumbo 30-year rates marked time for a third day Friday. Holding at 6.95%, the average matches its highest mark since November. Though 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_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Most other new purchase averages either held steady or showed minimal movement Tuesday. The only sizable change was seen for FHA 30-year loans, whose average dipped a tenth of a percentage point. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.34%</td> <td>-0.02</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.33%</td> <td>-0.10</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.08%</td> <td>-0.06</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.13%</td> <td>-0.07</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.67%</td> <td>-0.06</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.81%</td> <td>-0.03</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.91%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.58%</td> <td>-0.05</td> </tr> <tr> <td>10/6 ARM</td> <td>7.62%</td> <td>-0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>7.60%</td> <td>-0.01</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.58%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.74%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.68%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_28-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/luJHT/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading subtracted 14 basis points to fall to 6.74%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Tuesday refinancing rates were similarly flat or down for most loan types. The 30-year refi average gave up 3 basis points, leaving the spread between 30-year new purchase and refi rates at 51 basis points. </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"> Only one refi average rose Tuesday, with FHA 30-year refi rates tacking on 8 basis points. Moving the other way, the 15-year and FHA 15-year refi averages declined 6 points. All other refi averages we flat or roughly steady Tuesday. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_40-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 152px;"></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>7.85%</td> <td>-0.03</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.79%</td> <td>+0.08</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.61%</td> <td>-0.04</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>6.95%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.45%</td> <td>-0.02</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.85%</td> <td>-0.06</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.96%</td> <td>-0.06</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>6.91%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.79%</td> <td>-0.04</td> </tr> <tr> <td>10/6 ARM</td> <td>7.79%</td> <td>No Change</td> </tr> <tr> <td>7/6 ARM</td> <td>7.86%</td> <td>No Change</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.68%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.80%</td> <td>-0.02</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.68%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or 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_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-lowest-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"> Lowest Mortgage Rates by State </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_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 were Mississippi, Louisiana, Hawaii, Iowa, and Vermont, while the states with the most expensive rates were Alabama, Minnesota, Arizona, Idaho, Nevada, and Oregon. </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/XKcpJ/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="State-by-state average minimum rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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 is overwhelmingly expected to hold rates steady at the conclusion of its meeting today, which would make that the central bank's fifth consecutive rate hold. The Fed will also be releasing its latest "dot plot" forecast of where it expects the federal funds rates to be at the end of this year and the next two. In its December dot plot, the Fed indicated it expected two to four rate cuts by the end of 2024. But today's renewed forecast could show a softening in those predictions. The Fed's statement and accompanying projections will be released today at 2:00 p.m. ET. </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-how-we-track-mortgage-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 Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> 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_74-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>	Rates on 30-year mortgages edged a bit lower Tuesday, adding to Monday's bigger decline. That further shaves off some of last week's three-day climb to the mid-7% range, and drops the flagship average to 7.34%. Almost all other loan types, both new purchase and refi, moved lower or held steady. ![Line graph showing the last 90 days of the 30-year mortgage rate average for new purchase loans - March 20, 2024]() ![Line graph showing the last 90 days of the 30-year mortgage rate average for new purchase loans - March 20, 2024](https://www.investopedia.com/thmb/KbSI3bIYDJkuqwAvh1KbmISRg7w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/3-20-4a008cfc8ef7491287cae2202d0bc39f.png) Rates vary widely across lenders, so it's always smart to shop around for [your best mortgage option](https://www.investopedia.com/mortgage-rates-5094943) and compare rates regularly, no matter the type of home loan you're seeking. \| National Averages of Lenders' Best Rates \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase \| Refinance \| \| 30-Year Fixed \| 7.34% \| 7.85% \| \| FHA 30-Year Fixed \| 7.33% \| 7.79% \| \| Jumbo 30-Year Fixed \| 6.95% \| 6.95% \| \| 15-Year Fixed \| 6.67% \| 6.85% \| \| 5/6 ARM \| 7.74% \| 7.80% \| National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. ## Today's Mortgage Rate Averages: New Purchase Rates on 30-year new purchase mortgages fell another 2 basis points Tuesday, after a 9-point drop Monday. That's welcome news after the flagship average added 34 points over the second half of last week. The current average is now down to 7.34%. Given that 30-year rates sank into 6% territory at the start of February, current rates are still elevated. But they're dramatically cheaper than in October, when the 30-year average notched a historic 23-year peak of 8.45%. [Compare the Best Mortgage Rates Today - May 21, 2024](https://www.investopedia.com/mortgage-rates-5094943) Rates on 15-year new purchase loans also declined Tuesday, subtracting 6 basis points to drop the average to 6.67%. Though current rates are significantly pricier than the seven-month low of 6.10% we saw just before the new year, they're still much more affordable than last fall's 7.59% average—a peak since 2000. Jumbo 30-year rates marked time for a third day Friday. Holding at 6.95%, the average matches its highest mark since November. Though 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. Most other new purchase averages either held steady or showed minimal movement Tuesday. The only sizable change was seen for FHA 30-year loans, whose average dipped a tenth of a percentage point. \| National Averages of Lenders' Best Rates - New Purchase \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase Rates \| Daily Change \| \| 30-Year Fixed \| 7.34% \| -0.02 \| \| FHA 30-Year Fixed \| 7.33% \| -0.10 \| \| VA 30-Year Fixed \| 7.08% \| -0.06 \| \| Jumbo 30-Year Fixed \| 6.95% \| No Change \| \| 20-Year Fixed \| 7.13% \| -0.07 \| \| 15-Year Fixed \| 6.67% \| -0.06 \| \| FHA 15-Year Fixed \| 6.81% \| -0.03 \| \| Jumbo 15-Year Fixed \| 6.91% \| No Change \| \| 10-Year Fixed \| 6.58% \| -0.05 \| \| 10/6 ARM \| 7.62% \| -0.01 \| \| 7/6 ARM \| 7.60% \| -0.01 \| \| Jumbo 7/6 ARM \| 6.58% \| No Change \| \| 5/6 ARM \| 7.74% \| +0.01 \| \| Jumbo 5/6 ARM \| 6.68% \| No Change \| ## The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading subtracted 14 basis points to fall to 6.74%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with [discount points](https://www.investopedia.com/terms/d/discountpoints.asp), while Investopedia’s averages only include zero-point loans. ## Today's Mortgage Rate Averages: Refinancing Tuesday refinancing rates were similarly flat or down for most loan types. The 30-year refi average gave up 3 basis points, leaving the spread between 30-year new purchase and refi rates at 51 basis points. Only one refi average rose Tuesday, with FHA 30-year refi rates tacking on 8 basis points. Moving the other way, the 15-year and FHA 15-year refi averages declined 6 points. All other refi averages we flat or roughly steady Tuesday. \| National Averages of Lenders' Best Rates - Refinance \| \| \| \| --- \| --- \| --- \| \| Loan Type \| Refinance Rates \| Daily Change \| \| 30-Year Fixed \| 7.85% \| -0.03 \| \| FHA 30-Year Fixed \| 7.79% \| +0.08 \| \| VA 30-Year Fixed \| 7.61% \| -0.04 \| \| Jumbo 30-Year Fixed \| 6.95% \| No Change \| \| 20-Year Fixed \| 7.45% \| -0.02 \| \| 15-Year Fixed \| 6.85% \| -0.06 \| \| FHA 15-Year Fixed \| 6.96% \| -0.06 \| \| Jumbo 15-Year Fixed \| 6.91% \| No Change \| \| 10-Year Fixed \| 6.79% \| -0.04 \| \| 10/6 ARM \| 7.79% \| No Change \| \| 7/6 ARM \| 7.86% \| No Change \| \| Jumbo 7/6 ARM \| 6.68% \| No Change \| \| 5/6 ARM \| 7.80% \| -0.02 \| \| Jumbo 5/6 ARM \| 6.68% \| No Change \| Calculate monthly payments for different loan scenarios with our [Mortgage Calculator](https://www.investopedia.com/mortgage-calculator-5084794). ### The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. ## Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Louisiana, Hawaii, Iowa, and Vermont, while the states with the most expensive rates were Alabama, Minnesota, Arizona, Idaho, Nevada, and Oregon. ## 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 is overwhelmingly expected to hold rates steady at the conclusion of its meeting today, which would make that the central bank's fifth consecutive rate hold. The Fed will also be releasing its latest "dot plot" forecast of where it expects the federal funds rates to be at the end of this year and the next two. In its December dot plot, the Fed indicated it expected two to four rate cuts by the end of 2024. But today's renewed forecast could show a softening in those predictions. The Fed's statement and accompanying projections will be released today at 2:00 p.m. ET. ## How We Track Mortgage Rates The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a [loan-to-value ratio (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760.	Rates on 30-year mortgages edged a bit lower Tuesday, adding to Monday's bigger decline. That further shaves off some of last week's three-day climb to the mid-7% range, and drops the flagship average to 7.34%. Almost all other loan types, both new purchase and refi, moved lower or held steady. Rates vary widely across lenders, so it's always smart to shop around for your best mortgage option and compare rates regularly, no matter the type of home loan you're seeking. National Averages of Lenders' Best Rates Loan Type New Purchase Refinance 30-Year Fixed 7.34% 7.85% FHA 30-Year Fixed 7.33% 7.79% Jumbo 30-Year Fixed 6.95% 6.95% 15-Year Fixed 6.67% 6.85% 5/6 ARM 7.74% 7.80% National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points. Today's Mortgage Rate Averages: New Purchase Rates on 30-year new purchase mortgages fell another 2 basis points Tuesday, after a 9-point drop Monday. That's welcome news after the flagship average added 34 points over the second half of last week. The current average is now down to 7.34%. Given that 30-year rates sank into 6% territory at the start of February, current rates are still elevated. But they're dramatically cheaper than in October, when the 30-year average notched a historic 23-year peak of 8.45%. Compare the Best Mortgage Rates Today - May 21, 2024 Rates on 15-year new purchase loans also declined Tuesday, subtracting 6 basis points to drop the average to 6.67%. Though current rates are significantly pricier than the seven-month low of 6.10% we saw just before the new year, they're still much more affordable than last fall's 7.59% average—a peak since 2000. Jumbo 30-year rates marked time for a third day Friday. Holding at 6.95%, the average matches its highest mark since November. Though 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. Most other new purchase averages either held steady or showed minimal movement Tuesday. The only sizable change was seen for FHA 30-year loans, whose average dipped a tenth of a percentage point. National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.34% -0.02 FHA 30-Year Fixed 7.33% -0.10 VA 30-Year Fixed 7.08% -0.06 Jumbo 30-Year Fixed 6.95% No Change 20-Year Fixed 7.13% -0.07 15-Year Fixed 6.67% -0.06 FHA 15-Year Fixed 6.81% -0.03 Jumbo 15-Year Fixed 6.91% No Change 10-Year Fixed 6.58% -0.05 10/6 ARM 7.62% -0.01 7/6 ARM 7.60% -0.01 Jumbo 7/6 ARM 6.58% No Change 5/6 ARM 7.74% +0.01 Jumbo 5/6 ARM 6.68% No Change The Weekly Freddie Mac Average Every Thursday afternoon, Freddie Mac publishes a weekly average of 30-year mortgage rates, and last week's reading subtracted 14 basis points to fall to 6.74%. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its most expensive level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January. Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a weekly average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with discount points, while Investopedia’s averages only include zero-point loans. Today's Mortgage Rate Averages: Refinancing Tuesday refinancing rates were similarly flat or down for most loan types. The 30-year refi average gave up 3 basis points, leaving the spread between 30-year new purchase and refi rates at 51 basis points. Only one refi average rose Tuesday, with FHA 30-year refi rates tacking on 8 basis points. Moving the other way, the 15-year and FHA 15-year refi averages declined 6 points. All other refi averages we flat or roughly steady Tuesday. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.85% -0.03 FHA 30-Year Fixed 7.79% +0.08 VA 30-Year Fixed 7.61% -0.04 Jumbo 30-Year Fixed 6.95% No Change 20-Year Fixed 7.45% -0.02 15-Year Fixed 6.85% -0.06 FHA 15-Year Fixed 6.96% -0.06 Jumbo 15-Year Fixed 6.91% No Change 10-Year Fixed 6.79% -0.04 10/6 ARM 7.79% No Change 7/6 ARM 7.86% No Change Jumbo 7/6 ARM 6.68% No Change 5/6 ARM 7.80% -0.02 Jumbo 5/6 ARM 6.68% No Change Calculate monthly payments for different loan scenarios with our Mortgage Calculator. The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or they may be selected based on a hypothetical borrower with an ultra-high credit score or taking a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it may be higher or lower than the averages you see here. Lowest Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates were Mississippi, Louisiana, Hawaii, Iowa, and Vermont, while the states with the most expensive rates were Alabama, Minnesota, Arizona, Idaho, Nevada, and Oregon. 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 is overwhelmingly expected to hold rates steady at the conclusion of its meeting today, which would make that the central bank's fifth consecutive rate hold. The Fed will also be releasing its latest "dot plot" forecast of where it expects the federal funds rates to be at the end of this year and the next two. In its December dot plot, the Fed indicated it expected two to four rate cuts by the end of 2024. But today's renewed forecast could show a softening in those predictions. The Fed's statement and accompanying projections will be released today at 2:00 p.m. ET. 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.	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https://www.investopedia.com/the-express-podcast-episode-140-7508105	Going Back to the Future to See How A.I. and ChatGPT Are Changing Finance	<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=MERE3584414277" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Going Back to the Future to See How A.I. and ChatGPT Are Changing Finance "></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lexsokolin.com/" rel="nofollow">Lex Sokolin</a>, one of our favorite futurists, rejoins The Express to show us how A.I., ChatGPT, and the Blockchain are already changing finance and investing, and where they are taking us into the future. Plus, the debt ceiling drama is over, the labor market remains strong and the Fed appears poised to pause its rate hiking campaign? So why are hedge funds so bearish? </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) [Lex Sokolin](https://www.lexsokolin.com/), one of our favorite futurists, rejoins The Express to show us how A.I., ChatGPT, and the Blockchain are already changing finance and investing, and where they are taking us into the future. Plus, the debt ceiling drama is over, the labor market remains strong and the Fed appears poised to pause its rate hiking campaign? So why are hedge funds so bearish? 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 Lex Sokolin, one of our favorite futurists, rejoins The Express to show us how A.I., ChatGPT, and the Blockchain are already changing finance and investing, and where they are taking us into the future. Plus, the debt ceiling drama is over, the labor market remains strong and the Fed appears poised to pause its rate hiking campaign? So why are hedge funds so bearish? 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" ], [ "Lex Sokolin", "https://www.lexsokolin.com/" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/terms/m/marketrisk.asp	Market Risk Definition: How to Deal with Systematic Risk	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-market-risk"></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 Market Risk? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-market.asp">financial markets</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>Market risk, or systematic risk, affects the performance of the entire market simultaneously.</li><li>Market risk cannot be eliminated through diversification.</li><li>Specific risk, or unsystematic risk, involves the performance of a particular security and can be mitigated through diversification. </li><li>Market risk may arise due to changes to interest rates, exchange rates, geopolitical events, or recessions.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_6-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Market Risk: The possibility of losing money on an investment." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/6Nd0MJr52gVFnn9Og418khvFhUw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/6Nd0MJr52gVFnn9Og418khvFhUw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg" data-srcset="https://www.investopedia.com/thmb/9oZfs28FkP26g38ofzqUXgWVGm0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Market Risk: The possibility of losing money on an investment." class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/6Nd0MJr52gVFnn9Og418khvFhUw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg" srcset="https://www.investopedia.com/thmb/9oZfs28FkP26g38ofzqUXgWVGm0=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Yurle Villegas</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-market-risk"></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 Market Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Market risk and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/specificrisk.asp">specific risk</a> (unsystematic) make up the two major categories of investment risk. Market risk, also called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/systematicrisk.asp">systematic risk</a>, <em>cannot </em>be eliminated through diversification, though it can be hedged in other ways. Sources of market risk include <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recession.asp">recessions</a>, political turmoil, changes in <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrate.asp">interest rates</a>, natural disasters, and terrorist attacks. Systematic risk, or market risk, tends to influence the entire market at the same time.<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_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> This can be contrasted with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsystematicrisk.asp">unsystematic risk</a>, which is unique to a specific company or industry. Also known as nonsystematic risk, specific risk, diversifiable risk, or residual risk, in the context of an investment <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>, unsystematic risk can be reduced through <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Market risk exists because of price changes.<span class="ql-inline-citation" data-cite="2"></span> The standard deviation of changes in the prices of stocks, currencies, or commodities is referred to as price volatility. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">Volatility</a> is rated in annualized terms and may be expressed as an absolute number, such as $10, or a percentage of the initial value, such as 10%.<br/> </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>Publicly traded companies in the United States are required by 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> to disclose how their productivity and results may be linked to the performance of the financial markets. This requirement is meant to detail a company’s exposure to <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>.<span class="ql-inline-citation" data-cite="1"></span> For example, a company providing derivative investments or foreign exchange futures may be more exposed to financial risk than companies that do not provide these types of investments. This information helps investors and traders make decisions based on their own risk management rules.</p></div></div></div> <span class="heading-toc" id="toc-other-types-of-risk"></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"> Other Types of Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In contrast to the market’s overall risk, specific risk or unsystematic risk is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042415/how-does-market-risk-differ-specific-risk.asp">tied directly to the performance of a particular security</a> and can be protected against through investment diversification. One example of unsystematic risk is a company declaring bankruptcy, thereby making its stock worthless to investors.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The most common types of market risks include interest rate risk, equity risk, currency risk, and commodity risk. </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><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> covers the volatility that may accompany interest rate fluctuations due to fundamental factors, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">central bank</a> announcements related to changes in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetarypolicy.asp">monetary policy</a>. This risk is most relevant to investments in fixed-income securities, such as bonds. </li> <li>Equity risk is the risk involved in the changing prices of stock investments.</li> <li><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity-price-risk.asp">Commodity risk</a> covers the changing prices of commodities such as crude oil and corn.</li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currencyrisk.asp">Currency risk</a>, or exchange-rate risk, arises from the change in the price of one currency in relation to another. Investors or firms holding assets in another country are subject to currency risk.<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_22-0"></div> <span class="heading-toc" id="toc-managing-market-risk"></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"> Managing Market Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If you are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investing.asp">investing</a>, there is no single way to completely avoid market risk. But you can use <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050615/what-are-most-effective-hedging-strategies-reduce-market-risk.asp">hedging strategies</a> to protect against volatility and minimize the impact that market risk will have on your investments and overall financial health. For example, you can buy <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/putoption.asp">put options</a> to protect against a downside move when targeting specific securities. Or, if you want to <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge.asp">hedge</a> a large portfolio of stocks, you can utilize <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexoption.asp">index options</a>. </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"> Use a variety of these strategies to manage market risk and protect your portfolio. </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_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Dollar-cost averaging won’t protect you against market risk. But investing the same amount of money on a regular schedule can help you ride out ups and downs in the market, taking advantage of periods of both low costs and high returns.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-subheading__text"> Study Currency Profiles </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> If you are investing in foreign markets, pay attention to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currency.asp">currency</a> profiles of the companies in which you invest. Industries that import more, for example, will be impacted by changes to the local currency. Industries that export more will be affected by changes to the value of the euro or dollar. Allocate your assets across a variety of industries to mitigate risk, and invest in markets and companies backed by strong currencies. </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"> Watch Interest Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> To manage interest rate risk, pay attention to monetary policy and be prepared to shift your investments to account for interest rate changes. For example, if you are heavily invested in bonds and interest rates are rising, you may want to tweak your investments to focus on shorter-term bonds. </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"> Maintain Liquidity </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> When markets are volatile, you may have trouble selling or buying an asset within your price range, especially when you need to exit a position in a hurry. If the market is crashing, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a> may be difficult no matter what type of stocks you buy. Under more normal conditions, though, you can maintain your liquidity by sticking with stocks that have low impact cost (the cost of a transaction for that stock) to make trading easier. </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"> Invest in Staples </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Some industries tend to do well even when the overall economy is poor. These tend to be <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 businesses producing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consumerstaples.asp">consumer staples</a>. That’s because no matter what the economy is doing, people still need to turn their lights on, still need to eat, and still need toilet paper and toothpaste. By keeping some of your money in staples, you can still see returns in a recession or a period of high unemployment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Think Long Term </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> No matter where you invest your money, it is impossible to fully escape market risk and volatility. But you can manage this risk, and escape much of the impact of volatile markets, by using a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/longterm.asp">long-term investing</a> strategy. You may want to make small tweaks in response to changes in the market. But don’t upend your entire investing strategy because a recession hit or a currency changed value. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> In general, short-term traders are more impacted by volatility. By contrast, over time, volatility tends to even out over time. By approaching your investing systematically, and sticking with a long-term outlook and strategy, you are more likely to see your portfolio bounce back from the impact of market risks. </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-measuring-market-risk"></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"> Measuring Market Risk </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> To measure market risk, investors and analysts often use the <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/var.asp">value-at-risk (VaR)</a> method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known and widely utilized, the VaR method requires certain assumptions that limit its precision.<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_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> For example, it assumes that the makeup and content of the portfolio being measured are unchanged over a specified period. Though this may be acceptable for short-term horizons, it may provide less accurate measurements for long-term investments. </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"> Value at Risk (VaR) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> VaR is a statistical measure that calculates the maximum potential loss a portfolio could experience over a given time period at a certain level of confidence. So, a VaR of 95% suggests that there is a 95% chance that the portfolio would not lose more than the calculated amount over the given time period. </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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/historical-returns.asp">historical method</a> for computing VaR looks at one’s prior returns history and orders them from worst losses to greatest gains—following from the premise that past returns experience will inform future outcomes.</li> <li>The variance-covariance method, also called the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041715/what-variancecovariance-matrix-or-parametric-method-value-risk-var.asp">parametric method</a>, does not look backward but instead assumes that gains and losses are <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/normaldistribution.asp">normally distributed</a>. Potential losses are framed in terms of the number of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeviation.asp">standard deviations</a> from the mean.</li> <li><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/montecarlosimulation.asp">Monte Carlo simulation</a> uses computational models to simulate projected returns over hundreds or thousands of possible iterations. Then, it estimates the chances that a loss will occur to compute the VaR—say, what the maximum loss would be 5% of the time.</li> </ul> <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"> Risk Premium </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equityriskpremium.asp">equity risk premium (ERP)</a> is a measure of market risk that reflects the excess return that investors demand for investing in stocks over and above the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-freereturn.asp">risk-free rate of return</a>. In other words, it is the implied additional compensation that investors require to hold an investment in the broader stock market, which is inherently riskier than holding a risk-free asset like U.S. Treasuries. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> The ERP is calculated by subtracting the risk-free rate of return (usually the yield on a short-term or midterm government bond) from the expected return on the stock market. For example, if the expected return on the stock market is 10% and the risk-free rate is 2%, the ERP would be 8%. </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"> The difference between the broader <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketriskpremium.asp">market risk premium (MRP)</a> and the equity risk premium comes down to scope. The ERP is specific to the stock market, while the MRP is the additional return that’s expected on a diversified portfolio of investments held among various asset classes that is above the risk-free rate. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_64-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_65-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beta.asp">Beta</a> is another relevant risk metric that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/031715/how-does-beta-reflect-systematic-risk.asp">measures the relative volatility or market risk</a> of a security or portfolio compared to the market as a whole. It is used in the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capm.asp">capital asset pricing model (CAPM)</a> to calculate the expected return of an asset.<span class="ql-inline-citation" data-cite="5"></span> A beta of 1.0 indicates a stock has market risk identical to the broader S&P 500, while a beta greater than 1 means that the asset is more volatile than the market. Beta can be used to estimate the market risk of a portfolio by calculating the weighted average beta of its constituent assets.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-whats-the-difference-between-market-risk-and-specific-risk"></span> <h2 class="mntl-sc-block-questionandanswer__question">What’s the difference between market risk and specific risk?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Market risk and specific risk make up the two major categories of investment risk.</p><p>Market risk, also called systematic risk, cannot be eliminated through diversification, though it can be hedged in other ways and tends to influence the entire market at the same time.</p><p>Specific risk, in contrast, is unique to a specific company or industry. Specific risk, also known as unsystematic risk, diversifiable risk or residual risk, can be reduced through diversification.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-are-some-types-of-market-risk"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are some types of market risk?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The most common types of market risk include interest rate risk, equity risk, commodity risk, and currency risk.</p><p>Interest rate risk covers the volatility that may accompany interest rate fluctuations and is most relevant to fixed-income investments.</p><p>Equity risk is the risk involved in the changing prices of stock investments.</p><p>Commodity risk covers the changing prices of commodities such as crude oil and corn.</p><p>Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another. This may affect investors holding assets in another country.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-how-is-market-risk-measured"></span> <h2 class="mntl-sc-block-questionandanswer__question">How is market risk measured?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A widely used measure of market risk is the value-at-risk (VaR) method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known, the VaR method requires certain assumptions that limit its precision.</p><p>Beta is another relevant risk metric that measures the relative sensitivity of an asset to broader market movements. The equity risk premium (ERP) is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071415/what-formula-calculating-capital-asset-pricing-model-capm-excel.asp">implied expected return</a> that investors demand while holding market risk in the stock market, above and beyond that of the risk-free rate of return.</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-is-inflation-a-market-risk"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is inflation a market risk?</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/i/inflation.asp">Inflation</a> can contribute to market risk by impacting business performance, consumer behavior, and investor confidence. Monetary policy may be used to counter inflation through higher interest rates, which can in turn lead to a recession, causing the entire market to slow down.</p><p>This is different from inflationary risk, or the possibility that the rising prices caused by inflation could outpace the returns from your investment.</p><p>Inflationary risk is not a specific type of market risk because it doesn’t impact the overall performance of financial markets. However, it is a type of investing risk. Diversification, investing early to take advantage of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compound interest</a>, and investing more aggressively when you are younger can all help minimize inflationary risk.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Market risk is the chance of incurring losses due to factors that affect the overall performance of financial markets. Events such as changes in interest rates, geopolitical events, or recessions can bring on what is known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pain-trade.asp">pain trade</a>. It is called systematic risk since it cannot be eliminated through diversification. Specific risk, on the other hand, is unique to a particular stock or industry sector and can be minimized through diversification. </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"> Market risk can be measured using methods such as the value-at-risk (VaR) method, risk premia, or beta coefficient. </p></div>	## What Is Market Risk? Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the [financial markets](https://www.investopedia.com/terms/f/financial-market.asp). ### Key Takeaways * Market risk, or systematic risk, affects the performance of the entire market simultaneously. * Market risk cannot be eliminated through diversification. * Specific risk, or unsystematic risk, involves the performance of a particular security and can be mitigated through diversification. * Market risk may arise due to changes to interest rates, exchange rates, geopolitical events, or recessions. ![Market Risk: The possibility of losing money on an investment.]() ![Market Risk: The possibility of losing money on an investment.](https://www.investopedia.com/thmb/6Nd0MJr52gVFnn9Og418khvFhUw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/market-risk.asp-Final-267d57db9f87429cb80051c8a5132847.jpg) Investopedia / Yurle Villegas ## Understanding Market Risk Market risk and [specific risk](https://www.investopedia.com/terms/s/specificrisk.asp) (unsystematic) make up the two major categories of investment risk. Market risk, also called [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp), cannot be eliminated through diversification, though it can be hedged in other ways. Sources of market risk include [recessions](https://www.investopedia.com/terms/r/recession.asp), political turmoil, changes in [interest rates](https://www.investopedia.com/terms/i/interestrate.asp), natural disasters, and terrorist attacks. Systematic risk, or market risk, tends to influence the entire market at the same time. This can be contrasted with [unsystematic risk](https://www.investopedia.com/terms/u/unsystematicrisk.asp), which is unique to a specific company or industry. Also known as nonsystematic risk, specific risk, diversifiable risk, or residual risk, in the context of an investment [portfolio](https://www.investopedia.com/terms/p/portfolio.asp), unsystematic risk can be reduced through [diversification](https://www.investopedia.com/terms/d/diversification.asp). Market risk exists because of price changes. The standard deviation of changes in the prices of stocks, currencies, or commodities is referred to as price volatility. [Volatility](https://www.investopedia.com/terms/v/volatility.asp) is rated in annualized terms and may be expressed as an absolute number, such as $10, or a percentage of the initial value, such as 10%. ### Publicly traded companies in the United States are required by the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) to disclose how their productivity and results may be linked to the performance of the financial markets. This requirement is meant to detail a company’s exposure to [financial risk](https://www.investopedia.com/terms/f/financialrisk.asp). For example, a company providing derivative investments or foreign exchange futures may be more exposed to financial risk than companies that do not provide these types of investments. This information helps investors and traders make decisions based on their own risk management rules. ## Other Types of Risk In contrast to the market’s overall risk, specific risk or unsystematic risk is [tied directly to the performance of a particular security](https://www.investopedia.com/ask/answers/042415/how-does-market-risk-differ-specific-risk.asp) and can be protected against through investment diversification. One example of unsystematic risk is a company declaring bankruptcy, thereby making its stock worthless to investors. The most common types of market risks include interest rate risk, equity risk, currency risk, and commodity risk. * [Interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp) covers the volatility that may accompany interest rate fluctuations due to fundamental factors, such as [central bank](https://www.investopedia.com/terms/c/centralbank.asp) announcements related to changes in [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp). This risk is most relevant to investments in fixed-income securities, such as bonds. * Equity risk is the risk involved in the changing prices of stock investments. * [Commodity risk](https://www.investopedia.com/terms/c/commodity-price-risk.asp) covers the changing prices of commodities such as crude oil and corn. * [Currency risk](https://www.investopedia.com/terms/c/currencyrisk.asp), or exchange-rate risk, arises from the change in the price of one currency in relation to another. Investors or firms holding assets in another country are subject to currency risk. ## Managing Market Risk If you are [investing](https://www.investopedia.com/terms/i/investing.asp), there is no single way to completely avoid market risk. But you can use [hedging strategies](https://www.investopedia.com/ask/answers/050615/what-are-most-effective-hedging-strategies-reduce-market-risk.asp) to protect against volatility and minimize the impact that market risk will have on your investments and overall financial health. For example, you can buy [put options](https://www.investopedia.com/terms/p/putoption.asp) to protect against a downside move when targeting specific securities. Or, if you want to [hedge](https://www.investopedia.com/terms/h/hedge.asp) a large portfolio of stocks, you can utilize [index options](https://www.investopedia.com/terms/i/indexoption.asp). Use a variety of these strategies to manage market risk and protect your portfolio. ### Dollar-cost averaging won’t protect you against market risk. But investing the same amount of money on a regular schedule can help you ride out ups and downs in the market, taking advantage of periods of both low costs and high returns. ### Study Currency Profiles If you are investing in foreign markets, pay attention to the [currency](https://www.investopedia.com/terms/c/currency.asp) profiles of the companies in which you invest. Industries that import more, for example, will be impacted by changes to the local currency. Industries that export more will be affected by changes to the value of the euro or dollar. Allocate your assets across a variety of industries to mitigate risk, and invest in markets and companies backed by strong currencies. ### Watch Interest Rates To manage interest rate risk, pay attention to monetary policy and be prepared to shift your investments to account for interest rate changes. For example, if you are heavily invested in bonds and interest rates are rising, you may want to tweak your investments to focus on shorter-term bonds. ### Maintain Liquidity When markets are volatile, you may have trouble selling or buying an asset within your price range, especially when you need to exit a position in a hurry. If the market is crashing, [liquidity](https://www.investopedia.com/terms/l/liquidity.asp) may be difficult no matter what type of stocks you buy. Under more normal conditions, though, you can maintain your liquidity by sticking with stocks that have low impact cost (the cost of a transaction for that stock) to make trading easier. ### Invest in Staples Some industries tend to do well even when the overall economy is poor. These tend to be [utilities](https://www.investopedia.com/terms/u/utilities_sector.asp) and businesses producing [consumer staples](https://www.investopedia.com/terms/c/consumerstaples.asp). That’s because no matter what the economy is doing, people still need to turn their lights on, still need to eat, and still need toilet paper and toothpaste. By keeping some of your money in staples, you can still see returns in a recession or a period of high unemployment. ### Think Long Term No matter where you invest your money, it is impossible to fully escape market risk and volatility. But you can manage this risk, and escape much of the impact of volatile markets, by using a [long-term investing](https://www.investopedia.com/terms/l/longterm.asp) strategy. You may want to make small tweaks in response to changes in the market. But don’t upend your entire investing strategy because a recession hit or a currency changed value. In general, short-term traders are more impacted by volatility. By contrast, over time, volatility tends to even out over time. By approaching your investing systematically, and sticking with a long-term outlook and strategy, you are more likely to see your portfolio bounce back from the impact of market risks. ## Measuring Market Risk To measure market risk, investors and analysts often use the [value-at-risk (VaR)](https://www.investopedia.com/terms/v/var.asp) method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known and widely utilized, the VaR method requires certain assumptions that limit its precision. For example, it assumes that the makeup and content of the portfolio being measured are unchanged over a specified period. Though this may be acceptable for short-term horizons, it may provide less accurate measurements for long-term investments. ### Value at Risk (VaR) VaR is a statistical measure that calculates the maximum potential loss a portfolio could experience over a given time period at a certain level of confidence. So, a VaR of 95% suggests that there is a 95% chance that the portfolio would not lose more than the calculated amount over the given time period. * The [historical method](https://www.investopedia.com/terms/h/historical-returns.asp) for computing VaR looks at one’s prior returns history and orders them from worst losses to greatest gains—following from the premise that past returns experience will inform future outcomes. * The variance-covariance method, also called the [parametric method](https://www.investopedia.com/ask/answers/041715/what-variancecovariance-matrix-or-parametric-method-value-risk-var.asp), does not look backward but instead assumes that gains and losses are [normally distributed](https://www.investopedia.com/terms/n/normaldistribution.asp). Potential losses are framed in terms of the number of [standard deviations](https://www.investopedia.com/terms/s/standarddeviation.asp) from the mean. * [Monte Carlo simulation](https://www.investopedia.com/terms/m/montecarlosimulation.asp) uses computational models to simulate projected returns over hundreds or thousands of possible iterations. Then, it estimates the chances that a loss will occur to compute the VaR—say, what the maximum loss would be 5% of the time. ### Risk Premium The [equity risk premium (ERP)](https://www.investopedia.com/terms/e/equityriskpremium.asp) is a measure of market risk that reflects the excess return that investors demand for investing in stocks over and above the [risk-free rate of return](https://www.investopedia.com/terms/r/risk-freereturn.asp). In other words, it is the implied additional compensation that investors require to hold an investment in the broader stock market, which is inherently riskier than holding a risk-free asset like U.S. Treasuries. The ERP is calculated by subtracting the risk-free rate of return (usually the yield on a short-term or midterm government bond) from the expected return on the stock market. For example, if the expected return on the stock market is 10% and the risk-free rate is 2%, the ERP would be 8%. The difference between the broader [market risk premium (MRP)](https://www.investopedia.com/terms/m/marketriskpremium.asp) and the equity risk premium comes down to scope. The ERP is specific to the stock market, while the MRP is the additional return that’s expected on a diversified portfolio of investments held among various asset classes that is above the risk-free rate. ### [Beta](https://www.investopedia.com/terms/b/beta.asp) is another relevant risk metric that [measures the relative volatility or market risk](https://www.investopedia.com/ask/answers/031715/how-does-beta-reflect-systematic-risk.asp) of a security or portfolio compared to the market as a whole. It is used in the [capital asset pricing model (CAPM)](https://www.investopedia.com/terms/c/capm.asp) to calculate the expected return of an asset. A beta of 1.0 indicates a stock has market risk identical to the broader S&P 500, while a beta greater than 1 means that the asset is more volatile than the market. Beta can be used to estimate the market risk of a portfolio by calculating the weighted average beta of its constituent assets. ## What’s the difference between market risk and specific risk? Market risk and specific risk make up the two major categories of investment risk. Market risk, also called systematic risk, cannot be eliminated through diversification, though it can be hedged in other ways and tends to influence the entire market at the same time. Specific risk, in contrast, is unique to a specific company or industry. Specific risk, also known as unsystematic risk, diversifiable risk or residual risk, can be reduced through diversification. ## What are some types of market risk? The most common types of market risk include interest rate risk, equity risk, commodity risk, and currency risk. Interest rate risk covers the volatility that may accompany interest rate fluctuations and is most relevant to fixed-income investments. Equity risk is the risk involved in the changing prices of stock investments. Commodity risk covers the changing prices of commodities such as crude oil and corn. Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another. This may affect investors holding assets in another country. ## How is market risk measured? A widely used measure of market risk is the value-at-risk (VaR) method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known, the VaR method requires certain assumptions that limit its precision. Beta is another relevant risk metric that measures the relative sensitivity of an asset to broader market movements. The equity risk premium (ERP) is the [implied expected return](https://www.investopedia.com/ask/answers/071415/what-formula-calculating-capital-asset-pricing-model-capm-excel.asp) that investors demand while holding market risk in the stock market, above and beyond that of the risk-free rate of return. ## Is inflation a market risk? [Inflation](https://www.investopedia.com/terms/i/inflation.asp) can contribute to market risk by impacting business performance, consumer behavior, and investor confidence. Monetary policy may be used to counter inflation through higher interest rates, which can in turn lead to a recession, causing the entire market to slow down. This is different from inflationary risk, or the possibility that the rising prices caused by inflation could outpace the returns from your investment. Inflationary risk is not a specific type of market risk because it doesn’t impact the overall performance of financial markets. However, it is a type of investing risk. Diversification, investing early to take advantage of [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp), and investing more aggressively when you are younger can all help minimize inflationary risk. ## The Bottom Line Market risk is the chance of incurring losses due to factors that affect the overall performance of financial markets. Events such as changes in interest rates, geopolitical events, or recessions can bring on what is known as the [pain trade](https://www.investopedia.com/terms/p/pain-trade.asp). It is called systematic risk since it cannot be eliminated through diversification. Specific risk, on the other hand, is unique to a particular stock or industry sector and can be minimized through diversification. Market risk can be measured using methods such as the value-at-risk (VaR) method, risk premia, or beta coefficient.	What Is Market Risk? Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets. Key Takeaways Market risk, or systematic risk, affects the performance of the entire market simultaneously.Market risk cannot be eliminated through diversification.Specific risk, or unsystematic risk, involves the performance of a particular security and can be mitigated through diversification. Market risk may arise due to changes to interest rates, exchange rates, geopolitical events, or recessions. Investopedia / Yurle Villegas Understanding Market Risk Market risk and specific risk (unsystematic) make up the two major categories of investment risk. Market risk, also called systematic risk, cannot be eliminated through diversification, though it can be hedged in other ways. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters, and terrorist attacks. Systematic risk, or market risk, tends to influence the entire market at the same time. This can be contrasted with unsystematic risk, which is unique to a specific company or industry. Also known as nonsystematic risk, specific risk, diversifiable risk, or residual risk, in the context of an investment portfolio, unsystematic risk can be reduced through diversification. Market risk exists because of price changes. The standard deviation of changes in the prices of stocks, currencies, or commodities is referred to as price volatility. Volatility is rated in annualized terms and may be expressed as an absolute number, such as $10, or a percentage of the initial value, such as 10%. Publicly traded companies in the United States are required by the Securities and Exchange Commission (SEC) to disclose how their productivity and results may be linked to the performance of the financial markets. This requirement is meant to detail a company’s exposure to financial risk. For example, a company providing derivative investments or foreign exchange futures may be more exposed to financial risk than companies that do not provide these types of investments. This information helps investors and traders make decisions based on their own risk management rules. Other Types of Risk In contrast to the market’s overall risk, specific risk or unsystematic risk is tied directly to the performance of a particular security and can be protected against through investment diversification. One example of unsystematic risk is a company declaring bankruptcy, thereby making its stock worthless to investors. The most common types of market risks include interest rate risk, equity risk, currency risk, and commodity risk. Interest rate risk covers the volatility that may accompany interest rate fluctuations due to fundamental factors, such as central bank announcements related to changes in monetary policy. This risk is most relevant to investments in fixed-income securities, such as bonds. Equity risk is the risk involved in the changing prices of stock investments. Commodity risk covers the changing prices of commodities such as crude oil and corn. Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another. Investors or firms holding assets in another country are subject to currency risk. Managing Market Risk If you are investing, there is no single way to completely avoid market risk. But you can use hedging strategies to protect against volatility and minimize the impact that market risk will have on your investments and overall financial health. For example, you can buy put options to protect against a downside move when targeting specific securities. Or, if you want to hedge a large portfolio of stocks, you can utilize index options. Use a variety of these strategies to manage market risk and protect your portfolio. Dollar-cost averaging won’t protect you against market risk. But investing the same amount of money on a regular schedule can help you ride out ups and downs in the market, taking advantage of periods of both low costs and high returns. Study Currency Profiles If you are investing in foreign markets, pay attention to the currency profiles of the companies in which you invest. Industries that import more, for example, will be impacted by changes to the local currency. Industries that export more will be affected by changes to the value of the euro or dollar. Allocate your assets across a variety of industries to mitigate risk, and invest in markets and companies backed by strong currencies. Watch Interest Rates To manage interest rate risk, pay attention to monetary policy and be prepared to shift your investments to account for interest rate changes. For example, if you are heavily invested in bonds and interest rates are rising, you may want to tweak your investments to focus on shorter-term bonds. Maintain Liquidity When markets are volatile, you may have trouble selling or buying an asset within your price range, especially when you need to exit a position in a hurry. If the market is crashing, liquidity may be difficult no matter what type of stocks you buy. Under more normal conditions, though, you can maintain your liquidity by sticking with stocks that have low impact cost (the cost of a transaction for that stock) to make trading easier. Invest in Staples Some industries tend to do well even when the overall economy is poor. These tend to be utilities and businesses producing consumer staples. That’s because no matter what the economy is doing, people still need to turn their lights on, still need to eat, and still need toilet paper and toothpaste. By keeping some of your money in staples, you can still see returns in a recession or a period of high unemployment. Think Long Term No matter where you invest your money, it is impossible to fully escape market risk and volatility. But you can manage this risk, and escape much of the impact of volatile markets, by using a long-term investing strategy. You may want to make small tweaks in response to changes in the market. But don’t upend your entire investing strategy because a recession hit or a currency changed value. In general, short-term traders are more impacted by volatility. By contrast, over time, volatility tends to even out over time. By approaching your investing systematically, and sticking with a long-term outlook and strategy, you are more likely to see your portfolio bounce back from the impact of market risks. Measuring Market Risk To measure market risk, investors and analysts often use the value-at-risk (VaR) method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known and widely utilized, the VaR method requires certain assumptions that limit its precision. For example, it assumes that the makeup and content of the portfolio being measured are unchanged over a specified period. Though this may be acceptable for short-term horizons, it may provide less accurate measurements for long-term investments. Value at Risk (VaR) VaR is a statistical measure that calculates the maximum potential loss a portfolio could experience over a given time period at a certain level of confidence. So, a VaR of 95% suggests that there is a 95% chance that the portfolio would not lose more than the calculated amount over the given time period. The historical method for computing VaR looks at one’s prior returns history and orders them from worst losses to greatest gains—following from the premise that past returns experience will inform future outcomes. The variance-covariance method, also called the parametric method, does not look backward but instead assumes that gains and losses are normally distributed. Potential losses are framed in terms of the number of standard deviations from the mean. Monte Carlo simulation uses computational models to simulate projected returns over hundreds or thousands of possible iterations. Then, it estimates the chances that a loss will occur to compute the VaR—say, what the maximum loss would be 5% of the time. Risk Premium The equity risk premium (ERP) is a measure of market risk that reflects the excess return that investors demand for investing in stocks over and above the risk-free rate of return. In other words, it is the implied additional compensation that investors require to hold an investment in the broader stock market, which is inherently riskier than holding a risk-free asset like U.S. Treasuries. The ERP is calculated by subtracting the risk-free rate of return (usually the yield on a short-term or midterm government bond) from the expected return on the stock market. For example, if the expected return on the stock market is 10% and the risk-free rate is 2%, the ERP would be 8%. The difference between the broader market risk premium (MRP) and the equity risk premium comes down to scope. The ERP is specific to the stock market, while the MRP is the additional return that’s expected on a diversified portfolio of investments held among various asset classes that is above the risk-free rate. Beta is another relevant risk metric that measures the relative volatility or market risk of a security or portfolio compared to the market as a whole. It is used in the capital asset pricing model (CAPM) to calculate the expected return of an asset. A beta of 1.0 indicates a stock has market risk identical to the broader S&P 500, while a beta greater than 1 means that the asset is more volatile than the market. Beta can be used to estimate the market risk of a portfolio by calculating the weighted average beta of its constituent assets. What’s the difference between market risk and specific risk? Market risk and specific risk make up the two major categories of investment risk.Market risk, also called systematic risk, cannot be eliminated through diversification, though it can be hedged in other ways and tends to influence the entire market at the same time.Specific risk, in contrast, is unique to a specific company or industry. Specific risk, also known as unsystematic risk, diversifiable risk or residual risk, can be reduced through diversification. What are some types of market risk? The most common types of market risk include interest rate risk, equity risk, commodity risk, and currency risk.Interest rate risk covers the volatility that may accompany interest rate fluctuations and is most relevant to fixed-income investments.Equity risk is the risk involved in the changing prices of stock investments.Commodity risk covers the changing prices of commodities such as crude oil and corn.Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another. This may affect investors holding assets in another country. How is market risk measured? A widely used measure of market risk is the value-at-risk (VaR) method. VaR modeling is a statistical risk management method that quantifies a stock’s or portfolio’s potential loss as well as the probability of that potential loss occurring. While well-known, the VaR method requires certain assumptions that limit its precision.Beta is another relevant risk metric that measures the relative sensitivity of an asset to broader market movements. The equity risk premium (ERP) is the implied expected return that investors demand while holding market risk in the stock market, above and beyond that of the risk-free rate of return. Is inflation a market risk? Inflation can contribute to market risk by impacting business performance, consumer behavior, and investor confidence. Monetary policy may be used to counter inflation through higher interest rates, which can in turn lead to a recession, causing the entire market to slow down.This is different from inflationary risk, or the possibility that the rising prices caused by inflation could outpace the returns from your investment.Inflationary risk is not a specific type of market risk because it doesn’t impact the overall performance of financial markets. However, it is a type of investing risk. Diversification, investing early to take advantage of compound interest, and investing more aggressively when you are younger can all help minimize inflationary risk. The Bottom Line Market risk is the chance of incurring losses due to factors that affect the overall performance of financial markets. Events such as changes in interest rates, geopolitical events, or recessions can bring on what is known as the pain trade. It is called systematic risk since it cannot be eliminated through diversification. Specific risk, on the other hand, is unique to a particular stock or industry sector and can be minimized through diversification. Market risk can be measured using methods such as the value-at-risk (VaR) method, risk premia, or beta coefficient.	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https://www.investopedia.com/terms/s/specialneedschild.asp	What Is a Special Needs Child? Definition and Financial Resources	<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 special needs child is a youth who has been determined to require special attention and specific necessities that other children do not. The state may declare this status for the purpose of offering benefits and assistance for the child’s well-being and growth. Special needs can also be a legal designation, particularly in the adoption and foster care community, wherein the child and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/guardian.asp">guardian</a> receive support to help them both lead productive lives. </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 definition of special needs pertaining to a child includes a wide variety of conditions including physical ailments, learning disabilities, and terminal illness.</li><li>Parents and guardians of special needs children usually receive tax credits or deductions to help offset the cost of raising a special needs child.</li><li>Some special needs children are able to go to public schools that offer a wide range of educational and emotional support programs, such as occupational therapy and one-on-one teacher aides in the classroom.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-meaning-of-special-needs-child"></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 the Meaning of Special Needs Child </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The guardians of special needs children typically receive some sort of additional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxcredit.asp">tax credit</a> or deduction to address the additional costs and efforts that providing for child care and well-being may require.<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_7-0"></div> <span class="heading-toc" id="toc-what-qualifies-as-a-special-need"></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"> What Qualifies as a Special Need? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A variety of conditions and impairments can be classified as special needs. They can include chronic and terminal illnesses, physical impairments, and cognitive or psychiatric issues. </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 assistance and medical attention that elevating the quality of life for special needs children may require can result in long-term and escalating costs. The extent of the child’s condition may call for far-reaching medical support to allow the child to live and thrive. For example, a child with a debilitating or life-threatening condition that is permanent could require constant medical support throughout their lives. </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"> They may need to be monitored on a regular basis in case their ailments become exacerbated. Support equipment may be needed to provide the child with mobility around the residence, and the procurement of support animals such as specially trained dogs may also be needed. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A special needs child may have a life-threatening condition or severe learning disabilities. Either way, they are a child that requires special attention and care that other children do not.</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_17-0"> <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_18-0"> A special needs child may require alternative approaches to education that not only accommodate their conditions but also work toward creating ways for them to further their own capacity to learn and develop. </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"> For instance, a child with impaired physical mobility or challenges communicating through traditional verbal cues may need to be trained in other ways, and they may also need training in how to apply those skills in the classroom and real-world settings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> For instances in which a special needs child has cognitive impairments, their education may require expertise in addressing such issues and finding methods for connecting with them. Some examples of this can include taking substantially more time and effort to ensure they can not only understand the lesson but also advance to another stage of learning. </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"> Though public education is open to all students, not all teachers are trained to present lessons in ways that speak to these needs. This may lead to special needs children being taught privately, in classes or schools dedicated to addressing those needs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-what-financial-help-is-available-for-parents-of-special-needs-children"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Financial Help is Available for Parents of Special Needs Children?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are a number of government programs intended to ease the financial burden of supporting a special needs child. Special needs children are eligible for subsidized healthcare programs such as Medicaid and the Children's Health Insurance Program (CHIP). There are also programs that offer direct payments or assistance with securing food and shelter, such as Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP). There are also grants available from various nonprofits that can help offset costs.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-are-children-with-special-needs-eligible-for-supplemental-security-income-ssi"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Children With Special Needs Eligible for Supplemental Security Income (SSI)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Children with special needs that are under the age of 18 can qualify for SSI if they meet several parameters based on their income level and the type of disability. Payments may vary from state to state, and conditions are reevaluated every three years in most cases. After the child turns 18, they may be eligible for SSI disability payments but would be evaluated differently.<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_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-how-can-you-build-a-financial-plan-for-children-with-special-needs"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Build a Financial Plan for Children with Special Needs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Though predicting what care will cost in the future is uncertain at best, parents can open a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/special-needs-trust.asp">special needs trust</a> that will allow parents or loved ones to contribute financially to a fund that can be disbursed for costs such as medical expenses, caretakers, or transportation. The important detail about a special needs trust is that the money held there will not affect any public assistance programs that the child may receive. Special needs trusts are overseen by a fiduciary.<br/></p><p>Combined with programs such as SSI, grant programs, and nutritional and healthcare programs, parents can build a sustainable plan for their child's care.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-how-do-able-accounts-benefit-a-special-needs-child"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do ABLE Accounts Benefit a Special Needs Child?</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/a/able-account.asp">Achieving a Better Life Experience (ABLE)</a> plans, or 529A ABLE accounts, are tax-advantaged savings plans that are similar to 529 college savings plans. Their beneficiaries are special needs children and adults under the age of 26. Money deposited into an ABLE account can be invested, growing tax-free, with distributions covering qualified disability expenses.</p><p>Any person can contribute to a beneficiary’s ABLE account—be it a parent, grandparent, family friend, etc.—up to $16,000 per year, which is the annual gift tax exemption limit. For the purposes of SSI eligibility, the first $100,000 of an ABLE account balance is excluded as a resource. Going over that amount may lead to a suspension of SSI payments.<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_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_34-0"><span class="heading-toc" id="toc-can-a-child-have-both-an-able-and-a-special-needs-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Child Have Both an ABLE and a Special Needs Trust?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, a special needs child can have both an ABLE and a special needs trust. Because there are specific qualifying expenses that may be paid with each type of account, having both accounts open and funded can be beneficial. Because there is no upper limit on a special needs trust, that offers more leeway for parents securing their child's future beyond them, but ABLE plans may cover basic living expenses such as rent, whereas a special needs trust may not.</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-is-special-needs-insensitive"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is "Special Needs" Insensitive?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. The National Disability Rights Network says “special needs” is considered condescending and offensive and should be avoided, along with “differently-abled” and “physically challenged.” The National Center on Disability and Journalism also says that “special needs” is offensive, and should only be used with regard to government references or when used as part of the formal name of an organization or program.<span class="ql-inline-citation" data-cite="7"></span><span class="ql-inline-citation" data-cite="6"></span> </p></div> </div></div>	A special needs child is a youth who has been determined to require special attention and specific necessities that other children do not. The state may declare this status for the purpose of offering benefits and assistance for the child’s well-being and growth. Special needs can also be a legal designation, particularly in the adoption and foster care community, wherein the child and [guardian](https://www.investopedia.com/terms/g/guardian.asp) receive support to help them both lead productive lives. ### Key Takeaways * The definition of special needs pertaining to a child includes a wide variety of conditions including physical ailments, learning disabilities, and terminal illness. * Parents and guardians of special needs children usually receive tax credits or deductions to help offset the cost of raising a special needs child. * Some special needs children are able to go to public schools that offer a wide range of educational and emotional support programs, such as occupational therapy and one-on-one teacher aides in the classroom. ## Understanding the Meaning of Special Needs Child The guardians of special needs children typically receive some sort of additional [tax credit](https://www.investopedia.com/terms/t/taxcredit.asp) or deduction to address the additional costs and efforts that providing for child care and well-being may require. ## What Qualifies as a Special Need? A variety of conditions and impairments can be classified as special needs. They can include chronic and terminal illnesses, physical impairments, and cognitive or psychiatric issues. The assistance and medical attention that elevating the quality of life for special needs children may require can result in long-term and escalating costs. The extent of the child’s condition may call for far-reaching medical support to allow the child to live and thrive. For example, a child with a debilitating or life-threatening condition that is permanent could require constant medical support throughout their lives. They may need to be monitored on a regular basis in case their ailments become exacerbated. Support equipment may be needed to provide the child with mobility around the residence, and the procurement of support animals such as specially trained dogs may also be needed. ### A special needs child may have a life-threatening condition or severe learning disabilities. Either way, they are a child that requires special attention and care that other children do not. ## Special Considerations A special needs child may require alternative approaches to education that not only accommodate their conditions but also work toward creating ways for them to further their own capacity to learn and develop. For instance, a child with impaired physical mobility or challenges communicating through traditional verbal cues may need to be trained in other ways, and they may also need training in how to apply those skills in the classroom and real-world settings. For instances in which a special needs child has cognitive impairments, their education may require expertise in addressing such issues and finding methods for connecting with them. Some examples of this can include taking substantially more time and effort to ensure they can not only understand the lesson but also advance to another stage of learning. Though public education is open to all students, not all teachers are trained to present lessons in ways that speak to these needs. This may lead to special needs children being taught privately, in classes or schools dedicated to addressing those needs. ## What Financial Help is Available for Parents of Special Needs Children? There are a number of government programs intended to ease the financial burden of supporting a special needs child. Special needs children are eligible for subsidized healthcare programs such as Medicaid and the Children's Health Insurance Program (CHIP). There are also programs that offer direct payments or assistance with securing food and shelter, such as Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP). There are also grants available from various nonprofits that can help offset costs. ## Are Children With Special Needs Eligible for Supplemental Security Income (SSI)? Children with special needs that are under the age of 18 can qualify for SSI if they meet several parameters based on their income level and the type of disability. Payments may vary from state to state, and conditions are reevaluated every three years in most cases. After the child turns 18, they may be eligible for SSI disability payments but would be evaluated differently. ## How Can You Build a Financial Plan for Children with Special Needs? Though predicting what care will cost in the future is uncertain at best, parents can open a [special needs trust](https://www.investopedia.com/terms/s/special-needs-trust.asp) that will allow parents or loved ones to contribute financially to a fund that can be disbursed for costs such as medical expenses, caretakers, or transportation. The important detail about a special needs trust is that the money held there will not affect any public assistance programs that the child may receive. Special needs trusts are overseen by a fiduciary. Combined with programs such as SSI, grant programs, and nutritional and healthcare programs, parents can build a sustainable plan for their child's care. ## How Do ABLE Accounts Benefit a Special Needs Child? [Achieving a Better Life Experience (ABLE)](https://www.investopedia.com/terms/a/able-account.asp) plans, or 529A ABLE accounts, are tax-advantaged savings plans that are similar to 529 college savings plans. Their beneficiaries are special needs children and adults under the age of 26. Money deposited into an ABLE account can be invested, growing tax-free, with distributions covering qualified disability expenses. Any person can contribute to a beneficiary’s ABLE account—be it a parent, grandparent, family friend, etc.—up to $16,000 per year, which is the annual gift tax exemption limit. For the purposes of SSI eligibility, the first $100,000 of an ABLE account balance is excluded as a resource. Going over that amount may lead to a suspension of SSI payments. ## Can a Child Have Both an ABLE and a Special Needs Trust? Yes, a special needs child can have both an ABLE and a special needs trust. Because there are specific qualifying expenses that may be paid with each type of account, having both accounts open and funded can be beneficial. Because there is no upper limit on a special needs trust, that offers more leeway for parents securing their child's future beyond them, but ABLE plans may cover basic living expenses such as rent, whereas a special needs trust may not. ## Is "Special Needs" Insensitive? Yes. The National Disability Rights Network says “special needs” is considered condescending and offensive and should be avoided, along with “differently-abled” and “physically challenged.” The National Center on Disability and Journalism also says that “special needs” is offensive, and should only be used with regard to government references or when used as part of the formal name of an organization or program.	A special needs child is a youth who has been determined to require special attention and specific necessities that other children do not. The state may declare this status for the purpose of offering benefits and assistance for the child’s well-being and growth. Special needs can also be a legal designation, particularly in the adoption and foster care community, wherein the child and guardian receive support to help them both lead productive lives. Key Takeaways The definition of special needs pertaining to a child includes a wide variety of conditions including physical ailments, learning disabilities, and terminal illness.Parents and guardians of special needs children usually receive tax credits or deductions to help offset the cost of raising a special needs child.Some special needs children are able to go to public schools that offer a wide range of educational and emotional support programs, such as occupational therapy and one-on-one teacher aides in the classroom. Understanding the Meaning of Special Needs Child The guardians of special needs children typically receive some sort of additional tax credit or deduction to address the additional costs and efforts that providing for child care and well-being may require. What Qualifies as a Special Need? A variety of conditions and impairments can be classified as special needs. They can include chronic and terminal illnesses, physical impairments, and cognitive or psychiatric issues. The assistance and medical attention that elevating the quality of life for special needs children may require can result in long-term and escalating costs. The extent of the child’s condition may call for far-reaching medical support to allow the child to live and thrive. For example, a child with a debilitating or life-threatening condition that is permanent could require constant medical support throughout their lives. They may need to be monitored on a regular basis in case their ailments become exacerbated. Support equipment may be needed to provide the child with mobility around the residence, and the procurement of support animals such as specially trained dogs may also be needed. A special needs child may have a life-threatening condition or severe learning disabilities. Either way, they are a child that requires special attention and care that other children do not. Special Considerations A special needs child may require alternative approaches to education that not only accommodate their conditions but also work toward creating ways for them to further their own capacity to learn and develop. For instance, a child with impaired physical mobility or challenges communicating through traditional verbal cues may need to be trained in other ways, and they may also need training in how to apply those skills in the classroom and real-world settings. For instances in which a special needs child has cognitive impairments, their education may require expertise in addressing such issues and finding methods for connecting with them. Some examples of this can include taking substantially more time and effort to ensure they can not only understand the lesson but also advance to another stage of learning. Though public education is open to all students, not all teachers are trained to present lessons in ways that speak to these needs. This may lead to special needs children being taught privately, in classes or schools dedicated to addressing those needs. What Financial Help is Available for Parents of Special Needs Children? There are a number of government programs intended to ease the financial burden of supporting a special needs child. Special needs children are eligible for subsidized healthcare programs such as Medicaid and the Children's Health Insurance Program (CHIP). There are also programs that offer direct payments or assistance with securing food and shelter, such as Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP). There are also grants available from various nonprofits that can help offset costs. Are Children With Special Needs Eligible for Supplemental Security Income (SSI)? Children with special needs that are under the age of 18 can qualify for SSI if they meet several parameters based on their income level and the type of disability. Payments may vary from state to state, and conditions are reevaluated every three years in most cases. After the child turns 18, they may be eligible for SSI disability payments but would be evaluated differently. How Can You Build a Financial Plan for Children with Special Needs? Though predicting what care will cost in the future is uncertain at best, parents can open a special needs trust that will allow parents or loved ones to contribute financially to a fund that can be disbursed for costs such as medical expenses, caretakers, or transportation. The important detail about a special needs trust is that the money held there will not affect any public assistance programs that the child may receive. Special needs trusts are overseen by a fiduciary.Combined with programs such as SSI, grant programs, and nutritional and healthcare programs, parents can build a sustainable plan for their child's care. How Do ABLE Accounts Benefit a Special Needs Child? Achieving a Better Life Experience (ABLE) plans, or 529A ABLE accounts, are tax-advantaged savings plans that are similar to 529 college savings plans. Their beneficiaries are special needs children and adults under the age of 26. Money deposited into an ABLE account can be invested, growing tax-free, with distributions covering qualified disability expenses.Any person can contribute to a beneficiary’s ABLE account—be it a parent, grandparent, family friend, etc.—up to $16,000 per year, which is the annual gift tax exemption limit. For the purposes of SSI eligibility, the first $100,000 of an ABLE account balance is excluded as a resource. Going over that amount may lead to a suspension of SSI payments. Can a Child Have Both an ABLE and a Special Needs Trust? Yes, a special needs child can have both an ABLE and a special needs trust. Because there are specific qualifying expenses that may be paid with each type of account, having both accounts open and funded can be beneficial. Because there is no upper limit on a special needs trust, that offers more leeway for parents securing their child's future beyond them, but ABLE plans may cover basic living expenses such as rent, whereas a special needs trust may not. Is "Special Needs" Insensitive? Yes. The National Disability Rights Network says “special needs” is considered condescending and offensive and should be avoided, along with “differently-abled” and “physically challenged.” The National Center on Disability and Journalism also says that “special needs” is offensive, and should only be used with regard to government references or when used as part of the formal name of an organization or program.	[ [ "guardian", "https://www.investopedia.com/terms/g/guardian.asp" ], [ "tax credit", "https://www.investopedia.com/terms/t/taxcredit.asp" ], [ "special needs trust", "https://www.investopedia.com/terms/s/special-needs-trust.asp" ], [ "Achieving a Better Life Experience (ABLE)", "https://www.investopedia.com/terms/a/able-account.asp" ] ]
https://www.investopedia.com/articles/investing/041114/simple-overview-quantitative-analysis.asp	Quantitative Analysis: A Simple 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-quantitative-analysis"></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 Quantitative Analysis? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Quantitative analysis (also known as quant analysis or QA) in finance is an approach that emphasizes mathematical and statistical analysis to help determine the value of a financial asset, such as a stock or option. Quantitative trading analysts (also known as "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/111214/quants-what-they-do-and-how-theyve-evolved.asp">quants</a>") use a variety of data to develop trading algorithms and computer models, including historical investment and stock market data. </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 information generated by these computer models helps investors analyze investment opportunities and develop what they believe will be a successful <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trading-strategy.asp">trading strategy</a>. Typically, this trading strategy will include very specific information about entry and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/understanding-exit-strategies/">exit points</a>, the expected risk of the trade, and the expected return. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The ultimate goal of financial <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quantitativeanalysis.asp">quantitative analysis</a> is to use quantifiable statistics and metrics to assist investors in making profitable investment decisions. In this article, we review the history of quantitative investing, compare it to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualitativeanalysis.asp">qualitative analysis</a>, and provide an example of a quant-based strategy in action. </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>Quantitative analysis emerged from the rise of the computer era, which made it easier than ever before to analyze huge amounts of data in short amounts of time.</li><li>Quantitative trading analysts (quants) identify trading patterns, build models to assess those patterns, and make predictions about the price and direction of securities.</li><li>Once the models are built and the information is gathered, quants use the data to set up automated trades of securities.</li><li>Quantitative analysis is different from qualitative analysis, which looks at non-statistical aspects of a company to make predictions.</li><li>Quantitative analysis can be used to mitigate risk by identifying which investments provide the best level of return relative to an investor's preferred level of risk.</li></ul></div></div></div> <span class="heading-toc" id="toc-origins-of-quant-investing"></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"> Origins of Quant Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Nobel Prize-winning economist <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/harrymarkowitz.asp" rel="noopener noreferrer">Harry Markowitz</a> is generally credited with beginning the quantitative investment movement when he published “Portfolio Selection” in the <em>Journal of Finance</em> in March 1952.<span class="ql-inline-citation" data-cite="1"></span> Markowitz introduced <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/modernportfoliotheory.asp" rel="noopener noreferrer">modern portfolio theory</a> (MPT), which showed investors how to construct a diversified portfolio of assets capable of maximizing returns for various risk levels. Markowitz used math to quantify <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp" rel="noopener noreferrer">diversification</a> and is cited as an early adopter of the concept that mathematical models could be applied to investing. </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"> Robert Merton, a pioneer in modern financial theory, won a Nobel Prize for his research into mathematical methods for pricing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp" rel="noopener noreferrer">derivatives</a>.<span class="ql-inline-citation" data-cite="2"></span> The work of Markowitz and Merton laid the foundation for the quantitative (quant) approach to investing. </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-quantitative-vs-qualitative-analysis"></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"> Quantitative vs. Qualitative Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Unlike traditional <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/qualitative-factors-when-using-fundamental-analysis/">qualitative investment analysts</a>, quants don’t visit companies, meet the management teams, or research the products the firms sell to identify a competitive edge. They often don’t know or care about the qualitative aspects of the companies they invest in or the products or services these companies provide. Instead, they rely purely on math to make investment decisions. </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"> Quants—who frequently have a scientific background and a degree in statistics or math—will use their knowledge of computers and programming languages to build customized trading systems that automate the trading process. The inputs to their programs might range from key financial ratios (such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-earningsratio.asp">price-to-earnings ratio</a>) to more complex calculations, such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dcf.asp">discounted cash flow</a> (DCF) valuations. </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 data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedge-fund-manager.asp">Hedge fund managers</a> embraced the methodology. Advances in computing technology further advanced the field, allowing complex algorithms could be calculated in the blink of an eye and creating automated trading strategies. The field flourished during the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dotcom-bubble.asp">dotcom boom and bust</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Quant strategies stumbled in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp">the Great Recession</a> as they failed to account for the impact <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> had on the market and economy as a whole. However, quant strategies remain in use today and have gained notable attention for their role in <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/high-frequency-trading.asp">high-frequency trading</a> (HFT), which relies on math to make trading decisions. </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"> Quantitative investing is also widely practiced both as a stand-alone discipline and in conjunction with traditional qualitative analysis for both return enhancement and risk mitigation. </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>Quantitative analysts don't look at who manages a company, what its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheet</a> looks like, what products it makes, or any other qualitative factor. They focus entirely on the numbers and choose the investment that, mathematically speaking, offers the best return for the lowest level of risk.</p></div></div></div> <span class="heading-toc" id="toc-data-used-in-quantitative-analysis"></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"> Data Used in Quantitative Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The rise of the computer era made it possible to crunch enormous volumes of data in extraordinarily short periods of time. This has led to increasingly complex <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quantitative-trading.asp">quantitative trading</a> strategies, as traders seek to identify consistent patterns, model those patterns, and use them to predict price movements in securities. </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"> Quants implement their strategies using publicly available data. The identification of patterns enables them to set up automatic triggers to buy or sell securities. </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"> For example, a trading strategy based on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041015/why-trading-volume-important-investors.asp">trading volume patterns</a> may have identified a correlation between trading volume and prices. So if the trading volume on a particular stock rises when the stock’s price hits $25 per share and drops when the price hits $30, a quant might set up an automatic buy at $25.50 and an automatic sell at $29.50. </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"> Similar strategies can be based on earnings, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/06/earningsforecasts.asp">earnings forecasts</a>, earnings surprises, and a host of other factors. In each case, pure quant traders don’t care about the company’s sales prospects, management team, product quality, or any other aspect of its business. They are placing their orders to buy and sell based strictly on the numbers accounted for in the patterns they have identified. </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-risk-reduction"></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"> Risk Reduction </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Quantitative analysis can be used to identify patterns that may lend themselves to profitable security trades, but that isn’t its only value. While making money is a goal every investor can understand, quantitative analysis can also be used to reduce risk. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The pursuit of so-called “risk-adjusted returns” involves comparing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmeasures.asp">risk measures</a> such as alpha, beta, r-squared, standard deviation, and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sharperatio.asp">Sharpe ratio</a> to identify the investment that will deliver the highest level of return for the given level of risk. The idea is that investors should take no more risk than is necessary to achieve their targeted level of return. </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"> So if the data reveals that two investments are likely to generate similar returns, but that one will be significantly more volatile in terms of up and down price swings, quants (and common sense) would recommend the less risky investment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-parity.asp">Risk-parity</a> portfolios are an example of quant-based strategies in action. The basic concept involves making asset allocation decisions <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/understanding-volatility-measurements/">based on market volatility</a>. When volatility declines, the level of risk-taking in the portfolio goes up. When volatility increases, the level of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/091715/how-create-risk-parity-portfolio.asp">risk-taking in the portfolio goes down</a>. </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-example-of-quantitative-analysis"></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 Quantitative Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> To make the example a little more realistic, consider a portfolio that divides its assets between cash and an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp" rel="noopener noreferrer">S&P 500 index fund</a>. Using the Chicago Board Options Exchange Volatility Index (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vix.asp" rel="noopener noreferrer">VIX</a>) as a proxy for stock market volatility, when volatility rises, our hypothetical portfolio would shift its assets toward cash. </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"> When volatility declines, our portfolio would shift assets to the S&P 500 index fund. Models can be significantly more complex than the one we reference here, perhaps including stocks, bonds, commodities, currencies, and other investments, but the concept remains the same. </p> <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-pros-and-cons-of-quant-trading"></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"> Pros and Cons of Quant Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Like any trading strategy, quantitative analysis offers both advantages and disadvantages. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> Advantages </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <li><strong>Unemotional</strong>: In quant trading, the patterns and numbers are all that matter. It is an effective buy-sell discipline, as it can be executed consistently, unhindered by the emotion that is often associated with financial decisions.</li> <li><strong>Cost-effective</strong>: Firms that rely on quant strategies don't need to hire large teams of analysts and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfoliomanager.asp">portfolio managers</a> or travel to assess potential investments. They use computers to analyze the data and execute the trades.</li> </ul> <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"> Disadvantages </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li><strong>Vulnerable to manipulated data</strong>: Quant analysis involves culling through vast amounts of data. Choosing the right data is by no means a guarantee, just as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pattern.asp">trading patterns</a> that appear to suggest certain outcomes may work perfectly until they don’t. Even when a pattern appears to work, validating the patterns can be a challenge.</li> <li><strong>Qualitative factors matter</strong>: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflectionpoint.asp">Inflection points</a>, such as the stock market downturn of 2008-09, can be tough on these strategies, as patterns can change suddenly. Humans can see a scandal or management change as it is developing, while a purely mathematical approach cannot necessarily do so. </li> <li><strong>Widely used</strong>: A strategy becomes less effective as an increasing number of investors attempt to employ it. Patterns that work will become less effective as more and more investors try to profit from them.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-what-is-quant-finance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Quant Finance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quant finance, short for quantitative finance, is using large datasets and mathematical models to analyze patterns in financial markets. It is used by traders to make predictions about how markets will behave, then buy or sell securities based on those predictions.</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-what-is-a-quant"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Quant?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quants or quant traders are traders who use quantitative analysis to analyze financial markets and make trading decisions.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-is-the-difference-between-quantitative-analysis-and-qualitative-analysis"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between Quantitative Analysis and Qualitative Analysis?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Quantitative analysis uses statistical models to make predictions or reach conclusions based solely on things that can be measured. Qualitative analysis makes predictions using subjective, non-numerical data, such as opinions, attitudes, or experiences.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-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"> Many investment strategies use a blend of both quantitative and qualitative strategies. They use quant strategies to identify potential investments and then use qualitative analysis to take their research efforts to the next level in identifying the final investment. </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"> They may also use qualitative insight to select investments and quant data for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskmanagement.asp" rel="noopener noreferrer">risk management</a>. While both quantitative and qualitative investment strategies have their proponents and their critics, the strategies do not need to be mutually exclusive. </p></div>	## What Is Quantitative Analysis? Quantitative analysis (also known as quant analysis or QA) in finance is an approach that emphasizes mathematical and statistical analysis to help determine the value of a financial asset, such as a stock or option. Quantitative trading analysts (also known as "[quants](https://www.investopedia.com/articles/active-trading/111214/quants-what-they-do-and-how-theyve-evolved.asp)") use a variety of data to develop trading algorithms and computer models, including historical investment and stock market data. The information generated by these computer models helps investors analyze investment opportunities and develop what they believe will be a successful [trading strategy](https://www.investopedia.com/terms/t/trading-strategy.asp). Typically, this trading strategy will include very specific information about entry and [exit points](https://www.investopedia.com/investing/understanding-exit-strategies/), the expected risk of the trade, and the expected return. The ultimate goal of financial [quantitative analysis](https://www.investopedia.com/terms/q/quantitativeanalysis.asp) is to use quantifiable statistics and metrics to assist investors in making profitable investment decisions. In this article, we review the history of quantitative investing, compare it to [qualitative analysis](https://www.investopedia.com/terms/q/qualitativeanalysis.asp), and provide an example of a quant-based strategy in action. ### Key Takeaways * Quantitative analysis emerged from the rise of the computer era, which made it easier than ever before to analyze huge amounts of data in short amounts of time. * Quantitative trading analysts (quants) identify trading patterns, build models to assess those patterns, and make predictions about the price and direction of securities. * Once the models are built and the information is gathered, quants use the data to set up automated trades of securities. * Quantitative analysis is different from qualitative analysis, which looks at non-statistical aspects of a company to make predictions. * Quantitative analysis can be used to mitigate risk by identifying which investments provide the best level of return relative to an investor's preferred level of risk. ## Origins of Quant Investing Nobel Prize-winning economist [Harry Markowitz](https://www.investopedia.com/terms/h/harrymarkowitz.asp) is generally credited with beginning the quantitative investment movement when he published “Portfolio Selection” in the Journal of Finance in March 1952. Markowitz introduced [modern portfolio theory](https://www.investopedia.com/terms/m/modernportfoliotheory.asp) (MPT), which showed investors how to construct a diversified portfolio of assets capable of maximizing returns for various risk levels. Markowitz used math to quantify [diversification](https://www.investopedia.com/terms/d/diversification.asp) and is cited as an early adopter of the concept that mathematical models could be applied to investing. Robert Merton, a pioneer in modern financial theory, won a Nobel Prize for his research into mathematical methods for pricing [derivatives](https://www.investopedia.com/terms/d/derivative.asp). The work of Markowitz and Merton laid the foundation for the quantitative (quant) approach to investing. ## Quantitative vs. Qualitative Analysis Unlike traditional [qualitative investment analysts](https://www.investopedia.com/ask/answers/qualitative-factors-when-using-fundamental-analysis/), quants don’t visit companies, meet the management teams, or research the products the firms sell to identify a competitive edge. They often don’t know or care about the qualitative aspects of the companies they invest in or the products or services these companies provide. Instead, they rely purely on math to make investment decisions. Quants—who frequently have a scientific background and a degree in statistics or math—will use their knowledge of computers and programming languages to build customized trading systems that automate the trading process. The inputs to their programs might range from key financial ratios (such as the [price-to-earnings ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp)) to more complex calculations, such as [discounted cash flow](https://www.investopedia.com/terms/d/dcf.asp) (DCF) valuations. [Hedge fund managers](https://www.investopedia.com/terms/h/hedge-fund-manager.asp) embraced the methodology. Advances in computing technology further advanced the field, allowing complex algorithms could be calculated in the blink of an eye and creating automated trading strategies. The field flourished during the [dotcom boom and bust](https://www.investopedia.com/terms/d/dotcom-bubble.asp). Quant strategies stumbled in [the Great Recession](https://www.investopedia.com/terms/g/great-recession.asp) as they failed to account for the impact [mortgage-backed securities](https://www.investopedia.com/terms/m/mbs.asp) had on the market and economy as a whole. However, quant strategies remain in use today and have gained notable attention for their role in [high-frequency trading](https://www.investopedia.com/terms/h/high-frequency-trading.asp) (HFT), which relies on math to make trading decisions. Quantitative investing is also widely practiced both as a stand-alone discipline and in conjunction with traditional qualitative analysis for both return enhancement and risk mitigation. ### Quantitative analysts don't look at who manages a company, what its [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) looks like, what products it makes, or any other qualitative factor. They focus entirely on the numbers and choose the investment that, mathematically speaking, offers the best return for the lowest level of risk. ## Data Used in Quantitative Analysis The rise of the computer era made it possible to crunch enormous volumes of data in extraordinarily short periods of time. This has led to increasingly complex [quantitative trading](https://www.investopedia.com/terms/q/quantitative-trading.asp) strategies, as traders seek to identify consistent patterns, model those patterns, and use them to predict price movements in securities. Quants implement their strategies using publicly available data. The identification of patterns enables them to set up automatic triggers to buy or sell securities. For example, a trading strategy based on [trading volume patterns](https://www.investopedia.com/ask/answers/041015/why-trading-volume-important-investors.asp) may have identified a correlation between trading volume and prices. So if the trading volume on a particular stock rises when the stock’s price hits $25 per share and drops when the price hits $30, a quant might set up an automatic buy at $25.50 and an automatic sell at $29.50. Similar strategies can be based on earnings, [earnings forecasts](https://www.investopedia.com/articles/stocks/06/earningsforecasts.asp), earnings surprises, and a host of other factors. In each case, pure quant traders don’t care about the company’s sales prospects, management team, product quality, or any other aspect of its business. They are placing their orders to buy and sell based strictly on the numbers accounted for in the patterns they have identified. ## Risk Reduction Quantitative analysis can be used to identify patterns that may lend themselves to profitable security trades, but that isn’t its only value. While making money is a goal every investor can understand, quantitative analysis can also be used to reduce risk. The pursuit of so-called “risk-adjusted returns” involves comparing [risk measures](https://www.investopedia.com/terms/r/riskmeasures.asp) such as alpha, beta, r-squared, standard deviation, and the [Sharpe ratio](https://www.investopedia.com/terms/s/sharperatio.asp) to identify the investment that will deliver the highest level of return for the given level of risk. The idea is that investors should take no more risk than is necessary to achieve their targeted level of return. So if the data reveals that two investments are likely to generate similar returns, but that one will be significantly more volatile in terms of up and down price swings, quants (and common sense) would recommend the less risky investment. [Risk-parity](https://www.investopedia.com/terms/r/risk-parity.asp) portfolios are an example of quant-based strategies in action. The basic concept involves making asset allocation decisions [based on market volatility](https://www.investopedia.com/investing/understanding-volatility-measurements/). When volatility declines, the level of risk-taking in the portfolio goes up. When volatility increases, the level of [risk-taking in the portfolio goes down](https://www.investopedia.com/articles/active-trading/091715/how-create-risk-parity-portfolio.asp). ## Example of Quantitative Analysis To make the example a little more realistic, consider a portfolio that divides its assets between cash and an [S&P 500 index fund](https://www.investopedia.com/terms/i/indexfund.asp). Using the Chicago Board Options Exchange Volatility Index ([VIX](https://www.investopedia.com/terms/v/vix.asp)) as a proxy for stock market volatility, when volatility rises, our hypothetical portfolio would shift its assets toward cash. When volatility declines, our portfolio would shift assets to the S&P 500 index fund. Models can be significantly more complex than the one we reference here, perhaps including stocks, bonds, commodities, currencies, and other investments, but the concept remains the same. ## Pros and Cons of Quant Trading Like any trading strategy, quantitative analysis offers both advantages and disadvantages. ### Advantages * Unemotional: In quant trading, the patterns and numbers are all that matter. It is an effective buy-sell discipline, as it can be executed consistently, unhindered by the emotion that is often associated with financial decisions. * Cost-effective: Firms that rely on quant strategies don't need to hire large teams of analysts and [portfolio managers](https://www.investopedia.com/terms/p/portfoliomanager.asp) or travel to assess potential investments. They use computers to analyze the data and execute the trades. ### Disadvantages * Vulnerable to manipulated data: Quant analysis involves culling through vast amounts of data. Choosing the right data is by no means a guarantee, just as [trading patterns](https://www.investopedia.com/terms/p/pattern.asp) that appear to suggest certain outcomes may work perfectly until they don’t. Even when a pattern appears to work, validating the patterns can be a challenge. * Qualitative factors matter: [Inflection points](https://www.investopedia.com/terms/i/inflectionpoint.asp), such as the stock market downturn of 2008-09, can be tough on these strategies, as patterns can change suddenly. Humans can see a scandal or management change as it is developing, while a purely mathematical approach cannot necessarily do so. * Widely used: A strategy becomes less effective as an increasing number of investors attempt to employ it. Patterns that work will become less effective as more and more investors try to profit from them. ## What Is Quant Finance? Quant finance, short for quantitative finance, is using large datasets and mathematical models to analyze patterns in financial markets. It is used by traders to make predictions about how markets will behave, then buy or sell securities based on those predictions. ## What Is a Quant? Quants or quant traders are traders who use quantitative analysis to analyze financial markets and make trading decisions. ## What Is the Difference Between Quantitative Analysis and Qualitative Analysis? Quantitative analysis uses statistical models to make predictions or reach conclusions based solely on things that can be measured. Qualitative analysis makes predictions using subjective, non-numerical data, such as opinions, attitudes, or experiences. ## The Bottom Line Many investment strategies use a blend of both quantitative and qualitative strategies. They use quant strategies to identify potential investments and then use qualitative analysis to take their research efforts to the next level in identifying the final investment. They may also use qualitative insight to select investments and quant data for [risk management](https://www.investopedia.com/terms/r/riskmanagement.asp). While both quantitative and qualitative investment strategies have their proponents and their critics, the strategies do not need to be mutually exclusive.	What Is Quantitative Analysis? Quantitative analysis (also known as quant analysis or QA) in finance is an approach that emphasizes mathematical and statistical analysis to help determine the value of a financial asset, such as a stock or option. Quantitative trading analysts (also known as "quants") use a variety of data to develop trading algorithms and computer models, including historical investment and stock market data. The information generated by these computer models helps investors analyze investment opportunities and develop what they believe will be a successful trading strategy. Typically, this trading strategy will include very specific information about entry and exit points, the expected risk of the trade, and the expected return. The ultimate goal of financial quantitative analysis is to use quantifiable statistics and metrics to assist investors in making profitable investment decisions. In this article, we review the history of quantitative investing, compare it to qualitative analysis, and provide an example of a quant-based strategy in action. Key Takeaways Quantitative analysis emerged from the rise of the computer era, which made it easier than ever before to analyze huge amounts of data in short amounts of time.Quantitative trading analysts (quants) identify trading patterns, build models to assess those patterns, and make predictions about the price and direction of securities.Once the models are built and the information is gathered, quants use the data to set up automated trades of securities.Quantitative analysis is different from qualitative analysis, which looks at non-statistical aspects of a company to make predictions.Quantitative analysis can be used to mitigate risk by identifying which investments provide the best level of return relative to an investor's preferred level of risk. Origins of Quant Investing Nobel Prize-winning economist Harry Markowitz is generally credited with beginning the quantitative investment movement when he published “Portfolio Selection” in the Journal of Finance in March 1952. Markowitz introduced modern portfolio theory (MPT), which showed investors how to construct a diversified portfolio of assets capable of maximizing returns for various risk levels. Markowitz used math to quantify diversification and is cited as an early adopter of the concept that mathematical models could be applied to investing. Robert Merton, a pioneer in modern financial theory, won a Nobel Prize for his research into mathematical methods for pricing derivatives. The work of Markowitz and Merton laid the foundation for the quantitative (quant) approach to investing. Quantitative vs. Qualitative Analysis Unlike traditional qualitative investment analysts, quants don’t visit companies, meet the management teams, or research the products the firms sell to identify a competitive edge. They often don’t know or care about the qualitative aspects of the companies they invest in or the products or services these companies provide. Instead, they rely purely on math to make investment decisions. Quants—who frequently have a scientific background and a degree in statistics or math—will use their knowledge of computers and programming languages to build customized trading systems that automate the trading process. The inputs to their programs might range from key financial ratios (such as the price-to-earnings ratio) to more complex calculations, such as discounted cash flow (DCF) valuations. Hedge fund managers embraced the methodology. Advances in computing technology further advanced the field, allowing complex algorithms could be calculated in the blink of an eye and creating automated trading strategies. The field flourished during the dotcom boom and bust. Quant strategies stumbled in the Great Recession as they failed to account for the impact mortgage-backed securities had on the market and economy as a whole. However, quant strategies remain in use today and have gained notable attention for their role in high-frequency trading (HFT), which relies on math to make trading decisions. Quantitative investing is also widely practiced both as a stand-alone discipline and in conjunction with traditional qualitative analysis for both return enhancement and risk mitigation. Quantitative analysts don't look at who manages a company, what its balance sheet looks like, what products it makes, or any other qualitative factor. They focus entirely on the numbers and choose the investment that, mathematically speaking, offers the best return for the lowest level of risk. Data Used in Quantitative Analysis The rise of the computer era made it possible to crunch enormous volumes of data in extraordinarily short periods of time. This has led to increasingly complex quantitative trading strategies, as traders seek to identify consistent patterns, model those patterns, and use them to predict price movements in securities. Quants implement their strategies using publicly available data. The identification of patterns enables them to set up automatic triggers to buy or sell securities. For example, a trading strategy based on trading volume patterns may have identified a correlation between trading volume and prices. So if the trading volume on a particular stock rises when the stock’s price hits $25 per share and drops when the price hits $30, a quant might set up an automatic buy at $25.50 and an automatic sell at $29.50. Similar strategies can be based on earnings, earnings forecasts, earnings surprises, and a host of other factors. In each case, pure quant traders don’t care about the company’s sales prospects, management team, product quality, or any other aspect of its business. They are placing their orders to buy and sell based strictly on the numbers accounted for in the patterns they have identified. Risk Reduction Quantitative analysis can be used to identify patterns that may lend themselves to profitable security trades, but that isn’t its only value. While making money is a goal every investor can understand, quantitative analysis can also be used to reduce risk. The pursuit of so-called “risk-adjusted returns” involves comparing risk measures such as alpha, beta, r-squared, standard deviation, and the Sharpe ratio to identify the investment that will deliver the highest level of return for the given level of risk. The idea is that investors should take no more risk than is necessary to achieve their targeted level of return. So if the data reveals that two investments are likely to generate similar returns, but that one will be significantly more volatile in terms of up and down price swings, quants (and common sense) would recommend the less risky investment. Risk-parity portfolios are an example of quant-based strategies in action. The basic concept involves making asset allocation decisions based on market volatility. When volatility declines, the level of risk-taking in the portfolio goes up. When volatility increases, the level of risk-taking in the portfolio goes down. Example of Quantitative Analysis To make the example a little more realistic, consider a portfolio that divides its assets between cash and an S&P 500 index fund. Using the Chicago Board Options Exchange Volatility Index (VIX) as a proxy for stock market volatility, when volatility rises, our hypothetical portfolio would shift its assets toward cash. When volatility declines, our portfolio would shift assets to the S&P 500 index fund. Models can be significantly more complex than the one we reference here, perhaps including stocks, bonds, commodities, currencies, and other investments, but the concept remains the same. Pros and Cons of Quant Trading Like any trading strategy, quantitative analysis offers both advantages and disadvantages. Advantages Unemotional: In quant trading, the patterns and numbers are all that matter. It is an effective buy-sell discipline, as it can be executed consistently, unhindered by the emotion that is often associated with financial decisions. Cost-effective: Firms that rely on quant strategies don't need to hire large teams of analysts and portfolio managers or travel to assess potential investments. They use computers to analyze the data and execute the trades. Disadvantages Vulnerable to manipulated data: Quant analysis involves culling through vast amounts of data. Choosing the right data is by no means a guarantee, just as trading patterns that appear to suggest certain outcomes may work perfectly until they don’t. Even when a pattern appears to work, validating the patterns can be a challenge. Qualitative factors matter: Inflection points, such as the stock market downturn of 2008-09, can be tough on these strategies, as patterns can change suddenly. Humans can see a scandal or management change as it is developing, while a purely mathematical approach cannot necessarily do so. Widely used: A strategy becomes less effective as an increasing number of investors attempt to employ it. Patterns that work will become less effective as more and more investors try to profit from them. What Is Quant Finance? Quant finance, short for quantitative finance, is using large datasets and mathematical models to analyze patterns in financial markets. It is used by traders to make predictions about how markets will behave, then buy or sell securities based on those predictions. What Is a Quant? Quants or quant traders are traders who use quantitative analysis to analyze financial markets and make trading decisions. What Is the Difference Between Quantitative Analysis and Qualitative Analysis? Quantitative analysis uses statistical models to make predictions or reach conclusions based solely on things that can be measured. Qualitative analysis makes predictions using subjective, non-numerical data, such as opinions, attitudes, or experiences. The Bottom Line Many investment strategies use a blend of both quantitative and qualitative strategies. They use quant strategies to identify potential investments and then use qualitative analysis to take their research efforts to the next level in identifying the final investment. They may also use qualitative insight to select investments and quant data for risk management. While both quantitative and qualitative investment strategies have their proponents and their critics, the strategies do not need to be mutually exclusive.	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https://www.investopedia.com/personal-finance/want-credit-card-fees-waived-just-ask/	Requests to Waive Credit Card Fees or Negotiate Better Terms Often Successful	<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"> Is there a way to get credit card fees waived? Who wouldn’t want that? Thankfully, relief from excessive fees may be just a phone call away—that is, if you have the nerve to ask, according to a survey from CreditCards.com.<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>Credit card holders who ask for a reduction in fees, a lower interest rate, or a higher credit limit are often successful.</li><li>Many cardholders simply don’t know that they can ask.</li><li>Your odds of success improve if you keep the balances on your credit cards at a safe level.</li></ul></div></div></div> <span class="heading-toc" id="toc-getting-credit-card-fees-waived"></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"> Getting Credit Card Fees Waived </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> CreditCards.com polled 1,589 American cardholders to determine how difficult it is to negotiate better credit card terms. Specifically, the survey was focused on four actions: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <li>Waiving or reducing an annual fee</li><li>Reversing a late fee</li><li>Reducing interest rates</li><li>Increasing credit limits</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"> The survey, published in April 2018, found that up to 85% of cardholders who made one or more of those requests were successful in getting what they wanted. That’s encouraging, but the survey also found that consumers tended to be reluctant to try. Only 60% acknowledged making one of the requests. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For those who do take the initiative and try to wrangle better credit card terms, the response is largely positive. Among those who asked for a late-payment fee to be waived, 84% were successful. What’s more, 56% were able to negotiate a lower interest rate, and 85% talked their way into a higher credit limit. </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"> Even more interesting is that 70% of those who asked for their annual fee to be waived or lowered were able to get the credit card company to comply. Of course, there are many cards out there that don’t have an annual fee to begin with. In a 2019 U.S. News & World Report study, 68% of cards didn’t charge an annual fee; of those that did, the average was close to $110.<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 challenge is getting up the nerve to reach out to your credit card company and ask for a better deal on the annual fee. According to the CreditCards.com survey, just 18% of credit card users had ever asked for a reduction of their annual fee. They were more than twice as likely to ask for a credit limit increase or the waiver of a late fee. </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-negotiating-more-favorable-credit-terms"></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"> Negotiating More Favorable Credit Terms </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> While every credit card company makes decisions on a case-by-case basis, the CreditCards.com survey offers insight into factors that could affect your chances of getting a “yes” when you make a request. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The survey found that men were more likely than women to ask for better terms and more successful when they did ask (91%, compared to 86% for women). Millennials and Gen Xers were less likely to ask for credit breaks and less likely to get them, in many cases because they didn’t know such a request was even possible; 33% of millennials who said they had never asked for an interest rate reduction said they didn’t know that they could. Overall, 40% of those polled said they didn’t know that they could ask for a fee waiver, and about a third believed that they wouldn’t be successful if they did. </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"> Your income, education, and credit card management also may come into play. The survey found that cardholders who earn more, have more education, spend more, and keep their credit card balance at a safe level are more likely to be approved for a higher credit limit or lower interest rate. </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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> If the fees and interest on your credit cards are taking too big a bite out of your budget, then it may be worth your time to reach out to your credit card company. After all, the worst that could happen is that it will say no. If you’re willing to ask and the answer is yes, then you could enjoy some significant savings. You also might consider applying for a credit card with better terms. </p></div>	Is there a way to get credit card fees waived? Who wouldn’t want that? Thankfully, relief from excessive fees may be just a phone call away—that is, if you have the nerve to ask, according to a survey from CreditCards.com. ### Key Takeaways * Credit card holders who ask for a reduction in fees, a lower interest rate, or a higher credit limit are often successful. * Many cardholders simply don’t know that they can ask. * Your odds of success improve if you keep the balances on your credit cards at a safe level. ## Getting Credit Card Fees Waived CreditCards.com polled 1,589 American cardholders to determine how difficult it is to negotiate better credit card terms. Specifically, the survey was focused on four actions: * Waiving or reducing an annual fee * Reversing a late fee * Reducing interest rates * Increasing credit limits The survey, published in April 2018, found that up to 85% of cardholders who made one or more of those requests were successful in getting what they wanted. That’s encouraging, but the survey also found that consumers tended to be reluctant to try. Only 60% acknowledged making one of the requests. For those who do take the initiative and try to wrangle better credit card terms, the response is largely positive. Among those who asked for a late-payment fee to be waived, 84% were successful. What’s more, 56% were able to negotiate a lower interest rate, and 85% talked their way into a higher credit limit. Even more interesting is that 70% of those who asked for their annual fee to be waived or lowered were able to get the credit card company to comply. Of course, there are many cards out there that don’t have an annual fee to begin with. In a 2019 U.S. News & World Report study, 68% of cards didn’t charge an annual fee; of those that did, the average was close to $110. The challenge is getting up the nerve to reach out to your credit card company and ask for a better deal on the annual fee. According to the CreditCards.com survey, just 18% of credit card users had ever asked for a reduction of their annual fee. They were more than twice as likely to ask for a credit limit increase or the waiver of a late fee. ## Negotiating More Favorable Credit Terms While every credit card company makes decisions on a case-by-case basis, the CreditCards.com survey offers insight into factors that could affect your chances of getting a “yes” when you make a request. The survey found that men were more likely than women to ask for better terms and more successful when they did ask (91%, compared to 86% for women). Millennials and Gen Xers were less likely to ask for credit breaks and less likely to get them, in many cases because they didn’t know such a request was even possible; 33% of millennials who said they had never asked for an interest rate reduction said they didn’t know that they could. Overall, 40% of those polled said they didn’t know that they could ask for a fee waiver, and about a third believed that they wouldn’t be successful if they did. Your income, education, and credit card management also may come into play. The survey found that cardholders who earn more, have more education, spend more, and keep their credit card balance at a safe level are more likely to be approved for a higher credit limit or lower interest rate. ## The Bottom Line If the fees and interest on your credit cards are taking too big a bite out of your budget, then it may be worth your time to reach out to your credit card company. After all, the worst that could happen is that it will say no. If you’re willing to ask and the answer is yes, then you could enjoy some significant savings. You also might consider applying for a credit card with better terms.	Is there a way to get credit card fees waived? Who wouldn’t want that? Thankfully, relief from excessive fees may be just a phone call away—that is, if you have the nerve to ask, according to a survey from CreditCards.com. Key Takeaways Credit card holders who ask for a reduction in fees, a lower interest rate, or a higher credit limit are often successful.Many cardholders simply don’t know that they can ask.Your odds of success improve if you keep the balances on your credit cards at a safe level. Getting Credit Card Fees Waived CreditCards.com polled 1,589 American cardholders to determine how difficult it is to negotiate better credit card terms. Specifically, the survey was focused on four actions: Waiving or reducing an annual feeReversing a late feeReducing interest ratesIncreasing credit limits The survey, published in April 2018, found that up to 85% of cardholders who made one or more of those requests were successful in getting what they wanted. That’s encouraging, but the survey also found that consumers tended to be reluctant to try. Only 60% acknowledged making one of the requests. For those who do take the initiative and try to wrangle better credit card terms, the response is largely positive. Among those who asked for a late-payment fee to be waived, 84% were successful. What’s more, 56% were able to negotiate a lower interest rate, and 85% talked their way into a higher credit limit. Even more interesting is that 70% of those who asked for their annual fee to be waived or lowered were able to get the credit card company to comply. Of course, there are many cards out there that don’t have an annual fee to begin with. In a 2019 U.S. News & World Report study, 68% of cards didn’t charge an annual fee; of those that did, the average was close to $110. The challenge is getting up the nerve to reach out to your credit card company and ask for a better deal on the annual fee. According to the CreditCards.com survey, just 18% of credit card users had ever asked for a reduction of their annual fee. They were more than twice as likely to ask for a credit limit increase or the waiver of a late fee. Negotiating More Favorable Credit Terms While every credit card company makes decisions on a case-by-case basis, the CreditCards.com survey offers insight into factors that could affect your chances of getting a “yes” when you make a request. The survey found that men were more likely than women to ask for better terms and more successful when they did ask (91%, compared to 86% for women). Millennials and Gen Xers were less likely to ask for credit breaks and less likely to get them, in many cases because they didn’t know such a request was even possible; 33% of millennials who said they had never asked for an interest rate reduction said they didn’t know that they could. Overall, 40% of those polled said they didn’t know that they could ask for a fee waiver, and about a third believed that they wouldn’t be successful if they did. Your income, education, and credit card management also may come into play. The survey found that cardholders who earn more, have more education, spend more, and keep their credit card balance at a safe level are more likely to be approved for a higher credit limit or lower interest rate. The Bottom Line If the fees and interest on your credit cards are taking too big a bite out of your budget, then it may be worth your time to reach out to your credit card company. After all, the worst that could happen is that it will say no. If you’re willing to ask and the answer is yes, then you could enjoy some significant savings. You also might consider applying for a credit card with better terms.	[]
https://www.investopedia.com/gold-price-on-may-15-rate-rises-as-consumer-inflation-cools-8648899	Gold Price on May 15: Rate Rises as Consumer Inflation Cools	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The spot price of gold rose Wednesday as a report showed consumer inflation cooled in April. </li><li>The inflation news boosted hopes the Fed can cut interest rates, making gold more attractive to investors.</li><li>April retail sales came in below expectations, reinforcing speculation the economy could be slowing enough to give the Fed room to lower borrowing costs.</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 spot price of gold was up 1.3% to $2,387.97 per ounce as of 4:30 p.m. ET Wednesday, after a report showed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-ticked-downward-in-april-2024-8648737">consumer inflation slowed in April</a>, lifting hopes the Federal Reserve may cut interest rates, which would be bullish for gold. </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 Labor Department reported April's <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> was up 0.3% from the month before, down from the 0.4% gains in both February and March. The year-over-year increase of 3.4% eased from 3.5% in March. </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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coreinflation.asp">core</a> rate of inflation, which leaves out volatile food and energy prices, came in at an annual rise of 3.6%, the lowest since April 2021.<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> <span class="heading-toc" id="toc-april-retail-sales-below-expectations"></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"> April Retail Sales Below Expectations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A report from the Commerce Department on Wednesday showed retail sales were <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/april-2024-retail-sales-soft-consumers-reaching-limit-8648861">virtually unchanged</a> in April from the month before, suggesting consumers may be pulling back. Economists had been anticipating a gain of 0.4% after a 0.6% jump in March. Excluding autos and gas, sales declined 0.1% versus the predicted 0.1% advance.<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"> Sales at non-store retailers, which include online purchases, posted the biggest drop of any category at 1.2% versus March. </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-rising-expectations-of-september-rate-cut"></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"> Rising Expectations of September Rate Cut </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The economic news led to a shift in expectations of the probability of policymakers reducing interest rates in September, according to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cme-fedwatch-tool-7559817">CME's FedWatch Tool</a> based on fed funds futures pricing data. Markets are now pricing in a 75% chance of a rate cut in September, an increase of 10 percentage points from Tuesday.<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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:71.3%;"> <img alt="XAUUSD" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/PcBpf7ZzycNbQYy2g4wHJUCFmrk=/1404x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/A5tbb0DO37vbUFtk0V5hkD_c6lQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png" data-srcset="https://www.investopedia.com/thmb/R9pOq9wujPlpLCLwc88RKQjwKLU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png 750w" data-tracking-container="true" height="1002" id="mntl-sc-block-image_1-0" width="1404"/> <noscript> <img alt="XAUUSD" class="img--noscript universal-image__image" height="1002" sizes="750px" src="https://www.investopedia.com/thmb/A5tbb0DO37vbUFtk0V5hkD_c6lQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png" srcset="https://www.investopedia.com/thmb/R9pOq9wujPlpLCLwc88RKQjwKLU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png 750w" width="1404"/> </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 * The spot price of gold rose Wednesday as a report showed consumer inflation cooled in April. * The inflation news boosted hopes the Fed can cut interest rates, making gold more attractive to investors. * April retail sales came in below expectations, reinforcing speculation the economy could be slowing enough to give the Fed room to lower borrowing costs. The spot price of gold was up 1.3% to $2,387.97 per ounce as of 4:30 p.m. ET Wednesday, after a report showed [consumer inflation slowed in April](https://www.investopedia.com/inflation-ticked-downward-in-april-2024-8648737), lifting hopes the Federal Reserve may cut interest rates, which would be bullish for gold. The Labor Department reported April's [Consumer Price Index (CPI)](https://www.investopedia.com/terms/c/consumerpriceindex.asp) was up 0.3% from the month before, down from the 0.4% gains in both February and March. The year-over-year increase of 3.4% eased from 3.5% in March. The [core](https://www.investopedia.com/terms/c/coreinflation.asp) rate of inflation, which leaves out volatile food and energy prices, came in at an annual rise of 3.6%, the lowest since April 2021. ## April Retail Sales Below Expectations A report from the Commerce Department on Wednesday showed retail sales were [virtually unchanged](https://www.investopedia.com/april-2024-retail-sales-soft-consumers-reaching-limit-8648861) in April from the month before, suggesting consumers may be pulling back. Economists had been anticipating a gain of 0.4% after a 0.6% jump in March. Excluding autos and gas, sales declined 0.1% versus the predicted 0.1% advance. Sales at non-store retailers, which include online purchases, posted the biggest drop of any category at 1.2% versus March. ## Rising Expectations of September Rate Cut The economic news led to a shift in expectations of the probability of policymakers reducing interest rates in September, according to the [CME's FedWatch Tool](https://www.investopedia.com/cme-fedwatch-tool-7559817) based on fed funds futures pricing data. Markets are now pricing in a 75% chance of a rate cut in September, an increase of 10 percentage points from Tuesday. ![XAUUSD]() ![XAUUSD](https://www.investopedia.com/thmb/A5tbb0DO37vbUFtk0V5hkD_c6lQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/XAUUSD_2024-05-15_16-35-45-1416c2c069b74f21819fbcfac9b29b16.png) TradingView Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways The spot price of gold rose Wednesday as a report showed consumer inflation cooled in April. The inflation news boosted hopes the Fed can cut interest rates, making gold more attractive to investors.April retail sales came in below expectations, reinforcing speculation the economy could be slowing enough to give the Fed room to lower borrowing costs. The spot price of gold was up 1.3% to $2,387.97 per ounce as of 4:30 p.m. ET Wednesday, after a report showed consumer inflation slowed in April, lifting hopes the Federal Reserve may cut interest rates, which would be bullish for gold. The Labor Department reported April's Consumer Price Index (CPI) was up 0.3% from the month before, down from the 0.4% gains in both February and March. The year-over-year increase of 3.4% eased from 3.5% in March. The core rate of inflation, which leaves out volatile food and energy prices, came in at an annual rise of 3.6%, the lowest since April 2021. April Retail Sales Below Expectations A report from the Commerce Department on Wednesday showed retail sales were virtually unchanged in April from the month before, suggesting consumers may be pulling back. Economists had been anticipating a gain of 0.4% after a 0.6% jump in March. Excluding autos and gas, sales declined 0.1% versus the predicted 0.1% advance. Sales at non-store retailers, which include online purchases, posted the biggest drop of any category at 1.2% versus March. Rising Expectations of September Rate Cut The economic news led to a shift in expectations of the probability of policymakers reducing interest rates in September, according to the CME's FedWatch Tool based on fed funds futures pricing data. Markets are now pricing in a 75% chance of a rate cut in September, an increase of 10 percentage points from Tuesday. TradingView Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "consumer inflation slowed in April", "https://www.investopedia.com/inflation-ticked-downward-in-april-2024-8648737" ], [ "Consumer Price Index (CPI)", "https://www.investopedia.com/terms/c/consumerpriceindex.asp" ], [ "core", "https://www.investopedia.com/terms/c/coreinflation.asp" ], [ "virtually unchanged", "https://www.investopedia.com/april-2024-retail-sales-soft-consumers-reaching-limit-8648861" ], [ "CME's FedWatch Tool", "https://www.investopedia.com/cme-fedwatch-tool-7559817" ], [ "XAUUSD", "https://www.investopedia.com/thmb/A5tbb0DO37vbUFtk0V5hkD_c6lQ=/1500x0/filters:no_upscale(" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp	What Is a Graphics Processing Unit (GPU)? Definition and Examples	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-a-graphics-processing-unit-gpu"></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 Graphics Processing Unit (GPU)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A Graphics Processing Unit (GPU) is a chip or electronic circuit capable of rendering graphics for display on an electronic device. The GPU was introduced to the wider market in 1999 and is best known for its use in providing the smooth graphics that consumers expect in modern videos and games. </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 term graphics processing unit (GPU) refers to a chip or electronic circuit capable of rendering graphics for display on an electronic device.</li><li>The term “GPU” is often used interchangeably with “graphics card,” though the two are different.</li><li>Although GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of cryptocurrencies has created a new market for them.</li><li>GPUs, first introduced to the wider market in 1999, are perhaps best known for their use in providing the smooth graphics that consumers expect in modern videos and video games.</li><li>There has been a shortage of GPUs recently thanks to their application in the mining of cryptocurrencies. </li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-graphics-processing-unit-gpu-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How a Graphics Processing Unit (GPU) Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The graphics in videos and g<span class="ql-inline-citation" data-cite="8"></span>s consist of polygonal coordinates that are converted into bitmap<span class="ql-inline-citation" data-cite="1"></span>s—a process<span class="ql-inline-citation" data-cite="1"></span> called “rendering”—and then into signals that are shown on a screen. This conversion requires the Graphics Processing Unit (GPU) to have a lot of processing power, which also makes GPUs useful in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/machine-learning.asp">machine learning</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/alternative-investments-4427781">artificial intelligence</a>, and other tasks that require a large number of complex and sophisticated computation<span class="ql-inline-citation" data-cite="1"></span>s. </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-history-of-the-graphics-processing-unit-gpu"></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 the Graphics Processing Unit (GPU) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In 1999, Nvidia introduced the Geforce 256, the first widely available GPU. Nvidia defined a GPU as a "single-chip processor with integrated transform, lighting, triangle setup/clipping, and rendering engines that is capable of processing a minimum of 10 million polygons per second.” The GeForce 256 improved on the technology by other processors by optimizing 3D gaming performance. </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 Nvidia still <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/5-companies-owned-by-nvda-5092734">reigns supreme in the GPU market</a>, the technology has greatly improved. In the 2000s Nvidia released its GeForce 8800 GTX which has a texture-fill rate of a whopping 36.8 billion per second.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Today, GPUs have seen a resurgence in popularity. Their use has been extended into new industries thanks to the advent of artificial intelligence and cryptocurrencies. GPUs have also played a role in establishing wider access to higher-quality virtual reality gaming. </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-gpus-vs-cpus"></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"> GPUs vs CPUs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Before the arrival of GPUs in the late 1990s, graphic rendering was handled by the Central Processing Unit (CPU). When used in conjunction with a CPU, a GPU can increase computer performance by taking on some computationally intensive functions, such as rendering, from the CPU. This accelerates how quickly applications can process since the GPU can perform many calculations simultaneously. This shift also allowed for the development of more advanced and resource-intensive software. </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"> Processing data in a GPU or a CPU is handled by cores. The more cores a processing unit has, the faster (and potentially more efficiently) a computer can complete tasks. GPUs use thousands of cores to process tasks in parallel. The parallel structure of the GPU is different than that of the CPU, which uses fewer cores to process tasks sequentially. A CPU can perform calculations faster than a GPU, which makes it better at basic tasks. </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-special-considerations"></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"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The term “GPU” is often used interchangeably with “graphics card,” though the two are different. A graphics card is a piece of hardware that contains one or more GPUs, a daughterboard, and other electronic components that allow the graphics card to function. </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"> A GPU can, however, be integrated into the motherboard or be found in the daughterboard of a graphics card. Initially, high-end computers were the only ones to feature graphics cards. Today, most desktop computers typically use a separate graphics card with a GPU for increased performance, rather than rely on a GPU built into a motherboard. </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-gpus-and-cryptocurrency-mining"></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"> GPUs and Cryptocurrency Mining </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> While GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a> created a new market. This is because <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/gpu-cryptocurrency-mining/">cryptocurrency mining</a> requires thousands of calculations in order to add transactions to a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>, which is something that could be profitable with access to a GPU and an inexpensive supply of electricity. </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 recent years, two prominent graphics card manufacturers, Nvidia Corp. (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=nvda">NVDA</a>) and Advanced Micro Devices Inc. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=amd">AMD</a>) have experienced a rapid increase in sales and revenue as a result of cryptocurrency mining. </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"> This had the side effect of frustrating non-mining customers, who saw prices increase and supply dry up. As a result, retailers occasionally limited the number of graphics cards that an individual could purchase. While miners of the more popular cryptocurrencies, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">bitcoin,</a> have shifted to using specialized and more cost-effective chipsets called application-specific integrated circuits (ASICs), Graphics Processing Units are still used to mine lesser-known currencies. </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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The rise in the popularity of cryptocurrencies has caused a massive shortage of GPUs. Reporting from the Verge calculated that GPUs are being sold for two to three times their street price on sites like eBay.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <span class="heading-toc" id="toc-examples-of-gpu-companies"></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"> Examples of GPU Companies </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Advanced Micro Devices (AMD) and Nvidia (NVDA) are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/amd-versus-nvdia-amd-nvda/">two of the biggest names in the GPU market</a>. Let's take a look at both companies below. </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"> Advanced Micro Devices (AMD) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-amd-makes-money-5116826">AMD</a> is one of the most trusted producers of graphic cards. The manufacturer began as a startup in Silicon Valley in 1969 and develops high-performance computing and visualization products.<span class="ql-inline-citation" data-cite="1"></span> AMD entered the GPU market in 2006 when it acquired leading video card maker ATI. Since then, AMD and Nvidia have been the dominant players in the GPU market. As of May 2021, AMD has a market cap of $97.3 billion. AMD has shipped over 500 million GPUs since 2013 and controls 17% of the GPU market share.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> AMD places its focus in the GPU market on PC gaming and is a favorite among gamers worldwide. </p> <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"> Nvidia (NVDA) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-nvidia-makes-money-4799532">Nvidia</a> was the very first company to bring GPUs into the world in 1999. The first GPU in history was known as the Geforce 256. 1999 was also the year Nvidia launched its <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> (IPO) at $12 per share.<span class="ql-inline-citation" data-cite="3"></span> As of May 2021, the stock is trading around $645 per share. </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"> Nvidia has a market cap of $404.8 billion and controls 13% of the GPU market share.<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_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Nvidia has considerable reach in the advanced GPU market. According to Nvidia's website "eight of the world’s top 10 supercomputers now use NVIDIA GPUs, InfiniBand networking, or both. NVIDIA powers 346 of the overall TOP500 systems on the latest list." </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"> Nvidia's own supercomputer, named Selene, is ranked fifth in the world and is the world's fastest industrial supercomputer.<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-graphics-processing-unit-gpu-faqs"></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"> Graphics Processing Unit (GPU) FAQs </span> </h2> <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"> What Is the Difference Between GPU and VGA? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> Whereas GPU is a chip or electronic circuit capable used to render graphics for display on an electronic device, a VGA or video graphics array connector is a physical device used to transfer video signals and computer video output. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> How Do You Overclock Your GPU? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Before overclocking make sure you thoroughly clean your device and install any updates and bug fixes to your software. Thanks to updates in technology, overclocking is fairly simple. Simply install software such as Afterburner and let the system go to work. After the installation is complete, run a gaming benchmark to test out the new software. </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"> What Is GPU Scaling? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> GPU scaling is a feature that enables users to adjust the aspect ratio of a game based on their monitor’s resolution. Some users believe this adjusting the aspect ratio will further <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/ppi-pixels-inch.asp">enhance the image quality</a> of the display. </p></div>	## What Is a Graphics Processing Unit (GPU)? A Graphics Processing Unit (GPU) is a chip or electronic circuit capable of rendering graphics for display on an electronic device. The GPU was introduced to the wider market in 1999 and is best known for its use in providing the smooth graphics that consumers expect in modern videos and games. ### Key Takeaways * The term graphics processing unit (GPU) refers to a chip or electronic circuit capable of rendering graphics for display on an electronic device. * The term “GPU” is often used interchangeably with “graphics card,” though the two are different. * Although GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of cryptocurrencies has created a new market for them. * GPUs, first introduced to the wider market in 1999, are perhaps best known for their use in providing the smooth graphics that consumers expect in modern videos and video games. * There has been a shortage of GPUs recently thanks to their application in the mining of cryptocurrencies. ## How a Graphics Processing Unit (GPU) Works The graphics in videos and gs consist of polygonal coordinates that are converted into bitmaps—a process called “rendering”—and then into signals that are shown on a screen. This conversion requires the Graphics Processing Unit (GPU) to have a lot of processing power, which also makes GPUs useful in [machine learning](https://www.investopedia.com/terms/m/machine-learning.asp), [artificial intelligence](https://www.investopedia.com/alternative-investments-4427781), and other tasks that require a large number of complex and sophisticated computations. ## History of the Graphics Processing Unit (GPU) In 1999, Nvidia introduced the Geforce 256, the first widely available GPU. Nvidia defined a GPU as a "single-chip processor with integrated transform, lighting, triangle setup/clipping, and rendering engines that is capable of processing a minimum of 10 million polygons per second.” The GeForce 256 improved on the technology by other processors by optimizing 3D gaming performance. While Nvidia still [reigns supreme in the GPU market](https://www.investopedia.com/5-companies-owned-by-nvda-5092734), the technology has greatly improved. In the 2000s Nvidia released its GeForce 8800 GTX which has a texture-fill rate of a whopping 36.8 billion per second. Today, GPUs have seen a resurgence in popularity. Their use has been extended into new industries thanks to the advent of artificial intelligence and cryptocurrencies. GPUs have also played a role in establishing wider access to higher-quality virtual reality gaming. ## GPUs vs CPUs Before the arrival of GPUs in the late 1990s, graphic rendering was handled by the Central Processing Unit (CPU). When used in conjunction with a CPU, a GPU can increase computer performance by taking on some computationally intensive functions, such as rendering, from the CPU. This accelerates how quickly applications can process since the GPU can perform many calculations simultaneously. This shift also allowed for the development of more advanced and resource-intensive software. Processing data in a GPU or a CPU is handled by cores. The more cores a processing unit has, the faster (and potentially more efficiently) a computer can complete tasks. GPUs use thousands of cores to process tasks in parallel. The parallel structure of the GPU is different than that of the CPU, which uses fewer cores to process tasks sequentially. A CPU can perform calculations faster than a GPU, which makes it better at basic tasks. ## Special Considerations The term “GPU” is often used interchangeably with “graphics card,” though the two are different. A graphics card is a piece of hardware that contains one or more GPUs, a daughterboard, and other electronic components that allow the graphics card to function. A GPU can, however, be integrated into the motherboard or be found in the daughterboard of a graphics card. Initially, high-end computers were the only ones to feature graphics cards. Today, most desktop computers typically use a separate graphics card with a GPU for increased performance, rather than rely on a GPU built into a motherboard. ## GPUs and Cryptocurrency Mining While GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of [cryptocurrencies](https://www.investopedia.com/terms/c/cryptocurrency.asp) created a new market. This is because [cryptocurrency mining](https://www.investopedia.com/tech/gpu-cryptocurrency-mining/) requires thousands of calculations in order to add transactions to a [blockchain](https://www.investopedia.com/terms/b/blockchain.asp), which is something that could be profitable with access to a GPU and an inexpensive supply of electricity. In recent years, two prominent graphics card manufacturers, Nvidia Corp. ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=nvda)) and Advanced Micro Devices Inc. ([AMD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amd)) have experienced a rapid increase in sales and revenue as a result of cryptocurrency mining. This had the side effect of frustrating non-mining customers, who saw prices increase and supply dry up. As a result, retailers occasionally limited the number of graphics cards that an individual could purchase. While miners of the more popular cryptocurrencies, such as [bitcoin,](https://www.investopedia.com/terms/b/bitcoin.asp) have shifted to using specialized and more cost-effective chipsets called application-specific integrated circuits (ASICs), Graphics Processing Units are still used to mine lesser-known currencies. ### The rise in the popularity of cryptocurrencies has caused a massive shortage of GPUs. Reporting from the Verge calculated that GPUs are being sold for two to three times their street price on sites like eBay. ## Examples of GPU Companies Advanced Micro Devices (AMD) and Nvidia (NVDA) are [two of the biggest names in the GPU market](https://www.investopedia.com/news/amd-versus-nvdia-amd-nvda/). Let's take a look at both companies below. ### Advanced Micro Devices (AMD) [AMD](https://www.investopedia.com/how-amd-makes-money-5116826) is one of the most trusted producers of graphic cards. The manufacturer began as a startup in Silicon Valley in 1969 and develops high-performance computing and visualization products. AMD entered the GPU market in 2006 when it acquired leading video card maker ATI. Since then, AMD and Nvidia have been the dominant players in the GPU market. As of May 2021, AMD has a market cap of $97.3 billion. AMD has shipped over 500 million GPUs since 2013 and controls 17% of the GPU market share. AMD places its focus in the GPU market on PC gaming and is a favorite among gamers worldwide. ### Nvidia (NVDA) [Nvidia](https://www.investopedia.com/how-nvidia-makes-money-4799532) was the very first company to bring GPUs into the world in 1999. The first GPU in history was known as the Geforce 256. 1999 was also the year Nvidia launched its [initial public offering](https://www.investopedia.com/terms/i/ipo.asp) (IPO) at $12 per share. As of May 2021, the stock is trading around $645 per share. Nvidia has a market cap of $404.8 billion and controls 13% of the GPU market share. Nvidia has considerable reach in the advanced GPU market. According to Nvidia's website "eight of the world’s top 10 supercomputers now use NVIDIA GPUs, InfiniBand networking, or both. NVIDIA powers 346 of the overall TOP500 systems on the latest list." Nvidia's own supercomputer, named Selene, is ranked fifth in the world and is the world's fastest industrial supercomputer. ## Graphics Processing Unit (GPU) FAQs ### What Is the Difference Between GPU and VGA? Whereas GPU is a chip or electronic circuit capable used to render graphics for display on an electronic device, a VGA or video graphics array connector is a physical device used to transfer video signals and computer video output. ### How Do You Overclock Your GPU? Before overclocking make sure you thoroughly clean your device and install any updates and bug fixes to your software. Thanks to updates in technology, overclocking is fairly simple. Simply install software such as Afterburner and let the system go to work. After the installation is complete, run a gaming benchmark to test out the new software. ### What Is GPU Scaling? GPU scaling is a feature that enables users to adjust the aspect ratio of a game based on their monitor’s resolution. Some users believe this adjusting the aspect ratio will further [enhance the image quality](https://www.investopedia.com/terms/p/ppi-pixels-inch.asp) of the display.	What Is a Graphics Processing Unit (GPU)? A Graphics Processing Unit (GPU) is a chip or electronic circuit capable of rendering graphics for display on an electronic device. The GPU was introduced to the wider market in 1999 and is best known for its use in providing the smooth graphics that consumers expect in modern videos and games. Key Takeaways The term graphics processing unit (GPU) refers to a chip or electronic circuit capable of rendering graphics for display on an electronic device.The term “GPU” is often used interchangeably with “graphics card,” though the two are different.Although GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of cryptocurrencies has created a new market for them.GPUs, first introduced to the wider market in 1999, are perhaps best known for their use in providing the smooth graphics that consumers expect in modern videos and video games.There has been a shortage of GPUs recently thanks to their application in the mining of cryptocurrencies. How a Graphics Processing Unit (GPU) Works The graphics in videos and gs consist of polygonal coordinates that are converted into bitmaps—a process called “rendering”—and then into signals that are shown on a screen. This conversion requires the Graphics Processing Unit (GPU) to have a lot of processing power, which also makes GPUs useful in machine learning, artificial intelligence, and other tasks that require a large number of complex and sophisticated computations. History of the Graphics Processing Unit (GPU) In 1999, Nvidia introduced the Geforce 256, the first widely available GPU. Nvidia defined a GPU as a "single-chip processor with integrated transform, lighting, triangle setup/clipping, and rendering engines that is capable of processing a minimum of 10 million polygons per second.” The GeForce 256 improved on the technology by other processors by optimizing 3D gaming performance. While Nvidia still reigns supreme in the GPU market, the technology has greatly improved. In the 2000s Nvidia released its GeForce 8800 GTX which has a texture-fill rate of a whopping 36.8 billion per second. Today, GPUs have seen a resurgence in popularity. Their use has been extended into new industries thanks to the advent of artificial intelligence and cryptocurrencies. GPUs have also played a role in establishing wider access to higher-quality virtual reality gaming. GPUs vs CPUs Before the arrival of GPUs in the late 1990s, graphic rendering was handled by the Central Processing Unit (CPU). When used in conjunction with a CPU, a GPU can increase computer performance by taking on some computationally intensive functions, such as rendering, from the CPU. This accelerates how quickly applications can process since the GPU can perform many calculations simultaneously. This shift also allowed for the development of more advanced and resource-intensive software. Processing data in a GPU or a CPU is handled by cores. The more cores a processing unit has, the faster (and potentially more efficiently) a computer can complete tasks. GPUs use thousands of cores to process tasks in parallel. The parallel structure of the GPU is different than that of the CPU, which uses fewer cores to process tasks sequentially. A CPU can perform calculations faster than a GPU, which makes it better at basic tasks. Special Considerations The term “GPU” is often used interchangeably with “graphics card,” though the two are different. A graphics card is a piece of hardware that contains one or more GPUs, a daughterboard, and other electronic components that allow the graphics card to function. A GPU can, however, be integrated into the motherboard or be found in the daughterboard of a graphics card. Initially, high-end computers were the only ones to feature graphics cards. Today, most desktop computers typically use a separate graphics card with a GPU for increased performance, rather than rely on a GPU built into a motherboard. GPUs and Cryptocurrency Mining While GPUs were initially popular with video editing and computer gaming enthusiasts, the rapid growth of cryptocurrencies created a new market. This is because cryptocurrency mining requires thousands of calculations in order to add transactions to a blockchain, which is something that could be profitable with access to a GPU and an inexpensive supply of electricity. In recent years, two prominent graphics card manufacturers, Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD) have experienced a rapid increase in sales and revenue as a result of cryptocurrency mining. This had the side effect of frustrating non-mining customers, who saw prices increase and supply dry up. As a result, retailers occasionally limited the number of graphics cards that an individual could purchase. While miners of the more popular cryptocurrencies, such as bitcoin, have shifted to using specialized and more cost-effective chipsets called application-specific integrated circuits (ASICs), Graphics Processing Units are still used to mine lesser-known currencies. The rise in the popularity of cryptocurrencies has caused a massive shortage of GPUs. Reporting from the Verge calculated that GPUs are being sold for two to three times their street price on sites like eBay. Examples of GPU Companies Advanced Micro Devices (AMD) and Nvidia (NVDA) are two of the biggest names in the GPU market. Let's take a look at both companies below. Advanced Micro Devices (AMD) AMD is one of the most trusted producers of graphic cards. The manufacturer began as a startup in Silicon Valley in 1969 and develops high-performance computing and visualization products. AMD entered the GPU market in 2006 when it acquired leading video card maker ATI. Since then, AMD and Nvidia have been the dominant players in the GPU market. As of May 2021, AMD has a market cap of $97.3 billion. AMD has shipped over 500 million GPUs since 2013 and controls 17% of the GPU market share. AMD places its focus in the GPU market on PC gaming and is a favorite among gamers worldwide. Nvidia (NVDA) Nvidia was the very first company to bring GPUs into the world in 1999. The first GPU in history was known as the Geforce 256. 1999 was also the year Nvidia launched its initial public offering (IPO) at $12 per share. As of May 2021, the stock is trading around $645 per share. Nvidia has a market cap of $404.8 billion and controls 13% of the GPU market share. Nvidia has considerable reach in the advanced GPU market. According to Nvidia's website "eight of the world’s top 10 supercomputers now use NVIDIA GPUs, InfiniBand networking, or both. NVIDIA powers 346 of the overall TOP500 systems on the latest list." Nvidia's own supercomputer, named Selene, is ranked fifth in the world and is the world's fastest industrial supercomputer. Graphics Processing Unit (GPU) FAQs What Is the Difference Between GPU and VGA? Whereas GPU is a chip or electronic circuit capable used to render graphics for display on an electronic device, a VGA or video graphics array connector is a physical device used to transfer video signals and computer video output. How Do You Overclock Your GPU? Before overclocking make sure you thoroughly clean your device and install any updates and bug fixes to your software. Thanks to updates in technology, overclocking is fairly simple. Simply install software such as Afterburner and let the system go to work. After the installation is complete, run a gaming benchmark to test out the new software. What Is GPU Scaling? GPU scaling is a feature that enables users to adjust the aspect ratio of a game based on their monitor’s resolution. Some users believe this adjusting the aspect ratio will further enhance the image quality of the display.	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https://www.investopedia.com/terms/m/master-swap-agreement.asp	Master Swap Agreement: Meaning, History, Provisions	<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-master-swap-agreement"></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 Master Swap Agreement? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term master swap agreement refers to a standardized contract between two parties who agree to enter a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> agreement that is traded <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_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 master swap agreement is a standardized contract between two parties who enter an over-the-counter derivatives agreement.</li><li>It was established by the International Swaps and Derivatives Association and is internationally recognized.</li><li>The agreement is commonly used between parties who operate in different jurisdictions and in the event that different currencies are involved.</li><li>Master swap agreements provide information on the parties and gives them legal protections while outlining the terms of the deal.</li><li>Two versions exist: the original 1992 contract and an updated 2002 version.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-master-swap-agreement"></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 Master Swap Agreement </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> The master swap agreement was established by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/isda.asp">International Swaps and Derivatives Association</a> (ISDA) in 1992, and is internationally recognized. It's used between parties that operate in different jurisdictions and in the event that different currencies are involved. The master swap agreement identifies each party, outlines the terms and conditions, and provides legal protections to both parties involved. It was updated in 2002. </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/articles/optioninvestor/07/swaps.asp">Swaps</a> are derivative contracts that are established between two parties who want to execute transactions during a certain period of time. These instruments are traded over-the-counter rather than on an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchange.asp">exchange</a>. Contracts are rarely traded by individual investors (if at all), which means this market is dominated by financial institutions and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentcompany.asp">investment firms</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 International Swaps and Derivatives Association developed a standardized contract to streamline and provide structure to the agreement process. The organization was founded in 1985 by the private derivatives market to make it safer and more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketefficiency.asp">efficient</a> for participants. It provides documents that help reduce risks associated with these financial instruments while increasing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transparency.asp">transparency</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_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> One of these documents is the ISDA's master <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/swap.asp">swap</a> agreement. This is a contract that standardizes the agreements between two parties who agree to exchange swaps. Since these transactions are executed OTC rather than on an exchange, there's a greater chance of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/102413/why-and-when-do-countries-default.asp">default</a>. The contract outlines some information, including: </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>The two parties entering the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transaction</a></li> <li>The terms and conditions of the arrangement</li> <li><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payment.asp">Payment</a></li> <li>Events of default</li> <li>Termination details</li> <li>Other legalities of the deal<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The document was standardized as a way to help parties who enter into agreements with one another, especially when they operate in different jurisdictions. It also provides provisions for transactions involving different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currency.asp">currencies</a>.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Signing a master swap agreement makes it easier for the same parties to engage in additional transactions in the future because these can be based on the initial agreement.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Although the ISDA's master swap agreement is a standardized contract that is recognized internationally, parties aren't required to enter into this agreement in order to execute <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trade.asp">trades</a> on swaps. This means that two parties can enter into this kind of derivatives agreement initially without signing a contract.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If they decide to pursue this route, both parties agree to a vanilla ISDA agreement, which comes without any special addendums. Going into this type of agreement doesn't provide them with any special protections. They are, however, required to sign a confirmation saying that they promise to negotiate an ISDA agreement within 30 to 90 days.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-history-of-master-swap-agreements"></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"> History of Master Swap Agreements </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The master swap agreement established in 1992 is known as the Multicurrency–Cross Border agreement. It was updated in 2002 to include new provisions, such as damages, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>, and compensation. The new version also amends <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grace_period.asp">grace periods</a> outlined in the earlier contract by shortening them.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Both versions are still commonly used by members of the ISDA. The 2002 version is known to be lengthy, with as many as 28 pages.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_30-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_31-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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>Contracts and related materials are available to ISDA members for $150 while non-members pay $350.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-provisions-of-master-swap-agreement"></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"> Provisions of Master Swap Agreement </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Both the 1992 and 2002 master swap agreements are divided into 14 sections. These segments help determine and outline the basis of the relationship between each party.<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_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> The sections provide provisions for certain situations, such as: </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>What happens when at least one of the parties involved declares <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>;</li> <li>What takes place when these <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/10/derivatives-101.asp">derivatives</a> contracts are closed or terminated.<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_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> As noted above, the 2002 version of the agreement was updated with new provisions, including eight default events and five provisions that outline the termination of the agreement if one or both parties default on the contract.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The ISDA also provides a special schedule in case the parties involved want to make changes to the standard terms of the master swap agreement. This is negotiated by each party and can take as long as three months. The length of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negotiation.asp">negotiation</a> depends on how complex the contract special terms are and the willingness of each party to cooperate.<span class="ql-inline-citation" data-cite="3"></span> </p></div>	## What Is a Master Swap Agreement? The term master swap agreement refers to a standardized contract between two parties who agree to enter a [derivatives](https://www.investopedia.com/terms/d/derivative.asp) agreement that is traded [over-the-counter](https://www.investopedia.com/terms/o/otc.asp) (OTC). ### Key Takeaways * A master swap agreement is a standardized contract between two parties who enter an over-the-counter derivatives agreement. * It was established by the International Swaps and Derivatives Association and is internationally recognized. * The agreement is commonly used between parties who operate in different jurisdictions and in the event that different currencies are involved. * Master swap agreements provide information on the parties and gives them legal protections while outlining the terms of the deal. * Two versions exist: the original 1992 contract and an updated 2002 version. ## Understanding Master Swap Agreement The master swap agreement was established by the [International Swaps and Derivatives Association](https://www.investopedia.com/terms/i/isda.asp) (ISDA) in 1992, and is internationally recognized. It's used between parties that operate in different jurisdictions and in the event that different currencies are involved. The master swap agreement identifies each party, outlines the terms and conditions, and provides legal protections to both parties involved. It was updated in 2002. [Swaps](https://www.investopedia.com/articles/optioninvestor/07/swaps.asp) are derivative contracts that are established between two parties who want to execute transactions during a certain period of time. These instruments are traded over-the-counter rather than on an [exchange](https://www.investopedia.com/terms/e/exchange.asp). Contracts are rarely traded by individual investors (if at all), which means this market is dominated by financial institutions and [investment firms](https://www.investopedia.com/terms/i/investmentcompany.asp). The International Swaps and Derivatives Association developed a standardized contract to streamline and provide structure to the agreement process. The organization was founded in 1985 by the private derivatives market to make it safer and more [efficient](https://www.investopedia.com/terms/m/marketefficiency.asp) for participants. It provides documents that help reduce risks associated with these financial instruments while increasing [transparency](https://www.investopedia.com/terms/t/transparency.asp). One of these documents is the ISDA's master [swap](https://www.investopedia.com/terms/s/swap.asp) agreement. This is a contract that standardizes the agreements between two parties who agree to exchange swaps. Since these transactions are executed OTC rather than on an exchange, there's a greater chance of [default](https://www.investopedia.com/articles/investing/102413/why-and-when-do-countries-default.asp). The contract outlines some information, including: * The two parties entering the [transaction](https://www.investopedia.com/terms/t/transaction.asp) * The terms and conditions of the arrangement * [Payment](https://www.investopedia.com/terms/p/payment.asp) * Events of default * Termination details * Other legalities of the deal The document was standardized as a way to help parties who enter into agreements with one another, especially when they operate in different jurisdictions. It also provides provisions for transactions involving different [currencies](https://www.investopedia.com/terms/c/currency.asp). ### Signing a master swap agreement makes it easier for the same parties to engage in additional transactions in the future because these can be based on the initial agreement. Although the ISDA's master swap agreement is a standardized contract that is recognized internationally, parties aren't required to enter into this agreement in order to execute [trades](https://www.investopedia.com/terms/t/trade.asp) on swaps. This means that two parties can enter into this kind of derivatives agreement initially without signing a contract. If they decide to pursue this route, both parties agree to a vanilla ISDA agreement, which comes without any special addendums. Going into this type of agreement doesn't provide them with any special protections. They are, however, required to sign a confirmation saying that they promise to negotiate an ISDA agreement within 30 to 90 days. ## History of Master Swap Agreements The master swap agreement established in 1992 is known as the Multicurrency–Cross Border agreement. It was updated in 2002 to include new provisions, such as damages, [interest](https://www.investopedia.com/terms/i/interest.asp), and compensation. The new version also amends [grace periods](https://www.investopedia.com/terms/g/grace_period.asp) outlined in the earlier contract by shortening them. Both versions are still commonly used by members of the ISDA. The 2002 version is known to be lengthy, with as many as 28 pages. ### Contracts and related materials are available to ISDA members for $150 while non-members pay $350. ## Provisions of Master Swap Agreement Both the 1992 and 2002 master swap agreements are divided into 14 sections. These segments help determine and outline the basis of the relationship between each party. The sections provide provisions for certain situations, such as: * What happens when at least one of the parties involved declares [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp); * What takes place when these [derivatives](https://www.investopedia.com/articles/optioninvestor/10/derivatives-101.asp) contracts are closed or terminated. As noted above, the 2002 version of the agreement was updated with new provisions, including eight default events and five provisions that outline the termination of the agreement if one or both parties default on the contract. The ISDA also provides a special schedule in case the parties involved want to make changes to the standard terms of the master swap agreement. This is negotiated by each party and can take as long as three months. The length of the [negotiation](https://www.investopedia.com/terms/n/negotiation.asp) depends on how complex the contract special terms are and the willingness of each party to cooperate.	What Is a Master Swap Agreement? The term master swap agreement refers to a standardized contract between two parties who agree to enter a derivatives agreement that is traded over-the-counter (OTC). Key Takeaways A master swap agreement is a standardized contract between two parties who enter an over-the-counter derivatives agreement.It was established by the International Swaps and Derivatives Association and is internationally recognized.The agreement is commonly used between parties who operate in different jurisdictions and in the event that different currencies are involved.Master swap agreements provide information on the parties and gives them legal protections while outlining the terms of the deal.Two versions exist: the original 1992 contract and an updated 2002 version. Understanding Master Swap Agreement The master swap agreement was established by the International Swaps and Derivatives Association (ISDA) in 1992, and is internationally recognized. It's used between parties that operate in different jurisdictions and in the event that different currencies are involved. The master swap agreement identifies each party, outlines the terms and conditions, and provides legal protections to both parties involved. It was updated in 2002. Swaps are derivative contracts that are established between two parties who want to execute transactions during a certain period of time. These instruments are traded over-the-counter rather than on an exchange. Contracts are rarely traded by individual investors (if at all), which means this market is dominated by financial institutions and investment firms. The International Swaps and Derivatives Association developed a standardized contract to streamline and provide structure to the agreement process. The organization was founded in 1985 by the private derivatives market to make it safer and more efficient for participants. It provides documents that help reduce risks associated with these financial instruments while increasing transparency. One of these documents is the ISDA's master swap agreement. This is a contract that standardizes the agreements between two parties who agree to exchange swaps. Since these transactions are executed OTC rather than on an exchange, there's a greater chance of default. The contract outlines some information, including: The two parties entering the transaction The terms and conditions of the arrangement Payment Events of default Termination details Other legalities of the deal The document was standardized as a way to help parties who enter into agreements with one another, especially when they operate in different jurisdictions. It also provides provisions for transactions involving different currencies. Signing a master swap agreement makes it easier for the same parties to engage in additional transactions in the future because these can be based on the initial agreement. Although the ISDA's master swap agreement is a standardized contract that is recognized internationally, parties aren't required to enter into this agreement in order to execute trades on swaps. This means that two parties can enter into this kind of derivatives agreement initially without signing a contract. If they decide to pursue this route, both parties agree to a vanilla ISDA agreement, which comes without any special addendums. Going into this type of agreement doesn't provide them with any special protections. They are, however, required to sign a confirmation saying that they promise to negotiate an ISDA agreement within 30 to 90 days. History of Master Swap Agreements The master swap agreement established in 1992 is known as the Multicurrency–Cross Border agreement. It was updated in 2002 to include new provisions, such as damages, interest, and compensation. The new version also amends grace periods outlined in the earlier contract by shortening them. Both versions are still commonly used by members of the ISDA. The 2002 version is known to be lengthy, with as many as 28 pages. Contracts and related materials are available to ISDA members for $150 while non-members pay $350. Provisions of Master Swap Agreement Both the 1992 and 2002 master swap agreements are divided into 14 sections. These segments help determine and outline the basis of the relationship between each party. The sections provide provisions for certain situations, such as: What happens when at least one of the parties involved declares bankruptcy; What takes place when these derivatives contracts are closed or terminated. As noted above, the 2002 version of the agreement was updated with new provisions, including eight default events and five provisions that outline the termination of the agreement if one or both parties default on the contract. The ISDA also provides a special schedule in case the parties involved want to make changes to the standard terms of the master swap agreement. This is negotiated by each party and can take as long as three months. The length of the negotiation depends on how complex the contract special terms are and the willingness of each party to cooperate.	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https://www.investopedia.com/mortgage-rates-holding-a-bit-below-recent-highs-8638145	Mortgage Rates Holding a Bit Below Recent Highs	<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"> After notching a five-month high last week, 30-year mortgage rates have dipped slightly, and continue to bob around in a range below their recent peak. With a minor decrease Tuesday, the 30-year average is currently 7.51%. Rates for most 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> held close to steady Tuesday.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_3-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:75.8%;"> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 24, 2024" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/QWOwWhQMoymzB9bmGm9f4y_W9B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/QWOwWhQMoymzB9bmGm9f4y_W9B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png" data-srcset="https://www.investopedia.com/thmb/TRal1O8Xtwqw0Qb1FBiWxtiYMyw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png 750w" data-tracking-container="true" height="1880" id="mntl-sc-block-image_1-0" width="2480"/> <noscript> <img alt="Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 24, 2024" class="img--noscript universal-image__image" height="1880" sizes="750px" src="https://www.investopedia.com/thmb/QWOwWhQMoymzB9bmGm9f4y_W9B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png" srcset="https://www.investopedia.com/thmb/TRal1O8Xtwqw0Qb1FBiWxtiYMyw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png 750w" width="2480"/> </noscript> </div> </div> </figure> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_4-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Mortgage Rates</th> </tr> <tr> <th><b>Loan Type</b></th> <th><b>New Purchase</b></th> <th><b>Refinance</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.51%</td> <td>7.85%</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.26%</td> <td>7.50%</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.20%</td> <td>7.20%</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.88%</td> <td>7.11%</td> </tr> <tr> <td>5/6 ARM</td> <td>7.94%</td> <td>8.00%</td> </tr> </tbody> </table> <figcaption>National averages of the lowest rates offered by more than 200 of the country's top lenders, with a loan-to-value ratio (LTV) of 80%, an applicant with a FICO credit score of 700–760, and no mortgage points.</figcaption> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> 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_7-0"></div> <div class="comp mntl-sc-block mntl-sc-block-tool mntl-block mntl-sc-block--credible-rate-table--mortgage" id="mntl-sc-block_8-0"><span class="comp prm-external-component-tools mntl-external-component" id="prm-external-component-tools_1-0"><div id="credible-block"></div> </span></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_11-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://www.investopedia.com/mortgage-rates-5094943" id="mntl-sc-block-featuredlink__link_1-0" rel="nocaes"><span class="link__wrapper">Compare the Best Mortgage Rates Today - May 21, 2024</span></a></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-new-purchase"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: New Purchase </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Rates on 30-year mortgages subtracted a single basis point Tuesday, lowering the average to 7.51%. That's more than an eighth of a percentage point below the 7.65% reading of a week ago, which was the 30-year average's highest mark since late November. </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"> Thirty-year rates are elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit 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_17-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_18-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/OJWU4/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="30-Year Mortgage Rates Since June 2021"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> New purchase 15-year mortgage rates added a minimal basis point Tuesday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and is now just slightly below that at 6.88%. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> After surging last week, Tuesday's jumbo 30-year rates held steady for a ninth market day. Holding at 7.20%, that's the priciest jumbo 30-year average since November. Daily historical jumbo rates are not available before 2009, but it's estimated the 7.52% 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_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> All new purchase averages saw very minor movement Tuesday, with no average moving more than 3 basis points. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_26-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">National Averages of Lenders' Best Rates - New Purchase</th> </tr> <tr> <th>Loan Type</th> <th><b>New Purchase Rates</b></th> <th><b>Daily Change</b></th> </tr> </thead> <tbody data-check="0"> <tr> <td>30-Year Fixed</td> <td>7.51%</td> <td>-0.01</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.26%</td> <td>+0.02</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.05%</td> <td>-0.02</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.20%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.39%</td> <td>-0.03</td> </tr> <tr> <td>15-Year Fixed</td> <td>6.88%</td> <td>+0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>6.97%</td> <td>+0.03</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>7.03%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>6.80%</td> <td>+0.02</td> </tr> <tr> <td>10/6 ARM</td> <td>7.92%</td> <td>+0.03</td> </tr> <tr> <td>7/6 ARM</td> <td>7.96%</td> <td>+0.02</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.83%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>7.94%</td> <td>No Change</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.93%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_28-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/GyWsd/1/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="90-Day Ranges of Best Mortgage Rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-the-weekly-freddie-mac-average"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_30-0"> <span class="mntl-sc-block-heading__text"> The Weekly Freddie Mac Average </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading surged 22 basis points to 7.10%, marking the first time the weekly average has risen above 7% in 2024. Back in late October, Freddie Mac's average reached a historic peak of 7.79%—its highest level in 23 years. But since then, it has come down significantly, registering a recent low of 6.60% in mid-January.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Freddie Mac’s average differs from our own 30-year average for two notable reasons. First, Freddie Mac calculates a <em>weekly</em> average that blends five previous days of rates, while our Investopedia averages are daily, offering a more precise and timely indicator of rate movement. Second, the rates included in Freddie Mac's survey can include loans priced with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discountpoints.asp">discount points</a>, while Investopedia’s averages only include zero-point loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <span class="heading-toc" id="toc-todays-mortgage-rate-averages-refinancing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_35-0"> <span class="mntl-sc-block-heading__text"> Today's Mortgage Rate Averages: Refinancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Most refinancing averages were also relatively flat Tuesday. The 30-year refi average dipped a single basis point, leaving the gap between 30-year new purchase and refi rates at 34 basis points. The 15-year refi average also dipped 1 basis point, while the jumbo 30-year refi average marked time for a ninth day. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The only refi averages to move by more than 2 basis points Tuesday were the 20-year and VA 30-year refi averages, which declined 6 and 5 basis points, respectively. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_40-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style="width: 165px;"></colgroup> <colgroup span="1" style="width: 123px;"></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>7.85%</td> <td>-0.01</td> </tr> <tr> <td>FHA 30-Year Fixed</td> <td>7.50%</td> <td>-0.02</td> </tr> <tr> <td>VA 30-Year Fixed</td> <td>7.54%</td> <td>-0.05</td> </tr> <tr> <td>Jumbo 30-Year Fixed</td> <td>7.20%</td> <td>No Change</td> </tr> <tr> <td>20-Year Fixed</td> <td>7.66%</td> <td>-0.06</td> </tr> <tr> <td>15-Year Fixed</td> <td>7.11%</td> <td>-0.01</td> </tr> <tr> <td>FHA 15-Year Fixed</td> <td>7.13%</td> <td>+0.02</td> </tr> <tr> <td>Jumbo 15-Year Fixed</td> <td>7.03%</td> <td>No Change</td> </tr> <tr> <td>10-Year Fixed</td> <td>7.04%</td> <td>-0.01</td> </tr> <tr> <td>10/6 ARM</td> <td>8.14%</td> <td>+0.01</td> </tr> <tr> <td>7/6 ARM</td> <td>8.04%</td> <td>+0.01</td> </tr> <tr> <td>Jumbo 7/6 ARM</td> <td>6.92%</td> <td>No Change</td> </tr> <tr> <td>5/6 ARM</td> <td>8.00%</td> <td>No Change</td> </tr> <tr> <td>Jumbo 5/6 ARM</td> <td>6.92%</td> <td>No Change</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Calculate monthly payments for different loan scenarios with our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage-calculator-5084794">Mortgage Calculator</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_44-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_45-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The rates you see here generally won’t compare directly with teaser rates you see advertised online, since those rates are cherry-picked as the most attractive, while these rates are averages. Teaser rates may involve paying points in advance, or 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 Tuesday were Mississippi, Rhode Island, Delaware, Iowa, and Wisconsin, while the states with the highest average rates were Idaho, Arizona, Washington, Minnesota, Oregon, and Utah. </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/VXeix/2/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Mortgage Rates by State"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <span class="heading-toc" id="toc-what-causes-mortgage-rates-to-rise-or-fall"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_55-0"> <span class="mntl-sc-block-heading__text"> What Causes Mortgage Rates to Rise or Fall? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Mortgage rates are determined by a complex interaction of macroeconomic and industry factors, such as: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li>The level and direction of the bond market, especially 10-year Treasury yields</li> <li>The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservebank.asp">Federal Reserve's</a> current monetary policy, especially as it relates to bond buying and funding government-backed mortgages</li> <li>Competition between <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-mortgage-lenders-5076852">mortgage lenders and across loan types</a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Because fluctuations can be caused by any number of these at once, it's generally difficult to attribute the change to any one factor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Macroeconomic factors kept the mortgage market relatively low for much of 2021. In particular, the Federal Reserve had been buying billions of dollars of bonds in response to the pandemic's economic pressures. This <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060115/how-do-open-market-operations-omos-affect-bond-prices.asp">bond-buying policy</a> is a major influencer of mortgage rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> But starting in November 2021, the Fed began tapering its bond purchases downward, making sizable reductions each month until reaching net zero in March 2022.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Between that time and July 2023, the Fed aggressively raised the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalfundsrate.asp">federal funds rate</a> to fight decades-high inflation. While the fed funds rate can influence mortgage rates, it does not directly do so. In fact, the fed funds rate and mortgage rates can move in opposite directions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> But given the historic speed and magnitude of the Fed's 2022 and 2023 rate increases—raising the benchmark rate 5.25 percentage points over 16 months—even the indirect influence of the fed funds rate has resulted in a dramatic upward impact on mortgage rates over the last two years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> The Fed has been maintaining the federal funds rate at its current level since July, with a fifth consecutive rate hold announced on March 20.<span class="ql-inline-citation" data-cite="5"></span> Although inflation has come down considerably, it is still above the Fed's target level of 2%. Until the central bank feels confident inflation is falling sufficiently and reliably, it has said it is hesitant to start cutting rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Still, Fed committee members do collectively expect to reduce rates in 2024. The March 20 meeting included the latest installment of the Fed's "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/dot-plot-4581755">dot plot</a>" forecast, which showed that the median expectation among the 19 Fed members is for three rate decreases—totaling 0.75 percentage points—by year's end. The dot plot also shows similar expected rate cuts in 2025 and 2026.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> The Fed will hold six more meetings this year, with the next scheduled for April 30 to May 1.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <span class="heading-toc" id="toc-how-we-track-mortgage-rates"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_76-0"> <span class="mntl-sc-block-heading__text"> How We Track Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> The national averages cited above were calculated based on the lowest rate offered by more than 200 of the country's top lenders, assuming a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loantovalue.asp">loan-to-value ratio (LTV)</a> of 80% and an applicant with a FICO credit score in the 700–760 range. The resulting rates are representative of what customers should expect to see when receiving actual quotes from lenders based on their qualifications, which may vary from advertised teaser rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_78-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> For our map of the best state rates, the lowest rate currently offered by a surveyed lender in that state is listed, assuming the same parameters of an 80% LTV and a credit score between 700–760. </p></div>	After notching a five-month high last week, 30-year mortgage rates have dipped slightly, and continue to bob around in a range below their recent peak. With a minor decrease Tuesday, the 30-year average is currently 7.51%. Rates for most new purchase [mortgage types](https://www.investopedia.com/mortgage-rates-5094943) held close to steady Tuesday. ![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 24, 2024]() ![Line graph showing the last 90 days of the 30-year new purchase mortgage rate average - April 24, 2024](https://www.investopedia.com/thmb/QWOwWhQMoymzB9bmGm9f4y_W9B0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/4-24v2-9ac5035c37914a23b1c305c4e5a8a011.png) \| National Averages of Lenders' Best Mortgage Rates \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase \| Refinance \| \| 30-Year Fixed \| 7.51% \| 7.85% \| \| FHA 30-Year Fixed \| 7.26% \| 7.50% \| \| Jumbo 30-Year Fixed \| 7.20% \| 7.20% \| \| 15-Year Fixed \| 6.88% \| 7.11% \| \| 5/6 ARM \| 7.94% \| 8.00% \| 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. 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 Rates on 30-year mortgages subtracted a single basis point Tuesday, lowering the average to 7.51%. That's more than an eighth of a percentage point below the 7.65% reading of a week ago, which was the 30-year average's highest mark since late November. Thirty-year rates are elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit a historic 23-year peak of 8.45%. New purchase 15-year mortgage rates added a minimal basis point Tuesday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and is now just slightly below that at 6.88%. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. After surging last week, Tuesday's jumbo 30-year rates held steady for a ninth market day. Holding at 7.20%, that's the priciest jumbo 30-year average since November. Daily historical jumbo rates are not available before 2009, but it's estimated the 7.52% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years. All new purchase averages saw very minor movement Tuesday, with no average moving more than 3 basis points. \| National Averages of Lenders' Best Rates - New Purchase \| \| \| \| --- \| --- \| --- \| \| Loan Type \| New Purchase Rates \| Daily Change \| \| 30-Year Fixed \| 7.51% \| -0.01 \| \| FHA 30-Year Fixed \| 7.26% \| +0.02 \| \| VA 30-Year Fixed \| 7.05% \| -0.02 \| \| Jumbo 30-Year Fixed \| 7.20% \| No Change \| \| 20-Year Fixed \| 7.39% \| -0.03 \| \| 15-Year Fixed \| 6.88% \| +0.01 \| \| FHA 15-Year Fixed \| 6.97% \| +0.03 \| \| Jumbo 15-Year Fixed \| 7.03% \| No Change \| \| 10-Year Fixed \| 6.80% \| +0.02 \| \| 10/6 ARM \| 7.92% \| +0.03 \| \| 7/6 ARM \| 7.96% \| +0.02 \| \| Jumbo 7/6 ARM \| 6.83% \| No Change \| \| 5/6 ARM \| 7.94% \| No Change \| \| Jumbo 5/6 ARM \| 6.93% \| No Change \| ## The Weekly Freddie Mac Average Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading surged 22 basis points to 7.10%, marking the first time the weekly average has risen above 7% in 2024. 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 Most refinancing averages were also relatively flat Tuesday. The 30-year refi average dipped a single basis point, leaving the gap between 30-year new purchase and refi rates at 34 basis points. The 15-year refi average also dipped 1 basis point, while the jumbo 30-year refi average marked time for a ninth day. The only refi averages to move by more than 2 basis points Tuesday were the 20-year and VA 30-year refi averages, which declined 6 and 5 basis points, respectively. \| National Averages of Lenders' Best Rates - Refinance \| \| \| \| --- \| --- \| --- \| \| Loan Type \| Refinance Rates \| Daily Change \| \| 30-Year Fixed \| 7.85% \| -0.01 \| \| FHA 30-Year Fixed \| 7.50% \| -0.02 \| \| VA 30-Year Fixed \| 7.54% \| -0.05 \| \| Jumbo 30-Year Fixed \| 7.20% \| No Change \| \| 20-Year Fixed \| 7.66% \| -0.06 \| \| 15-Year Fixed \| 7.11% \| -0.01 \| \| FHA 15-Year Fixed \| 7.13% \| +0.02 \| \| Jumbo 15-Year Fixed \| 7.03% \| No Change \| \| 10-Year Fixed \| 7.04% \| -0.01 \| \| 10/6 ARM \| 8.14% \| +0.01 \| \| 7/6 ARM \| 8.04% \| +0.01 \| \| Jumbo 7/6 ARM \| 6.92% \| No Change \| \| 5/6 ARM \| 8.00% \| No Change \| \| Jumbo 5/6 ARM \| 6.92% \| 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 based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here. ## Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates Tuesday were Mississippi, Rhode Island, Delaware, Iowa, and Wisconsin, while the states with the highest average rates were Idaho, Arizona, Washington, Minnesota, Oregon, and Utah. ## 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.	After notching a five-month high last week, 30-year mortgage rates have dipped slightly, and continue to bob around in a range below their recent peak. With a minor decrease Tuesday, the 30-year average is currently 7.51%. Rates for most new purchase mortgage types held close to steady Tuesday. National Averages of Lenders' Best Mortgage Rates Loan Type New Purchase Refinance 30-Year Fixed 7.51% 7.85% FHA 30-Year Fixed 7.26% 7.50% Jumbo 30-Year Fixed 7.20% 7.20% 15-Year Fixed 6.88% 7.11% 5/6 ARM 7.94% 8.00% 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. 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 Rates on 30-year mortgages subtracted a single basis point Tuesday, lowering the average to 7.51%. That's more than an eighth of a percentage point below the 7.65% reading of a week ago, which was the 30-year average's highest mark since late November. Thirty-year rates are elevated vs. early February, when the average dipped its toe in 6% territory. But rates are still considerably cheaper than October, when the 30-year average hit a historic 23-year peak of 8.45%. New purchase 15-year mortgage rates added a minimal basis point Tuesday. The 15-year average recently hit its most expensive level in more than five months, at 7.00%, and is now just slightly below that at 6.88%. But today's 15-year rates are considerably more affordable than last fall's 7.59% average—a peak since 2000. After surging last week, Tuesday's jumbo 30-year rates held steady for a ninth market day. Holding at 7.20%, that's the priciest jumbo 30-year average since November. Daily historical jumbo rates are not available before 2009, but it's estimated the 7.52% peak reached last fall was the most expensive jumbo 30-year average in 20-plus years. All new purchase averages saw very minor movement Tuesday, with no average moving more than 3 basis points. National Averages of Lenders' Best Rates - New Purchase Loan Type New Purchase Rates Daily Change 30-Year Fixed 7.51% -0.01 FHA 30-Year Fixed 7.26% +0.02 VA 30-Year Fixed 7.05% -0.02 Jumbo 30-Year Fixed 7.20% No Change 20-Year Fixed 7.39% -0.03 15-Year Fixed 6.88% +0.01 FHA 15-Year Fixed 6.97% +0.03 Jumbo 15-Year Fixed 7.03% No Change 10-Year Fixed 6.80% +0.02 10/6 ARM 7.92% +0.03 7/6 ARM 7.96% +0.02 Jumbo 7/6 ARM 6.83% No Change 5/6 ARM 7.94% No Change Jumbo 5/6 ARM 6.93% No Change The Weekly Freddie Mac Average Every Thursday, Freddie Mac publishes a weekly average of 30-year mortgage rates. Last week's reading surged 22 basis points to 7.10%, marking the first time the weekly average has risen above 7% in 2024. 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 Most refinancing averages were also relatively flat Tuesday. The 30-year refi average dipped a single basis point, leaving the gap between 30-year new purchase and refi rates at 34 basis points. The 15-year refi average also dipped 1 basis point, while the jumbo 30-year refi average marked time for a ninth day. The only refi averages to move by more than 2 basis points Tuesday were the 20-year and VA 30-year refi averages, which declined 6 and 5 basis points, respectively. National Averages of Lenders' Best Rates - Refinance Loan Type Refinance Rates Daily Change 30-Year Fixed 7.85% -0.01 FHA 30-Year Fixed 7.50% -0.02 VA 30-Year Fixed 7.54% -0.05 Jumbo 30-Year Fixed 7.20% No Change 20-Year Fixed 7.66% -0.06 15-Year Fixed 7.11% -0.01 FHA 15-Year Fixed 7.13% +0.02 Jumbo 15-Year Fixed 7.03% No Change 10-Year Fixed 7.04% -0.01 10/6 ARM 8.14% +0.01 7/6 ARM 8.04% +0.01 Jumbo 7/6 ARM 6.92% No Change 5/6 ARM 8.00% No Change Jumbo 5/6 ARM 6.92% 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 based on a hypothetical borrower with an ultra-high credit score or for a smaller-than-typical loan. The mortgage rate you ultimately secure will be based on factors like your credit score, income, and more, so it can vary from the averages you see here. Mortgage Rates by State The lowest mortgage rates available vary depending on the state where originations occur. Mortgage rates can be influenced by state-level variations in credit score, average mortgage loan type, and size, in addition to individual lenders' varying risk management strategies. The states with the cheapest 30-year new purchase rates Tuesday were Mississippi, Rhode Island, Delaware, Iowa, and Wisconsin, while the states with the highest average rates were Idaho, Arizona, Washington, Minnesota, Oregon, and Utah. 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.	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https://www.investopedia.com/articles/investing/040515/are-there-taxes-bitcoins.asp	Are There Taxes on Bitcoin?	<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"> Even though <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a> was introduced in 2009, there is still considerable confusion about its taxes. Cryptocurrency was conceived as a medium for daily transactions but has yet to gain widespread traction as a currency. Meanwhile, it has become popular with speculators and traders interested in making a quick buck off its volatility. </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 <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> addressed cryptocurrency transactions in its notice 2014-21. The agency stated that cryptocurrencies would be treated as assets similar to property.<span class="ql-inline-citation" data-cite="21"></span> In 2020, the IRS began including a question on its <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> to determine whether the taxpayer had any cryptocurrency transactions during the given tax 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_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> Depending on the type of transaction, assets are subject to various kinds of taxes. However, the unique characteristics and use cases for Bitcoin mean that there are many exceptions with continually evolving tax legislation. </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>Bitcoin has been classified as an asset similar to property by the IRS and is taxed as such.</li><li>U.S. taxpayers must report Bitcoin transactions for tax purposes.</li><li>Retail transactions using Bitcoin, such as purchasing or selling goods, incur capital gains tax.</li><li>Bitcoin mining businesses are subject to capital gains tax and can make business deductions for their equipment.</li><li>Bitcoin hard forks and airdrops are taxed at ordinary income tax rates.</li><li>Gifting, donating, or inheriting Bitcoins are subject to the same limits as cash or property transactions.<span class="ql-inline-citation" data-cite="12"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-bitcoins-and-taxation-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Bitcoins and Taxation: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Bitcoin is an idea, a token of ownership of a certain value amount. Its value is determined by its market price on the day it is bought or sold—this price changes, sometimes by the minute. </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"> It is treated by users as a medium of exchange, investors as a store of value, and traders as a means to profit from price movements. In the U.S., it is taxed as property by the IRS.<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_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Because they are property, Bitcoin and cryptocurrencies are assets that require tax reporting when specific actions are taken. Depending on when and how someone acquires and uses cryptocurrency, they could be subject to capital gains or income taxes. </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-gains-or-losses-on-sales-of-bitcoin"></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"> Gains or Losses on Sales of Bitcoin </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> When you sell a virtual currency you've held for more than one year, you must recognize capital gains or losses on the sale. Any gain or loss is calculated based on the cryptocurrency's market value on the day and time you bought it (its basis). </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 gains or losses recognized are subject to limitations on the deductibility of the taxpayer's capital losses.<span class="ql-inline-citation" data-cite="12"></span> This tax legislation is determined by IRS Publication 544 (Sales and Other Dispositions of Assets).<span class="ql-inline-citation" data-cite="14"></span> Capital gains are reported on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scheduled.asp">Schedule D</a> of a taxpayer's Form 1040. </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 the broadest sense, gains and losses on the sale of Bitcoin are treated the same as other capital assets such as stocks, bonds, precious metals, or certain personal property,<span class="ql-inline-citation" data-cite="12"></span> Short-term capital gains are taxed as ordinary income and assessed at the same tax rate as the taxpayer's salary or wages. Long-term capital gains are taxed at a rate that varies on the taxpayer's income.<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_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Below are the capital gain rates for 2024.<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_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=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="4">2024 Capital Gains Tax Rates</th> </tr> <tr> <th>Filing Status</th> <th>0% Tax Rate</th> <th>15% Tax Rate</th> <th>20% Tax Rate</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Single </td> <td>Up to $47,025</td> <td>$47,025 to $518,900</td> <td>Greater than $518,900</td> </tr> <tr> <td>Head of Household </td> <td>Up to $63,000</td> <td>$63,000 to $551,350</td> <td>Greater than $551,350</td> </tr> <tr> <td>Married Filing Jointly </td> <td>Up to $94,050</td> <td>$94,050 to $583,750</td> <td>Greater than $583,750</td> </tr> <tr> <td>Married Filing Separately </td> <td> Up to $47,025</td> <td>$47,025 to $291,850</td> <td>Greater than $291,850</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-bitcoin-taxable-transactions"></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"> Bitcoin Taxable Transactions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The IRS has provided specific guidance on transactions involving digital assets that are to be included in a tax return. Note that the extent of these transactions may make for difficulty when tracking all transactions; cryptocurrency investors and users are advised to seek tax advisor guidance to ensure all of the following transactions are adequately being reported: </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>Sale of a digital asset for fiat</li> <li>Exchange of a digital asset for property, goods, or services</li> <li>Exchange or trade of one digital asset for another digital asset</li> <li>Receipt of a digital asset as payment for goods or services</li> <li>Receipt of a new digital asset as a result of a hard fork</li> <li>Receipt of a new digital asset as a result of mining or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/proof-stake-pos.asp">staking activities</a></li> <li>Receipt of a digital asset as a result of an airdrop</li> <li>Any other disposition of a financial interest in a digital asset</li> <li>Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift</li> <li>Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount<span class="ql-inline-citation" data-cite="17"></span><br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <span class="heading-toc" id="toc-bitcoin-tax-basis"></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"> Bitcoin Tax Basis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> In its broadest sense, the tax basis of Bitcoin used to determine your gain or loss is the cost for which the digital currency was obtained or its market price at the time it was acquired. For example, assume you acquired 100,000 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/satoshi.asp">Satoshi</a> when Bitcoin traded at $20,000/coin. The cost basis of the acquisition would be $20. </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"> In the example above, should the Bitcoin be sold for $25 more than one year later, a $5 taxable capital gain would occur. If the Bitcoin were sold for $14, a $6 loss would occur. If you sold it for $25 six months later, $5 in taxable income would need to be reported. </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 tax basis of Bitcoin becomes more complicated as less straightforward transactions occur. For example, an investor may receive airdropped tokens or tokens in exchange for a service at no cost. In most of these situations, the airdropped digital currencies would have a basis equal to the fair market value at the time of acquisition. This tax treatment is similar to that of stocks and bonds.<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> <span class="heading-toc" id="toc-tax-implications-of-bitcoin-mining"></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"> Tax Implications of Bitcoin Mining </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Cryptocurrency mining is also considered a taxable event.<span class="ql-inline-citation" data-cite="17"></span> The fair market value or cost basis of the coin is its price at the time at which it was rewarded to you.<span class="ql-inline-citation" data-cite="22"></span> The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or business gain. </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"> If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit.<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_43-0"></div> <span class="heading-toc" id="toc-tax-implications-of-swaps"></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"> Tax Implications of Swaps </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Some have argued that conversion of one cryptocurrency to another, say from Bitcoin to Ether, should be classified as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/like-kind_exchange.asp">like-kind transfer</a> under Section 1031 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>. The IRS allows you to defer income tax on exchanges of like-kind property when they are exchanged for productive use in a business or investment.<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_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> However, in a Memorandum from the Office of Chief Counsel released on June 18, 2021, the IRS ruled that such exchanges do not qualify as a like-kind exchange under Section 1031.<span class="ql-inline-citation" data-cite="13"></span> What's more, the Tax Cuts and Jobs Act (TCJA) of 2017 put an end to that practice by clarifying that like-kind transfers are restricted to property transactions.<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_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> If you receive cryptocurrency in a transaction performed via an exchange, the value of the digital currency received is recorded by the exchange at the time of the transaction. If the transaction is performed outside of the exchange (P2P), the basis of the cryptocurrency is the fair market value at the time.<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_50-0"></div> <span class="heading-toc" id="toc-tax-implications-of-hard-forks"></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"> Tax Implications of Hard Forks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Hard forks of a cryptocurrency occur when a blockchain split occurs, meaning there is a change in protocols. This creates a taxable event if new cryptocurrencies are acquired because of it. For instance, imagine a blockchain was split, and a new coin, with differences in mining and use cases, was created. Holders of the original cryptocurrency are given new coins. This practice is called an airdrop and is also used as a marketing tactic by developers of new coins to induce demand and usage. </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 a 2019 ruling, the IRS clarified that hard forks do not result in gross income, if the wallet holder does not receive units of cryptocurrency. Airdrops, on the other hand, qualify as gross income after the holder receives units of a new cryptocurrency either after a hard fork or by marketers of a coin. In the latter case, the quantity and time at which a crypto wallet holder receives the new coins determines the tax amount. Airdrops are taxed as ordinary income.<span class="ql-inline-citation" data-cite="25"></span> </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-callout mntl-block" id="mntl-sc-block_56-0"><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_57-0"><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 critical note here is the coins' value when you receive them. A new coin might be forked from Bitcoin, with the developers stating it has a certain value.<span class="ql-inline-citation" data-cite="29"></span> However, just because the creators state this doesn't mean the airdropped crypto was worth it—it is worth whatever its fair market value was on that day because it is no longer Bitcoin, and cryptocurrency creators of non-security tokens do not dictate market value. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security-token.asp">security token</a> would likely be issued with a value because you're buying an asset being issued like a stock.</p></div></div></div> <span class="heading-toc" id="toc-tax-implications-of-gifting-bitcoin"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> Tax Implications of Gifting Bitcoin </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Cryptocurrency donations are treated similarly to cash donations. They are tax-deductible, though donors face limits on how much they can deduct based on their adjusted gross income. An appraiser will assign a fair market value for the coin based on its market price at the time of donation. The donor is not required to pay any taxes on the price gain.<span class="ql-inline-citation" data-cite="30"></span> </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 IRS established an annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gifttax.asp">gift tax exclusion</a>. In 2023, taxpayers were allowed an annual exclusion per donee for a gift amount of up to $17,000. This limit was increased to $18,000 in 2024.<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_62-0"></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_63-0"> <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_64-0"> The volatility of Bitcoin's price makes it difficult to determine the fair value of the cryptocurrency on purchase and sale transactions. You should always track transactions as they occur, as retrospectively needing to obtain financial information (even on distributed ledgers) may prove to be difficult. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-how-can-i-avoid-paying-taxes-on-bitcoin"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Avoid Paying Taxes on Bitcoin?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The only way to avoid paying Bitcoin taxes is to not sell or use any during the tax year. Receiving Bitcoin as an airdrop or in exchange for service has tax implications, but most taxable events are triggered by the sale or exchange of the cryptocurrency.</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-does-the-irs-know-i-own-bitcoin"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does the IRS Know I Own Bitcoin?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>All centralized exchanges have "Know Your Client" reporting obligations in which investors must upload their photo identification and some personal information.<span class="ql-inline-citation" data-cite="26"></span> If your trading platform provides you with a Form 1099-B or Form 1099-K, the IRS is informed that you have transacted with the trading platform.<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_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-what-happens-if-you-dont-report-taxes-on-bitcoin-to-the-irs"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Happens If You Don't Report Taxes on Bitcoin to the IRS?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Tax evasion occurs when taxpayers knowingly fail to report and pay taxes on any source of income, whether related to cryptocurrency, wages, salaries, stocks, real estate, or other investments. If the IRS has reason to believe you have engaged in tax fraud, it may audit you.<span class="ql-inline-citation" data-cite="27"></span> Be mindful that trading platforms may issue tax statements notifying the IRS that you have engaged in cryptocurrency transactions.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Cryptocurrency is an exciting, volatile, risky, and emerging market. Those investing, trading, or using Bitcoin should take care to learn the tax implications of their digital currency moves. </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"> Most transactions trigger taxable events, and your Bitcoin's tax basis is usually the cost basis or fair market value at acquisition. Knowingly avoiding reporting income or gains <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/talking-to-clients-about-crypto-taxes-8402669">on cryptocurrency</a> is considered tax fraud. </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"> <em>The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer">warranty and liability disclaimer</a> for more info. </em><br/> </p></div>	Even though [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) was introduced in 2009, there is still considerable confusion about its taxes. Cryptocurrency was conceived as a medium for daily transactions but has yet to gain widespread traction as a currency. Meanwhile, it has become popular with speculators and traders interested in making a quick buck off its volatility. The [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) addressed cryptocurrency transactions in its notice 2014-21. The agency stated that cryptocurrencies would be treated as assets similar to property. In 2020, the IRS began including a question on its [Form 1040](https://www.investopedia.com/terms/1/1040.asp) to determine whether the taxpayer had any cryptocurrency transactions during the given tax year. Depending on the type of transaction, assets are subject to various kinds of taxes. However, the unique characteristics and use cases for Bitcoin mean that there are many exceptions with continually evolving tax legislation. ### Key Takeaways * Bitcoin has been classified as an asset similar to property by the IRS and is taxed as such. * U.S. taxpayers must report Bitcoin transactions for tax purposes. * Retail transactions using Bitcoin, such as purchasing or selling goods, incur capital gains tax. * Bitcoin mining businesses are subject to capital gains tax and can make business deductions for their equipment. * Bitcoin hard forks and airdrops are taxed at ordinary income tax rates. * Gifting, donating, or inheriting Bitcoins are subject to the same limits as cash or property transactions. ## Bitcoins and Taxation: An Overview Bitcoin is an idea, a token of ownership of a certain value amount. Its value is determined by its market price on the day it is bought or sold—this price changes, sometimes by the minute. It is treated by users as a medium of exchange, investors as a store of value, and traders as a means to profit from price movements. In the U.S., it is taxed as property by the IRS. Because they are property, Bitcoin and cryptocurrencies are assets that require tax reporting when specific actions are taken. Depending on when and how someone acquires and uses cryptocurrency, they could be subject to capital gains or income taxes. ## Gains or Losses on Sales of Bitcoin When you sell a virtual currency you've held for more than one year, you must recognize capital gains or losses on the sale. Any gain or loss is calculated based on the cryptocurrency's market value on the day and time you bought it (its basis). The gains or losses recognized are subject to limitations on the deductibility of the taxpayer's capital losses. This tax legislation is determined by IRS Publication 544 (Sales and Other Dispositions of Assets). Capital gains are reported on [Schedule D](https://www.investopedia.com/terms/s/scheduled.asp) of a taxpayer's Form 1040. In the broadest sense, gains and losses on the sale of Bitcoin are treated the same as other capital assets such as stocks, bonds, precious metals, or certain personal property, Short-term capital gains are taxed as ordinary income and assessed at the same tax rate as the taxpayer's salary or wages. Long-term capital gains are taxed at a rate that varies on the taxpayer's income. Below are the capital gain rates for 2024. \| 2024 Capital Gains Tax Rates \| \| \| \| \| --- \| --- \| --- \| --- \| \| Filing Status \| 0% Tax Rate \| 15% Tax Rate \| 20% Tax Rate \| \| Single \| Up to $47,025 \| $47,025 to $518,900 \| Greater than $518,900 \| \| Head of Household \| Up to $63,000 \| $63,000 to $551,350 \| Greater than $551,350 \| \| Married Filing Jointly \| Up to $94,050 \| $94,050 to $583,750 \| Greater than $583,750 \| \| Married Filing Separately \| Up to $47,025 \| $47,025 to $291,850 \| Greater than $291,850 \| ## Bitcoin Taxable Transactions The IRS has provided specific guidance on transactions involving digital assets that are to be included in a tax return. Note that the extent of these transactions may make for difficulty when tracking all transactions; cryptocurrency investors and users are advised to seek tax advisor guidance to ensure all of the following transactions are adequately being reported: * Sale of a digital asset for fiat * Exchange of a digital asset for property, goods, or services * Exchange or trade of one digital asset for another digital asset * Receipt of a digital asset as payment for goods or services * Receipt of a new digital asset as a result of a hard fork * Receipt of a new digital asset as a result of mining or [staking activities](https://www.investopedia.com/terms/p/proof-stake-pos.asp) * Receipt of a digital asset as a result of an airdrop * Any other disposition of a financial interest in a digital asset * Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift * Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount ## Bitcoin Tax Basis In its broadest sense, the tax basis of Bitcoin used to determine your gain or loss is the cost for which the digital currency was obtained or its market price at the time it was acquired. For example, assume you acquired 100,000 [Satoshi](https://www.investopedia.com/terms/s/satoshi.asp) when Bitcoin traded at $20,000/coin. The cost basis of the acquisition would be $20. In the example above, should the Bitcoin be sold for $25 more than one year later, a $5 taxable capital gain would occur. If the Bitcoin were sold for $14, a $6 loss would occur. If you sold it for $25 six months later, $5 in taxable income would need to be reported. The tax basis of Bitcoin becomes more complicated as less straightforward transactions occur. For example, an investor may receive airdropped tokens or tokens in exchange for a service at no cost. In most of these situations, the airdropped digital currencies would have a basis equal to the fair market value at the time of acquisition. This tax treatment is similar to that of stocks and bonds. ## Tax Implications of Bitcoin Mining Cryptocurrency mining is also considered a taxable event. The fair market value or cost basis of the coin is its price at the time at which it was rewarded to you. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or business gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit. ## Tax Implications of Swaps Some have argued that conversion of one cryptocurrency to another, say from Bitcoin to Ether, should be classified as a [like-kind transfer](https://www.investopedia.com/terms/l/like-kind_exchange.asp) under Section 1031 of the [Internal Revenue Code](https://www.investopedia.com/terms/i/internal-revenue-code.asp). The IRS allows you to defer income tax on exchanges of like-kind property when they are exchanged for productive use in a business or investment. However, in a Memorandum from the Office of Chief Counsel released on June 18, 2021, the IRS ruled that such exchanges do not qualify as a like-kind exchange under Section 1031. What's more, the Tax Cuts and Jobs Act (TCJA) of 2017 put an end to that practice by clarifying that like-kind transfers are restricted to property transactions. If you receive cryptocurrency in a transaction performed via an exchange, the value of the digital currency received is recorded by the exchange at the time of the transaction. If the transaction is performed outside of the exchange (P2P), the basis of the cryptocurrency is the fair market value at the time. ## Tax Implications of Hard Forks Hard forks of a cryptocurrency occur when a blockchain split occurs, meaning there is a change in protocols. This creates a taxable event if new cryptocurrencies are acquired because of it. For instance, imagine a blockchain was split, and a new coin, with differences in mining and use cases, was created. Holders of the original cryptocurrency are given new coins. This practice is called an airdrop and is also used as a marketing tactic by developers of new coins to induce demand and usage. In a 2019 ruling, the IRS clarified that hard forks do not result in gross income, if the wallet holder does not receive units of cryptocurrency. Airdrops, on the other hand, qualify as gross income after the holder receives units of a new cryptocurrency either after a hard fork or by marketers of a coin. In the latter case, the quantity and time at which a crypto wallet holder receives the new coins determines the tax amount. Airdrops are taxed as ordinary income. ### A critical note here is the coins' value when you receive them. A new coin might be forked from Bitcoin, with the developers stating it has a certain value. However, just because the creators state this doesn't mean the airdropped crypto was worth it—it is worth whatever its fair market value was on that day because it is no longer Bitcoin, and cryptocurrency creators of non-security tokens do not dictate market value. A [security token](https://www.investopedia.com/terms/s/security-token.asp) would likely be issued with a value because you're buying an asset being issued like a stock. ## Tax Implications of Gifting Bitcoin Cryptocurrency donations are treated similarly to cash donations. They are tax-deductible, though donors face limits on how much they can deduct based on their adjusted gross income. An appraiser will assign a fair market value for the coin based on its market price at the time of donation. The donor is not required to pay any taxes on the price gain. The IRS established an annual [gift tax exclusion](https://www.investopedia.com/terms/g/gifttax.asp). In 2023, taxpayers were allowed an annual exclusion per donee for a gift amount of up to $17,000. This limit was increased to $18,000 in 2024. ## Special Considerations The volatility of Bitcoin's price makes it difficult to determine the fair value of the cryptocurrency on purchase and sale transactions. You should always track transactions as they occur, as retrospectively needing to obtain financial information (even on distributed ledgers) may prove to be difficult. ## How Can I Avoid Paying Taxes on Bitcoin? The only way to avoid paying Bitcoin taxes is to not sell or use any during the tax year. Receiving Bitcoin as an airdrop or in exchange for service has tax implications, but most taxable events are triggered by the sale or exchange of the cryptocurrency. ## Does the IRS Know I Own Bitcoin? All centralized exchanges have "Know Your Client" reporting obligations in which investors must upload their photo identification and some personal information. If your trading platform provides you with a Form 1099-B or Form 1099-K, the IRS is informed that you have transacted with the trading platform. ## What Happens If You Don't Report Taxes on Bitcoin to the IRS? Tax evasion occurs when taxpayers knowingly fail to report and pay taxes on any source of income, whether related to cryptocurrency, wages, salaries, stocks, real estate, or other investments. If the IRS has reason to believe you have engaged in tax fraud, it may audit you. Be mindful that trading platforms may issue tax statements notifying the IRS that you have engaged in cryptocurrency transactions. ## The Bottom Line Cryptocurrency is an exciting, volatile, risky, and emerging market. Those investing, trading, or using Bitcoin should take care to learn the tax implications of their digital currency moves. Most transactions trigger taxable events, and your Bitcoin's tax basis is usually the cost basis or fair market value at acquisition. Knowingly avoiding reporting income or gains [on cryptocurrency](https://www.investopedia.com/talking-to-clients-about-crypto-taxes-8402669) is considered tax fraud. The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info.	Even though Bitcoin was introduced in 2009, there is still considerable confusion about its taxes. Cryptocurrency was conceived as a medium for daily transactions but has yet to gain widespread traction as a currency. Meanwhile, it has become popular with speculators and traders interested in making a quick buck off its volatility. The Internal Revenue Service addressed cryptocurrency transactions in its notice 2014-21. The agency stated that cryptocurrencies would be treated as assets similar to property. In 2020, the IRS began including a question on its Form 1040 to determine whether the taxpayer had any cryptocurrency transactions during the given tax year. Depending on the type of transaction, assets are subject to various kinds of taxes. However, the unique characteristics and use cases for Bitcoin mean that there are many exceptions with continually evolving tax legislation. Key Takeaways Bitcoin has been classified as an asset similar to property by the IRS and is taxed as such.U.S. taxpayers must report Bitcoin transactions for tax purposes.Retail transactions using Bitcoin, such as purchasing or selling goods, incur capital gains tax.Bitcoin mining businesses are subject to capital gains tax and can make business deductions for their equipment.Bitcoin hard forks and airdrops are taxed at ordinary income tax rates.Gifting, donating, or inheriting Bitcoins are subject to the same limits as cash or property transactions. Bitcoins and Taxation: An Overview Bitcoin is an idea, a token of ownership of a certain value amount. Its value is determined by its market price on the day it is bought or sold—this price changes, sometimes by the minute. It is treated by users as a medium of exchange, investors as a store of value, and traders as a means to profit from price movements. In the U.S., it is taxed as property by the IRS. Because they are property, Bitcoin and cryptocurrencies are assets that require tax reporting when specific actions are taken. Depending on when and how someone acquires and uses cryptocurrency, they could be subject to capital gains or income taxes. Gains or Losses on Sales of Bitcoin When you sell a virtual currency you've held for more than one year, you must recognize capital gains or losses on the sale. Any gain or loss is calculated based on the cryptocurrency's market value on the day and time you bought it (its basis). The gains or losses recognized are subject to limitations on the deductibility of the taxpayer's capital losses. This tax legislation is determined by IRS Publication 544 (Sales and Other Dispositions of Assets). Capital gains are reported on Schedule D of a taxpayer's Form 1040. In the broadest sense, gains and losses on the sale of Bitcoin are treated the same as other capital assets such as stocks, bonds, precious metals, or certain personal property, Short-term capital gains are taxed as ordinary income and assessed at the same tax rate as the taxpayer's salary or wages. Long-term capital gains are taxed at a rate that varies on the taxpayer's income. Below are the capital gain rates for 2024. 2024 Capital Gains Tax Rates Filing Status 0% Tax Rate 15% Tax Rate 20% Tax Rate Single Up to $47,025 $47,025 to $518,900 Greater than $518,900 Head of Household Up to $63,000 $63,000 to $551,350 Greater than $551,350 Married Filing Jointly Up to $94,050 $94,050 to $583,750 Greater than $583,750 Married Filing Separately Up to $47,025 $47,025 to $291,850 Greater than $291,850 Bitcoin Taxable Transactions The IRS has provided specific guidance on transactions involving digital assets that are to be included in a tax return. Note that the extent of these transactions may make for difficulty when tracking all transactions; cryptocurrency investors and users are advised to seek tax advisor guidance to ensure all of the following transactions are adequately being reported: Sale of a digital asset for fiat Exchange of a digital asset for property, goods, or services Exchange or trade of one digital asset for another digital asset Receipt of a digital asset as payment for goods or services Receipt of a new digital asset as a result of a hard fork Receipt of a new digital asset as a result of mining or staking activities Receipt of a digital asset as a result of an airdrop Any other disposition of a financial interest in a digital asset Receipt or transfer of a digital asset for free (without providing any consideration) that does not qualify as a bona fide gift Transferring a digital asset as a bona fide gift if the donor exceeds the annual gift exclusion amount Bitcoin Tax Basis In its broadest sense, the tax basis of Bitcoin used to determine your gain or loss is the cost for which the digital currency was obtained or its market price at the time it was acquired. For example, assume you acquired 100,000 Satoshi when Bitcoin traded at $20,000/coin. The cost basis of the acquisition would be $20. In the example above, should the Bitcoin be sold for $25 more than one year later, a $5 taxable capital gain would occur. If the Bitcoin were sold for $14, a $6 loss would occur. If you sold it for $25 six months later, $5 in taxable income would need to be reported. The tax basis of Bitcoin becomes more complicated as less straightforward transactions occur. For example, an investor may receive airdropped tokens or tokens in exchange for a service at no cost. In most of these situations, the airdropped digital currencies would have a basis equal to the fair market value at the time of acquisition. This tax treatment is similar to that of stocks and bonds. Tax Implications of Bitcoin Mining Cryptocurrency mining is also considered a taxable event. The fair market value or cost basis of the coin is its price at the time at which it was rewarded to you. The nature of those deductions differs based on whether you mined the cryptocurrencies for personal or business gain. If you run a mining business, then you can make the deductions to cut down your tax bill. But you cannot make these deductions if you mined the cryptocurrencies for personal benefit. Tax Implications of Swaps Some have argued that conversion of one cryptocurrency to another, say from Bitcoin to Ether, should be classified as a like-kind transfer under Section 1031 of the Internal Revenue Code. The IRS allows you to defer income tax on exchanges of like-kind property when they are exchanged for productive use in a business or investment. However, in a Memorandum from the Office of Chief Counsel released on June 18, 2021, the IRS ruled that such exchanges do not qualify as a like-kind exchange under Section 1031. What's more, the Tax Cuts and Jobs Act (TCJA) of 2017 put an end to that practice by clarifying that like-kind transfers are restricted to property transactions. If you receive cryptocurrency in a transaction performed via an exchange, the value of the digital currency received is recorded by the exchange at the time of the transaction. If the transaction is performed outside of the exchange (P2P), the basis of the cryptocurrency is the fair market value at the time. Tax Implications of Hard Forks Hard forks of a cryptocurrency occur when a blockchain split occurs, meaning there is a change in protocols. This creates a taxable event if new cryptocurrencies are acquired because of it. For instance, imagine a blockchain was split, and a new coin, with differences in mining and use cases, was created. Holders of the original cryptocurrency are given new coins. This practice is called an airdrop and is also used as a marketing tactic by developers of new coins to induce demand and usage. In a 2019 ruling, the IRS clarified that hard forks do not result in gross income, if the wallet holder does not receive units of cryptocurrency. Airdrops, on the other hand, qualify as gross income after the holder receives units of a new cryptocurrency either after a hard fork or by marketers of a coin. In the latter case, the quantity and time at which a crypto wallet holder receives the new coins determines the tax amount. Airdrops are taxed as ordinary income. A critical note here is the coins' value when you receive them. A new coin might be forked from Bitcoin, with the developers stating it has a certain value. However, just because the creators state this doesn't mean the airdropped crypto was worth it—it is worth whatever its fair market value was on that day because it is no longer Bitcoin, and cryptocurrency creators of non-security tokens do not dictate market value. A security token would likely be issued with a value because you're buying an asset being issued like a stock. Tax Implications of Gifting Bitcoin Cryptocurrency donations are treated similarly to cash donations. They are tax-deductible, though donors face limits on how much they can deduct based on their adjusted gross income. An appraiser will assign a fair market value for the coin based on its market price at the time of donation. The donor is not required to pay any taxes on the price gain. The IRS established an annual gift tax exclusion. In 2023, taxpayers were allowed an annual exclusion per donee for a gift amount of up to $17,000. This limit was increased to $18,000 in 2024. Special Considerations The volatility of Bitcoin's price makes it difficult to determine the fair value of the cryptocurrency on purchase and sale transactions. You should always track transactions as they occur, as retrospectively needing to obtain financial information (even on distributed ledgers) may prove to be difficult. How Can I Avoid Paying Taxes on Bitcoin? The only way to avoid paying Bitcoin taxes is to not sell or use any during the tax year. Receiving Bitcoin as an airdrop or in exchange for service has tax implications, but most taxable events are triggered by the sale or exchange of the cryptocurrency. Does the IRS Know I Own Bitcoin? All centralized exchanges have "Know Your Client" reporting obligations in which investors must upload their photo identification and some personal information. If your trading platform provides you with a Form 1099-B or Form 1099-K, the IRS is informed that you have transacted with the trading platform. What Happens If You Don't Report Taxes on Bitcoin to the IRS? Tax evasion occurs when taxpayers knowingly fail to report and pay taxes on any source of income, whether related to cryptocurrency, wages, salaries, stocks, real estate, or other investments. If the IRS has reason to believe you have engaged in tax fraud, it may audit you. Be mindful that trading platforms may issue tax statements notifying the IRS that you have engaged in cryptocurrency transactions. The Bottom Line Cryptocurrency is an exciting, volatile, risky, and emerging market. Those investing, trading, or using Bitcoin should take care to learn the tax implications of their digital currency moves. Most transactions trigger taxable events, and your Bitcoin's tax basis is usually the cost basis or fair market value at acquisition. Knowingly avoiding reporting income or gains on cryptocurrency is considered tax fraud. The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info.	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https://www.investopedia.com/secured-overnight-financing-rate-sofr-4683954	Secured Overnight Financing Rate (SOFR) Definition 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-is-the-secured-overnight-financing-rate-sofr"></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 Secured Overnight Financing Rate (SOFR)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). </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"> SOFR took the place of LIBOR in June 2023, offering fewer opportunities for market manipulation and current rates rather than forward-looking rates and terms. </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 Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR).</li><li>SOFR is based on transactions in the Treasury repurchase market and is preferable to LIBOR since it is based on data from observable transactions rather than estimated future borrowing rates.</li><li>While SOFR became the benchmark rate for dollar-denominated derivatives and loans, other countries have sought their own alternative rates, such as SONIA and EONIA.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-secured-overnight-financing-rate-sofr"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding the Secured Overnight Financing Rate (SOFR) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The SOFR is an influential interest rate banks use to price U.S. dollar-denominated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a> and loans. The daily SOFR is based on transactions in the <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">Treasury</a> repurchase market, where investors offer banks overnight loans backed by their bond assets. </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"> Benchmark rates such as the SOFR are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp">essential in derivatives trading</a>—particularly <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interestrateswap.asp">interest-rate swaps</a>, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs. </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"> Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. For example, in a “vanilla” swap, one party agrees to pay a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedinterestrate.asp">fixed interest rate</a>, and, in exchange, the receiving party agrees to pay a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/floatinginterestrate.asp">floating interest rate</a> based on the SOFR—the rate may be higher or lower than SOFR, assessed on the party’s credit rating and interest-rate conditions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> In this case, the payer benefits when interest rates go up because the value of the incoming SOFR-based payments is now higher, even though the cost of the fixed-rate payments to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/counterparty.asp">counterparty</a> remains the same. The inverse occurs when rates go down. </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-history-of-the-sofr"></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"> History of the SOFR </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The LIBOR was previously the go-to interest rate at which investors and banks pegged their <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditagreement.asp">credit agreements</a> to. Comprised of five currencies and seven <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/maturity.asp">maturities</a>, the LIBOR was determined by calculating the average interest rate at which major global banks borrow from one another. The five currencies were the U.S. dollar (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/usd.asp">USD</a>), euro (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/euro.asp">EUR</a>), British pound (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gbp.asp">GBP</a>), Japanese yen (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/forex/j/jpy-japanese-yen.asp">JPY</a>), and the Swiss franc (<a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/chf.asp">CHF</a>). The most commonly quoted LIBOR was the three-month U.S. dollar rate, at the time referred to as the current LIBOR rate. </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"> A Financial Crisis Solution </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Following the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great-recession.asp">financial crisis of 2008</a>, regulators grew wary of overreliance on LIBOR. For one, it was based largely on estimates from global banks that were surveyed—but not necessarily on actual transactions. </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 downside of giving banks that much freedom became apparent in 2012 when it was revealed that more than a dozen financial institutions <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor-scandal.asp">fudged their data</a> in order to reap bigger profits from LIBOR-based derivative products.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In addition, banking regulations after the financial crisis meant that there was less <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interbankmarket.asp">interbank</a> borrowing happening, prompting some officials to express concern that the limited volume of trading activity made the LIBOR even less reliable. Eventually, the British regulator that compiled LIBOR rates said it would no longer require banks to submit interbank lending information after 2021. This update sent developed countries around the world scrambling to find an alternative <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/referencerate.asp">reference rate</a> that could eventually replace it. </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"> Federal Reserve Action </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> In 2017, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federalreservesystem.asp">Federal Reserve (Fed)</a> responded by assembling the Alternative Reference Rate Committee, composed of several large banks, to select an alternative reference rate for the United States. The committee chose the Secured Overnight Financing Rate (SOFR), an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overnightrate.asp">overnight rate</a>, as the new benchmark for dollar-denominated contracts.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The Federal Reserve Bank of New York began publishing the SOFR in April 2018 as part of the effort to replace LIBOR.<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_31-0"></div> <span class="heading-toc" id="toc-sofr-vs-libor"></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"> SOFR vs. LIBOR </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Unlike the LIBOR, there’s extensive trading in the Treasury <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/repurchaseagreement.asp">repo</a> market—roughly $4.8 trillion in June 2023—theoretically making it a more accurate indicator of borrowing costs.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Moreover, the Secured Overnight Financing Rate (SOFR) is based on data from observable transactions rather than on estimated (or falsified) borrowing rates, as was generally the case with LIBOR.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <span class="heading-toc" id="toc-transitioning-to-the-sofr"></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"> Transitioning to the SOFR </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> On Nov. 30, 2020, the Federal Reserve announced the LIBOR would be phased out and eventually replaced by June 2023. In the same announcement, banks were instructed to stop writing contracts using LIBOR by the end of 2021.<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_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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The LIBOR and the Secured Overnight Financing Rate (SOFR) coexisted until June 2023, when SOFR became the standard in the U.S.</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"> Transition Challenges </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> The move to the SOFR is expected to have the greatest impact on the derivatives market. However, it should also play an important role in consumer credit products—including some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arm.asp">adjustable-rate mortgages</a> and private student loans—as well as debt instruments such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialpaper.asp">commercial paper</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> In the case of an adjustable-rate mortgage based on the SOFR, the movement of the benchmark rate determines how much borrowers will pay once the fixed interest period of their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan.asp">loan</a> ends. If the SOFR is higher when the loan “resets,” homeowners will be paying a higher rate as well. </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-special-considerations"></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"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Other countries have sought alternatives to the LIBOR. For instance, the United Kingdom chose the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sonia.asp">Sterling Overnight Index Average (SONIA)</a>, an overnight lending rate, as its benchmark for sterling-based contracts going forward. </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 European Central Bank (ECB), on the other hand, opted to use the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eonia.asp">Euro Overnight Index Average (EONIA)</a>, which is based on unsecured overnight loans, while Japan applied its own rate, called the Tokyo overnight average rate (TONAR). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-what-is-the-current-secured-overnight-financing-rate"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Current Secured Overnight Financing Rate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>On June 1, 2023, the SOFR was 5.08%, according to the Federal Reserve Bank of New York.<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_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-whats-the-difference-between-libor-and-sofr"></span> <h2 class="mntl-sc-block-questionandanswer__question">What's the Difference Between LIBOR and SOFR?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>SOFR measures the broad cost of overnight cash borrowing, using Treasury securities as collateral. LIBOR was the rate banks used to borrow from each other internationally—it was sunsetted in June 2023.<span class="ql-inline-citation" data-cite="8"></span><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_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-is-there-a-3-month-sofr-rate"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is There a 3-Month SOFR Rate?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Federal Reserve does not publish a three-month SOFR rate, but the Chicago Mercantile Exchange publishes one-, three-, six-, and 12-month Term SOFR rates for derivatives markets.<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_57-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> The Secured Overnight Lending Rate (SOFR) is the benchmark for interest rates on dollar-denominated loans and derivatives. It replaced the London Intrabank Offered Rate in 2023, which was the globally accepted rate before SOFR was adopted. SOFR reflects an overnight rate, whereas LIBOR was a forward-looking rate, making SOFR much less susceptible to market fluctuations and manipulation. </p></div>	## What Is the Secured Overnight Financing Rate (SOFR)? The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). SOFR took the place of LIBOR in June 2023, offering fewer opportunities for market manipulation and current rates rather than forward-looking rates and terms. ### Key Takeaways * The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). * SOFR is based on transactions in the Treasury repurchase market and is preferable to LIBOR since it is based on data from observable transactions rather than estimated future borrowing rates. * While SOFR became the benchmark rate for dollar-denominated derivatives and loans, other countries have sought their own alternative rates, such as SONIA and EONIA. ## Understanding the Secured Overnight Financing Rate (SOFR) The SOFR is an influential interest rate banks use to price U.S. dollar-denominated [derivatives](https://www.investopedia.com/terms/d/derivative.asp) and loans. The daily SOFR is based on transactions in the [Treasury](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp) repurchase market, where investors offer banks overnight loans backed by their bond assets. Benchmark rates such as the SOFR are [essential in derivatives trading](https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp)—particularly [interest-rate swaps](https://www.investopedia.com/terms/i/interestrateswap.asp), which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs. Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. For example, in a “vanilla” swap, one party agrees to pay a [fixed interest rate](https://www.investopedia.com/terms/f/fixedinterestrate.asp), and, in exchange, the receiving party agrees to pay a [floating interest rate](https://www.investopedia.com/terms/f/floatinginterestrate.asp) based on the SOFR—the rate may be higher or lower than SOFR, assessed on the party’s credit rating and interest-rate conditions. In this case, the payer benefits when interest rates go up because the value of the incoming SOFR-based payments is now higher, even though the cost of the fixed-rate payments to the [counterparty](https://www.investopedia.com/terms/c/counterparty.asp) remains the same. The inverse occurs when rates go down. ## History of the SOFR The LIBOR was previously the go-to interest rate at which investors and banks pegged their [credit agreements](https://www.investopedia.com/terms/c/creditagreement.asp) to. Comprised of five currencies and seven [maturities](https://www.investopedia.com/terms/m/maturity.asp), the LIBOR was determined by calculating the average interest rate at which major global banks borrow from one another. The five currencies were the U.S. dollar ([USD](https://www.investopedia.com/terms/u/usd.asp)), euro ([EUR](https://www.investopedia.com/terms/e/euro.asp)), British pound ([GBP](https://www.investopedia.com/terms/g/gbp.asp)), Japanese yen ([JPY](https://www.investopedia.com/terms/forex/j/jpy-japanese-yen.asp)), and the Swiss franc ([CHF](https://www.investopedia.com/terms/c/chf.asp)). The most commonly quoted LIBOR was the three-month U.S. dollar rate, at the time referred to as the current LIBOR rate. ### A Financial Crisis Solution Following the [financial crisis of 2008](https://www.investopedia.com/terms/g/great-recession.asp), regulators grew wary of overreliance on LIBOR. For one, it was based largely on estimates from global banks that were surveyed—but not necessarily on actual transactions. The downside of giving banks that much freedom became apparent in 2012 when it was revealed that more than a dozen financial institutions [fudged their data](https://www.investopedia.com/terms/l/libor-scandal.asp) in order to reap bigger profits from LIBOR-based derivative products. In addition, banking regulations after the financial crisis meant that there was less [interbank](https://www.investopedia.com/terms/i/interbankmarket.asp) borrowing happening, prompting some officials to express concern that the limited volume of trading activity made the LIBOR even less reliable. Eventually, the British regulator that compiled LIBOR rates said it would no longer require banks to submit interbank lending information after 2021. This update sent developed countries around the world scrambling to find an alternative [reference rate](https://www.investopedia.com/terms/r/referencerate.asp) that could eventually replace it. ### Federal Reserve Action In 2017, the [Federal Reserve (Fed)](https://www.investopedia.com/terms/f/federalreservesystem.asp) responded by assembling the Alternative Reference Rate Committee, composed of several large banks, to select an alternative reference rate for the United States. The committee chose the Secured Overnight Financing Rate (SOFR), an [overnight rate](https://www.investopedia.com/terms/o/overnightrate.asp), as the new benchmark for dollar-denominated contracts. The Federal Reserve Bank of New York began publishing the SOFR in April 2018 as part of the effort to replace LIBOR. ## SOFR vs. LIBOR Unlike the LIBOR, there’s extensive trading in the Treasury [repo](https://www.investopedia.com/terms/r/repurchaseagreement.asp) market—roughly $4.8 trillion in June 2023—theoretically making it a more accurate indicator of borrowing costs. Moreover, the Secured Overnight Financing Rate (SOFR) is based on data from observable transactions rather than on estimated (or falsified) borrowing rates, as was generally the case with LIBOR. ## Transitioning to the SOFR On Nov. 30, 2020, the Federal Reserve announced the LIBOR would be phased out and eventually replaced by June 2023. In the same announcement, banks were instructed to stop writing contracts using LIBOR by the end of 2021. ### The LIBOR and the Secured Overnight Financing Rate (SOFR) coexisted until June 2023, when SOFR became the standard in the U.S. ### Transition Challenges The move to the SOFR is expected to have the greatest impact on the derivatives market. However, it should also play an important role in consumer credit products—including some [adjustable-rate mortgages](https://www.investopedia.com/terms/a/arm.asp) and private student loans—as well as debt instruments such as [commercial paper](https://www.investopedia.com/terms/c/commercialpaper.asp). In the case of an adjustable-rate mortgage based on the SOFR, the movement of the benchmark rate determines how much borrowers will pay once the fixed interest period of their [loan](https://www.investopedia.com/terms/l/loan.asp) ends. If the SOFR is higher when the loan “resets,” homeowners will be paying a higher rate as well. ## Special Considerations Other countries have sought alternatives to the LIBOR. For instance, the United Kingdom chose the [Sterling Overnight Index Average (SONIA)](https://www.investopedia.com/terms/s/sonia.asp), an overnight lending rate, as its benchmark for sterling-based contracts going forward. The European Central Bank (ECB), on the other hand, opted to use the [Euro Overnight Index Average (EONIA)](https://www.investopedia.com/terms/e/eonia.asp), which is based on unsecured overnight loans, while Japan applied its own rate, called the Tokyo overnight average rate (TONAR). ## What Is the Current Secured Overnight Financing Rate? On June 1, 2023, the SOFR was 5.08%, according to the Federal Reserve Bank of New York. ## What's the Difference Between LIBOR and SOFR? SOFR measures the broad cost of overnight cash borrowing, using Treasury securities as collateral. LIBOR was the rate banks used to borrow from each other internationally—it was sunsetted in June 2023. ## Is There a 3-Month SOFR Rate? The Federal Reserve does not publish a three-month SOFR rate, but the Chicago Mercantile Exchange publishes one-, three-, six-, and 12-month Term SOFR rates for derivatives markets. ## The Bottom Line The Secured Overnight Lending Rate (SOFR) is the benchmark for interest rates on dollar-denominated loans and derivatives. It replaced the London Intrabank Offered Rate in 2023, which was the globally accepted rate before SOFR was adopted. SOFR reflects an overnight rate, whereas LIBOR was a forward-looking rate, making SOFR much less susceptible to market fluctuations and manipulation.	What Is the Secured Overnight Financing Rate (SOFR)? The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). SOFR took the place of LIBOR in June 2023, offering fewer opportunities for market manipulation and current rates rather than forward-looking rates and terms. Key Takeaways The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR).SOFR is based on transactions in the Treasury repurchase market and is preferable to LIBOR since it is based on data from observable transactions rather than estimated future borrowing rates.While SOFR became the benchmark rate for dollar-denominated derivatives and loans, other countries have sought their own alternative rates, such as SONIA and EONIA. Understanding the Secured Overnight Financing Rate (SOFR) The SOFR is an influential interest rate banks use to price U.S. dollar-denominated derivatives and loans. The daily SOFR is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets. Benchmark rates such as the SOFR are essential in derivatives trading—particularly interest-rate swaps, which corporations and other parties use to manage interest-rate risk and to speculate on changes in borrowing costs. Interest-rate swaps are agreements in which the parties exchange fixed-rate interest payments for floating-rate interest payments. For example, in a “vanilla” swap, one party agrees to pay a fixed interest rate, and, in exchange, the receiving party agrees to pay a floating interest rate based on the SOFR—the rate may be higher or lower than SOFR, assessed on the party’s credit rating and interest-rate conditions. In this case, the payer benefits when interest rates go up because the value of the incoming SOFR-based payments is now higher, even though the cost of the fixed-rate payments to the counterparty remains the same. The inverse occurs when rates go down. History of the SOFR The LIBOR was previously the go-to interest rate at which investors and banks pegged their credit agreements to. Comprised of five currencies and seven maturities, the LIBOR was determined by calculating the average interest rate at which major global banks borrow from one another. The five currencies were the U.S. dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), and the Swiss franc (CHF). The most commonly quoted LIBOR was the three-month U.S. dollar rate, at the time referred to as the current LIBOR rate. A Financial Crisis Solution Following the financial crisis of 2008, regulators grew wary of overreliance on LIBOR. For one, it was based largely on estimates from global banks that were surveyed—but not necessarily on actual transactions. The downside of giving banks that much freedom became apparent in 2012 when it was revealed that more than a dozen financial institutions fudged their data in order to reap bigger profits from LIBOR-based derivative products. In addition, banking regulations after the financial crisis meant that there was less interbank borrowing happening, prompting some officials to express concern that the limited volume of trading activity made the LIBOR even less reliable. Eventually, the British regulator that compiled LIBOR rates said it would no longer require banks to submit interbank lending information after 2021. This update sent developed countries around the world scrambling to find an alternative reference rate that could eventually replace it. Federal Reserve Action In 2017, the Federal Reserve (Fed) responded by assembling the Alternative Reference Rate Committee, composed of several large banks, to select an alternative reference rate for the United States. The committee chose the Secured Overnight Financing Rate (SOFR), an overnight rate, as the new benchmark for dollar-denominated contracts. The Federal Reserve Bank of New York began publishing the SOFR in April 2018 as part of the effort to replace LIBOR. SOFR vs. LIBOR Unlike the LIBOR, there’s extensive trading in the Treasury repo market—roughly $4.8 trillion in June 2023—theoretically making it a more accurate indicator of borrowing costs. Moreover, the Secured Overnight Financing Rate (SOFR) is based on data from observable transactions rather than on estimated (or falsified) borrowing rates, as was generally the case with LIBOR. Transitioning to the SOFR On Nov. 30, 2020, the Federal Reserve announced the LIBOR would be phased out and eventually replaced by June 2023. In the same announcement, banks were instructed to stop writing contracts using LIBOR by the end of 2021. The LIBOR and the Secured Overnight Financing Rate (SOFR) coexisted until June 2023, when SOFR became the standard in the U.S. Transition Challenges The move to the SOFR is expected to have the greatest impact on the derivatives market. However, it should also play an important role in consumer credit products—including some adjustable-rate mortgages and private student loans—as well as debt instruments such as commercial paper. In the case of an adjustable-rate mortgage based on the SOFR, the movement of the benchmark rate determines how much borrowers will pay once the fixed interest period of their loan ends. If the SOFR is higher when the loan “resets,” homeowners will be paying a higher rate as well. Special Considerations Other countries have sought alternatives to the LIBOR. For instance, the United Kingdom chose the Sterling Overnight Index Average (SONIA), an overnight lending rate, as its benchmark for sterling-based contracts going forward. The European Central Bank (ECB), on the other hand, opted to use the Euro Overnight Index Average (EONIA), which is based on unsecured overnight loans, while Japan applied its own rate, called the Tokyo overnight average rate (TONAR). What Is the Current Secured Overnight Financing Rate? On June 1, 2023, the SOFR was 5.08%, according to the Federal Reserve Bank of New York. What's the Difference Between LIBOR and SOFR? SOFR measures the broad cost of overnight cash borrowing, using Treasury securities as collateral. LIBOR was the rate banks used to borrow from each other internationally—it was sunsetted in June 2023. Is There a 3-Month SOFR Rate? The Federal Reserve does not publish a three-month SOFR rate, but the Chicago Mercantile Exchange publishes one-, three-, six-, and 12-month Term SOFR rates for derivatives markets. The Bottom Line The Secured Overnight Lending Rate (SOFR) is the benchmark for interest rates on dollar-denominated loans and derivatives. It replaced the London Intrabank Offered Rate in 2023, which was the globally accepted rate before SOFR was adopted. SOFR reflects an overnight rate, whereas LIBOR was a forward-looking rate, making SOFR much less susceptible to market fluctuations and manipulation.	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https://www.investopedia.com/gold-and-silver-etfs-shine-as-precious-metals-prices-surge-8651075	Gold and Silver ETFs Shine As Precious Metals Prices Surge	<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>Gold and silver ETFs have gained as prices of the underlying precious metals have hit new highs.</li><li>The SPDR Gold Shares ETF has gained 17.5% this year, largely tracking gold's jump to new all-time highs.</li><li>The iShares Physical Silver Trust is up 33% in 2024 as the underlying metal has hit its highest level in over a decade.</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"> Gold and silver <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/01/082901.asp">exchange-traded funds</a> gained on Monday as the underlying metals surged to new highs. </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"> Prices for gold bullion (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOLD">GOLD</a>) topped $2,450 for the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/gold-roundup-for-may-20-price-reaches-record-high-amid-expectations-of-fed-rate-cuts-8651016">first time</a> on Monday, while silver (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SILVER">SILVER</a>) was trading at its <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/silver-price-climbs-11-year-high-above-usd30-watch-this-level-8650919">highest level in 11 years</a>, around $32 </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"> Precious metals have been boosted by geopolitical tensions and weakness in the U.S. dollar after benign inflation data in the U.S. last week boosted hopes that the Federal Reserve could be in a position to consider cutting its benchmark interest 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"> That's good news for exchange-traded funds that hold gold and silver. </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-all-the-glitters-includes-gold-etfs"></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"> All The Glitters Includes Gold ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> SPDR Gold Shares ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GLD">GLD</a>)—the oldest and largest ETF backed by physical gold, with $64.8 billion in assets at the end of last week—rose 0.4% Monday and has gained 17.5% so far this year.<span class="ql-inline-citation" data-cite="3"></span> Shares in another popular gold ETF, the iShares Gold Trust (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IAU">IAU</a>), also gained 0.4% Monday and are up 17.6% in 2024. </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 recent months, gold prices have been rising, propped up to a large extent by central bank purchases, especially from China. </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"> Early in the year, investors were pulling money out of gold ETFs, according to analysis from the World Gold Council. However, the recent rally in gold prices may have helped turn the tide in favor of the yellow metal, with North American gold ETFs recording net inflows in March and April after massive outflows in the first two months of the year.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-silver-etfs-sparkle"></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"> Silver ETFs Sparkle </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Silver ETFs were also higher after an increase in the price of the underlying precious metal. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_21-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:69.0%;"> <img alt="GLD, IAU, SLV price chart year-to-date" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/WKbP2pOzVJ8Rwpb3uDiGPNJNZDA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/WKbP2pOzVJ8Rwpb3uDiGPNJNZDA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png" data-srcset="https://www.investopedia.com/thmb/TIzDyjphGopNMNPftXHSYiuKZkY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png 750w" data-tracking-container="true" height="1316" id="mntl-sc-block-image_1-0" width="1906"/> <noscript> <img alt="GLD, IAU, SLV price chart year-to-date" class="img--noscript universal-image__image" height="1316" sizes="750px" src="https://www.investopedia.com/thmb/WKbP2pOzVJ8Rwpb3uDiGPNJNZDA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png" srcset="https://www.investopedia.com/thmb/TIzDyjphGopNMNPftXHSYiuKZkY=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png 750w" width="1906"/> </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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The iShares Physical Silver Trust (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLV">SLV</a>), with $12.4 billion in assets, gained 0.7% on the day and are up 33% since the start of the year as retail investors look for diversification.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 * Gold and silver ETFs have gained as prices of the underlying precious metals have hit new highs. * The SPDR Gold Shares ETF has gained 17.5% this year, largely tracking gold's jump to new all-time highs. * The iShares Physical Silver Trust is up 33% in 2024 as the underlying metal has hit its highest level in over a decade. Gold and silver [exchange-traded funds](https://www.investopedia.com/articles/01/082901.asp) gained on Monday as the underlying metals surged to new highs. Prices for gold bullion ([GOLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOLD)) topped $2,450 for the [first time](https://www.investopedia.com/gold-roundup-for-may-20-price-reaches-record-high-amid-expectations-of-fed-rate-cuts-8651016) on Monday, while silver ([SILVER](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SILVER)) was trading at its [highest level in 11 years](https://www.investopedia.com/silver-price-climbs-11-year-high-above-usd30-watch-this-level-8650919), around $32 Precious metals have been boosted by geopolitical tensions and weakness in the U.S. dollar after benign inflation data in the U.S. last week boosted hopes that the Federal Reserve could be in a position to consider cutting its benchmark interest rate. That's good news for exchange-traded funds that hold gold and silver. ## All The Glitters Includes Gold ETFs SPDR Gold Shares ETF ([GLD](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GLD))—the oldest and largest ETF backed by physical gold, with $64.8 billion in assets at the end of last week—rose 0.4% Monday and has gained 17.5% so far this year. Shares in another popular gold ETF, the iShares Gold Trust ([IAU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IAU)), also gained 0.4% Monday and are up 17.6% in 2024. In recent months, gold prices have been rising, propped up to a large extent by central bank purchases, especially from China. Early in the year, investors were pulling money out of gold ETFs, according to analysis from the World Gold Council. However, the recent rally in gold prices may have helped turn the tide in favor of the yellow metal, with North American gold ETFs recording net inflows in March and April after massive outflows in the first two months of the year. ## Silver ETFs Sparkle Silver ETFs were also higher after an increase in the price of the underlying precious metal. ![GLD, IAU, SLV price chart year-to-date]() ![GLD, IAU, SLV price chart year-to-date](https://www.investopedia.com/thmb/WKbP2pOzVJ8Rwpb3uDiGPNJNZDA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GLD_2024-05-20_16-27-04-f8b45ed0b47f496abf2c231923682776.png) TradingView The iShares Physical Silver Trust ([SLV](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLV)), with $12.4 billion in assets, gained 0.7% on the day and are up 33% since the start of the year as retail investors look for diversification. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways Gold and silver ETFs have gained as prices of the underlying precious metals have hit new highs.The SPDR Gold Shares ETF has gained 17.5% this year, largely tracking gold's jump to new all-time highs.The iShares Physical Silver Trust is up 33% in 2024 as the underlying metal has hit its highest level in over a decade. Gold and silver exchange-traded funds gained on Monday as the underlying metals surged to new highs. Prices for gold bullion (GOLD) topped $2,450 for the first time on Monday, while silver (SILVER) was trading at its highest level in 11 years, around $32 Precious metals have been boosted by geopolitical tensions and weakness in the U.S. dollar after benign inflation data in the U.S. last week boosted hopes that the Federal Reserve could be in a position to consider cutting its benchmark interest rate. That's good news for exchange-traded funds that hold gold and silver. All The Glitters Includes Gold ETFs SPDR Gold Shares ETF (GLD)—the oldest and largest ETF backed by physical gold, with $64.8 billion in assets at the end of last week—rose 0.4% Monday and has gained 17.5% so far this year. Shares in another popular gold ETF, the iShares Gold Trust (IAU), also gained 0.4% Monday and are up 17.6% in 2024. In recent months, gold prices have been rising, propped up to a large extent by central bank purchases, especially from China. Early in the year, investors were pulling money out of gold ETFs, according to analysis from the World Gold Council. However, the recent rally in gold prices may have helped turn the tide in favor of the yellow metal, with North American gold ETFs recording net inflows in March and April after massive outflows in the first two months of the year. Silver ETFs Sparkle Silver ETFs were also higher after an increase in the price of the underlying precious metal. TradingView The iShares Physical Silver Trust (SLV), with $12.4 billion in assets, gained 0.7% on the day and are up 33% since the start of the year as retail investors look for diversification. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "exchange-traded funds", "https://www.investopedia.com/articles/01/082901.asp" ], [ "GOLD", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOLD" ], [ "first time", "https://www.investopedia.com/gold-roundup-for-may-20-price-reaches-record-high-amid-expectations-of-fed-rate-cuts-8651016" ], [ "SILVER", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=SILVER" ], [ "highest level in 11 years", "https://www.investopedia.com/silver-price-climbs-11-year-high-above-usd30-watch-this-level-8650919" ], [ "GLD", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GLD" ], [ "IAU", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=IAU" ], [ "GLD, IAU, SLV price chart year-to-date", "https://www.investopedia.com/thmb/WKbP2pOzVJ8Rwpb3uDiGPNJNZDA=/1500x0/filters:no_upscale(" ], [ "SLV", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=SLV" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/terms/t/tax_exempt.asp	What Does It Mean to Be Tax-Exempt or Have Tax-Exempt Income?	<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-does-it-mean-to-be-tax-exempt"></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 Does It Mean to Be Tax-Exempt? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Tax-exempt refers to income or transactions that are free from tax at the federal, state, or local level. The reporting of tax-free items may be on a taxpayer's individual or business tax return and shown for informational purposes only. The tax-exempt article is not part of any tax calculations. </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"> Tax-exempt may also refer to the status of a business or organization which has limits on the amount of income or gifts which are taxable. These organizations include religious and charitable institutions.<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_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>Tax-exempt status allows a taxpayer to file a return with the IRS that exempts them from paying taxes on any net income or profit.</li><li>A taxpayer can offset capital gains and avoid taxes on disposed assets, though this often allows a taxpayer to be exempt up to their current or prior losses.</li><li>Taxpayers who avoid taxes may still be required to pay alternative minimum taxes. </li><li>Most commonly, organizations gain tax-exempt status by requesting the status from the IRS.</li><li>To maintain the status, organizations must meet ongoing filing and reporting requirements.</li></ul></div></div></div> <span class="heading-toc" id="toc-common-tax-exempt-earnings"></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"> Common Tax-Exempt Earnings </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Not to be confused with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">tax deduction</a>, tax exemption frees the taxpayer of any tax obligation to submit taxes on the tax-free transaction or income. Whereas the use of a tax deduction is to reduce the tax obligation by lowering gross income.<span class="ql-inline-citation" data-cite="14"></span><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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> One common type of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062716/types-income-irs-cant-touch.asp">tax-exempt income</a> is interest earned on municipal bonds, which are bonds issued by states and cities to raise funds for general operations or a specific project. When a taxpayer makes interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes.<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"> Taxpayers receive IRS Form <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/form-1099-int.asp">1099-INT</a> for any investment interest they earn during the tax year.<span class="ql-inline-citation" data-cite="15"></span> The reporting of tax-exempt interest is in box 8 of the 1099 form. This information is only data and is not included in the calculation of personal income taxes.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-other-tax-exempt-income"></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"> Other Tax-Exempt Income </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There's a range of types of income that may be tax-exempt based on your specific situation. In addition, tax rules may continually evolve and change. When crafting your personal tax strategy, consult with a tax prepared to best understand the latest news and widest scope on other tax-exempt income. </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 list below contains other common tax-exempt income sources. The list is not meant to be exhaustive, and some of those additional items may include: </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>Health Savings Account (HSA) Withdrawals: </strong>Withdrawals from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp">HSAs</a> used to pay for qualified medical expenses are tax-exempt. Contributions to HSAs may also be tax-deductible, and any earnings within the account grow tax-free.<span class="ql-inline-citation" data-cite="24"></span></li> <li><strong>Qualified Roth IRA Distributions:</strong> Distributions from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRAs</a> are tax-exempt if certain conditions are met.<span class="ql-inline-citation" data-cite="25"></span></li> <li><strong>Certain Social Security Benefits:</strong> A portion of Social Security benefits may be tax-exempt, depending on the recipient's total income and filing status. Generally, if Social Security benefits are the only source of income, they are likely to be tax-exempt as the taxpayer may not meet a taxable threshold.<span class="ql-inline-citation" data-cite="26"></span></li> <li><strong>Certain Veterans Benefits: </strong>Some benefits provided to veterans, their dependents, and survivors by the Department of Veterans Affairs are tax-exempt.<span class="ql-inline-citation" data-cite="27"></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-exemption"></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-Exemption </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> A taxpayer may buy an asset and subsequently sell that asset for a profit. The profit is a capital gain, which creates a taxable event. However, several types of capital gains are exempt from taxation. </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 taxpayer can offset <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/tax/09/tax-effects-capital-gains.asp">capital gains</a> with other <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalloss.asp">capital losses</a> for the tax year. For example, an investor with $5,000 in profits and $3,000 in losses pays taxes on only $2,000 in capital gains. The amount of capital losses a taxpayer may claim in a given year has a cap of $3,000. When capital losses exceed this cap, the excess may be carried forward to offset gains in future years.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The tax code also allows taxpayers to exclude from federal taxes a specific portion of capital gains from the sale of a home.<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_28-0"></div> <span class="heading-toc" id="toc-alternative-minimum-tax-and-exemptions"></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"> Alternative Minimum Tax and Exemptions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> 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> is an alternative method for determining tax liability. AMT adds back specific tax-exempt items into the personal tax calculation. Interest from private activity bonds exempt from regular tax, for example, is added to the AMT tax calculation. Individual taxpayers must include the AMT calculation with their original tax return and pay tax on the higher tax liability.<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_31-0"></div> <span class="heading-toc" id="toc-tax-exempt-organizations"></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"> Tax-Exempt Organizations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay an estimated tax if it expects its tax for the year to be $500 or more.<span class="ql-inline-citation" data-cite="11"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/501c3-organizations.asp">501(c)(3)</a> nonprofit corporation is a charitable organization that the IRS recognizes as tax-exempt. This type of organization does not pay income tax on its earnings or on the donations it receives. Also, any taxpayer donations may reduce a taxpayer's taxable income by the donation amount. This incentive encourages private charity and makes it easier for nonprofits to raise money. </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"> A 501(c)(3) is a charitable organization involved in religious, charitable, educational, literary, preventing cruelty to animals and children, fostering amateur local and international sports competitions, testing for public safety, and scientific activities or operations.<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_38-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_40-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>To gain the exemption, an organization must demonstrate how the exemption will serve the public and provide a benefit to a community.</p></div></div></div> <span class="heading-toc" id="toc-becoming-tax-exempt"></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"> Becoming Tax-Exempt </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> An entity can become tax-exempt by meeting the requirements set forth by the IRS. There are several <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx">categories of tax-exempt status</a> for charitable, religious, educational, and scientific organizations. The type of tax-exempt status needed will depend on the nature of the organization's activities.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> The organization must be formed as a legal entity, and the organization must obtain an EIN from the IRS. With this EIN, the organization is able to file an application with the IRS to obtain tax-exempt status. The most common form is Form 1023 for 501(c)(3) organizations. The application must provide detailed information about the organization's activities, governance, finances, and other relevant information.<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 IRS will review the application and make a determination about the organization's tax-exempt status. The process can take several months, and the IRS may request additional information or clarification during the review process.<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_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Once tax-exempt status is granted, the organization must maintain compliance with IRS rules and regulations via filing annual tax returns and other forms, meeting governance and operational requirements, and avoiding prohibited activities that could jeopardize tax-exempt status.<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_49-0"></div> <span class="heading-toc" id="toc-tax-exempt-organization-vs-nonprofit-organization"></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"> Tax-Exempt Organization vs. Nonprofit Organization </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Though often interchanged to describe the same entity, there are worthwhile differences to mention between a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx">tax-exempt organization</a> and a nonprofit organization. </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 nonprofit organization is a type of entity that is organized for a specific purpose. Nonprofits can be structured in a variety of ways such as a corporation, trust, or unincorporated association. They are not required to pay federal income taxes on their earnings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_54-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> A tax-exempt entity, on the other hand, is an organization that has been granted exemption from federal income tax by the IRS. Though this includes most nonprofit organizations, not all nonprofits are automatically tax-exempt. In addition, a nonprofit must apply to become tax-exempt; without the review and approval by the IRS, the nonprofit will technically not be tax-exempt.<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_56-0"></div> <span class="heading-toc" id="toc-limitations-of-tax-exempt-status"></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"> Limitations of Tax-Exempt Status </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Keep in mind there are some downsides to obtaining a tax-exempt status. Tax-exempt organizations, particularly those classified as 501(c)(3) organizations, are subject to strict limitations and reporting requirements when engaging in political activities. This includes endorsing or opposing political candidates, contributing funds to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/042716/what-happens-campaign-funds-after-elections.asp">political campaigns</a>, and engaging in partisan activities.<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_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Tax-exempt entities must adhere to regulations regarding transactions with insiders such as board members, officers, and key employees. These regulations are designed to prevent conflicts of interest, self-dealing, and private inurement, where individuals in positions of authority benefit personally from the organization's resources. Engaging in prohibited transactions can result in penalties, fines, or loss of tax-exempt status.<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_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Last, tax-exempt entities are generally prohibited from distributing profits or assets to individuals or shareholders. Any excess, ungranted funds are to be kept internally with potentially minimal flexibility. Though this restriction ensures that the organization's resources are dedicated to its tax-exempt purpose, it puts an onus on the entity to disburse funds for a specific purpose. The tax-exempt entity risks jeopardizing future funding from donors or grantors if disbursement is slow. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-is-a-tax-exempt-organization-the-same-as-a-501c3-organization"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Tax-Exempt Organization the Same As a 501(c)(3) Organization?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A 501(c)(3) is a tax-exempt organization recognized by the IRS. However, there are other forms of organization an entity can file for and be awarded that are also tax-exempt. Therefore, while a 501(c) is tax-exempt, not all tax-exempt organizations are 501(c)(3) organizations.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-what-is-the-downside-of-being-tax-exempt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Downside of Being Tax-Exempt?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Administratively, there may be additional requirements a company must meet such as annual reporting and meeting stipulated criteria. To become and maintain its status as tax-exempt, there is an additional burden to an organization from a time and labor standpoint. Outside of this reporting and filing requirement, there are often little to no downsides to becoming tax-exempt.</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-why-do-nonprofit-organizations-not-pay-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Do Nonprofit Organizations Not Pay Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Nonprofit organizations do not pay taxes because they are engaged in public or private interests. The purpose of a nonprofit is to further extend the benefit to a community; for this reason, the IRS recognizes and awards these entities tax-exempt as any collected taxes would be used for a similar purpose (i.e. would be redistributed to benefit the community).</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-can-a-tax-exempt-organization-make-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Tax-Exempt Organization Make Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, tax-exempt organizations such as nonprofits are often encouraged and expected to make money or earn more money than what they spend. For the financial health and longevity of the organization, these <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/native-american-taxes-8382438">entities must build reserves</a> and have excess cash reside in bank accounts. The purpose of being tax-exempt is to have this net profit not be taxed by the IRS.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> A tax-exempt organization is a type of entity that is recognized by the IRS as being exempt from paying federal income taxes on its earnings. To be considered tax-exempt, an organization must meet certain requirements set forth by the IRS and must apply for tax-exempt status. Taxpayers can be exempt from paying certain amounts of ordinary income or capital gains. </p></div>	## What Does It Mean to Be Tax-Exempt? Tax-exempt refers to income or transactions that are free from tax at the federal, state, or local level. The reporting of tax-free items may be on a taxpayer's individual or business tax return and shown for informational purposes only. The tax-exempt article is not part of any tax calculations. Tax-exempt may also refer to the status of a business or organization which has limits on the amount of income or gifts which are taxable. These organizations include religious and charitable institutions. ### Key Takeaways * Tax-exempt status allows a taxpayer to file a return with the IRS that exempts them from paying taxes on any net income or profit. * A taxpayer can offset capital gains and avoid taxes on disposed assets, though this often allows a taxpayer to be exempt up to their current or prior losses. * Taxpayers who avoid taxes may still be required to pay alternative minimum taxes. * Most commonly, organizations gain tax-exempt status by requesting the status from the IRS. * To maintain the status, organizations must meet ongoing filing and reporting requirements. ## Common Tax-Exempt Earnings Not to be confused with a [tax deduction](https://www.investopedia.com/terms/t/tax-deduction.asp), tax exemption frees the taxpayer of any tax obligation to submit taxes on the tax-free transaction or income. Whereas the use of a tax deduction is to reduce the tax obligation by lowering gross income. One common type of [tax-exempt income](https://www.investopedia.com/articles/personal-finance/062716/types-income-irs-cant-touch.asp) is interest earned on municipal bonds, which are bonds issued by states and cities to raise funds for general operations or a specific project. When a taxpayer makes interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes. Taxpayers receive IRS Form [1099-INT](https://www.investopedia.com/terms/f/form-1099-int.asp) for any investment interest they earn during the tax year. The reporting of tax-exempt interest is in box 8 of the 1099 form. This information is only data and is not included in the calculation of personal income taxes. ## Other Tax-Exempt Income There's a range of types of income that may be tax-exempt based on your specific situation. In addition, tax rules may continually evolve and change. When crafting your personal tax strategy, consult with a tax prepared to best understand the latest news and widest scope on other tax-exempt income. The list below contains other common tax-exempt income sources. The list is not meant to be exhaustive, and some of those additional items may include: * Health Savings Account (HSA) Withdrawals: Withdrawals from [HSAs](https://www.investopedia.com/terms/h/hsa.asp) used to pay for qualified medical expenses are tax-exempt. Contributions to HSAs may also be tax-deductible, and any earnings within the account grow tax-free. * Qualified Roth IRA Distributions: Distributions from [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp) are tax-exempt if certain conditions are met. * Certain Social Security Benefits: A portion of Social Security benefits may be tax-exempt, depending on the recipient's total income and filing status. Generally, if Social Security benefits are the only source of income, they are likely to be tax-exempt as the taxpayer may not meet a taxable threshold. * Certain Veterans Benefits: Some benefits provided to veterans, their dependents, and survivors by the Department of Veterans Affairs are tax-exempt. ## Capital Gains Tax-Exemption A taxpayer may buy an asset and subsequently sell that asset for a profit. The profit is a capital gain, which creates a taxable event. However, several types of capital gains are exempt from taxation. A taxpayer can offset [capital gains](https://www.investopedia.com/articles/tax/09/tax-effects-capital-gains.asp) with other [capital losses](https://www.investopedia.com/terms/c/capitalloss.asp) for the tax year. For example, an investor with $5,000 in profits and $3,000 in losses pays taxes on only $2,000 in capital gains. The amount of capital losses a taxpayer may claim in a given year has a cap of $3,000. When capital losses exceed this cap, the excess may be carried forward to offset gains in future years. The tax code also allows taxpayers to exclude from federal taxes a specific portion of capital gains from the sale of a home. ## Alternative Minimum Tax and Exemptions The [alternative minimum tax (AMT)](https://www.investopedia.com/terms/a/alternativeminimumtax.asp) is an alternative method for determining tax liability. AMT adds back specific tax-exempt items into the personal tax calculation. Interest from private activity bonds exempt from regular tax, for example, is added to the AMT tax calculation. Individual taxpayers must include the AMT calculation with their original tax return and pay tax on the higher tax liability. ## Tax-Exempt Organizations An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay an estimated tax if it expects its tax for the year to be $500 or more. A [501(c)(3)](https://www.investopedia.com/terms/1/501c3-organizations.asp) nonprofit corporation is a charitable organization that the IRS recognizes as tax-exempt. This type of organization does not pay income tax on its earnings or on the donations it receives. Also, any taxpayer donations may reduce a taxpayer's taxable income by the donation amount. This incentive encourages private charity and makes it easier for nonprofits to raise money. A 501(c)(3) is a charitable organization involved in religious, charitable, educational, literary, preventing cruelty to animals and children, fostering amateur local and international sports competitions, testing for public safety, and scientific activities or operations. ### To gain the exemption, an organization must demonstrate how the exemption will serve the public and provide a benefit to a community. ## Becoming Tax-Exempt An entity can become tax-exempt by meeting the requirements set forth by the IRS. There are several [categories of tax-exempt status](https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx) for charitable, religious, educational, and scientific organizations. The type of tax-exempt status needed will depend on the nature of the organization's activities. The organization must be formed as a legal entity, and the organization must obtain an EIN from the IRS. With this EIN, the organization is able to file an application with the IRS to obtain tax-exempt status. The most common form is Form 1023 for 501(c)(3) organizations. The application must provide detailed information about the organization's activities, governance, finances, and other relevant information. The IRS will review the application and make a determination about the organization's tax-exempt status. The process can take several months, and the IRS may request additional information or clarification during the review process. Once tax-exempt status is granted, the organization must maintain compliance with IRS rules and regulations via filing annual tax returns and other forms, meeting governance and operational requirements, and avoiding prohibited activities that could jeopardize tax-exempt status. ## Tax-Exempt Organization vs. Nonprofit Organization Though often interchanged to describe the same entity, there are worthwhile differences to mention between a [tax-exempt organization](https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx) and a nonprofit organization. A nonprofit organization is a type of entity that is organized for a specific purpose. Nonprofits can be structured in a variety of ways such as a corporation, trust, or unincorporated association. They are not required to pay federal income taxes on their earnings. A tax-exempt entity, on the other hand, is an organization that has been granted exemption from federal income tax by the IRS. Though this includes most nonprofit organizations, not all nonprofits are automatically tax-exempt. In addition, a nonprofit must apply to become tax-exempt; without the review and approval by the IRS, the nonprofit will technically not be tax-exempt. ## Limitations of Tax-Exempt Status Keep in mind there are some downsides to obtaining a tax-exempt status. Tax-exempt organizations, particularly those classified as 501(c)(3) organizations, are subject to strict limitations and reporting requirements when engaging in political activities. This includes endorsing or opposing political candidates, contributing funds to [political campaigns](https://www.investopedia.com/articles/markets/042716/what-happens-campaign-funds-after-elections.asp), and engaging in partisan activities. Tax-exempt entities must adhere to regulations regarding transactions with insiders such as board members, officers, and key employees. These regulations are designed to prevent conflicts of interest, self-dealing, and private inurement, where individuals in positions of authority benefit personally from the organization's resources. Engaging in prohibited transactions can result in penalties, fines, or loss of tax-exempt status. Last, tax-exempt entities are generally prohibited from distributing profits or assets to individuals or shareholders. Any excess, ungranted funds are to be kept internally with potentially minimal flexibility. Though this restriction ensures that the organization's resources are dedicated to its tax-exempt purpose, it puts an onus on the entity to disburse funds for a specific purpose. The tax-exempt entity risks jeopardizing future funding from donors or grantors if disbursement is slow. ## Is a Tax-Exempt Organization the Same As a 501(c)(3) Organization? A 501(c)(3) is a tax-exempt organization recognized by the IRS. However, there are other forms of organization an entity can file for and be awarded that are also tax-exempt. Therefore, while a 501(c) is tax-exempt, not all tax-exempt organizations are 501(c)(3) organizations. ## What Is the Downside of Being Tax-Exempt? Administratively, there may be additional requirements a company must meet such as annual reporting and meeting stipulated criteria. To become and maintain its status as tax-exempt, there is an additional burden to an organization from a time and labor standpoint. Outside of this reporting and filing requirement, there are often little to no downsides to becoming tax-exempt. ## Why Do Nonprofit Organizations Not Pay Taxes? Nonprofit organizations do not pay taxes because they are engaged in public or private interests. The purpose of a nonprofit is to further extend the benefit to a community; for this reason, the IRS recognizes and awards these entities tax-exempt as any collected taxes would be used for a similar purpose (i.e. would be redistributed to benefit the community). ## Can a Tax-Exempt Organization Make Money? Yes, tax-exempt organizations such as nonprofits are often encouraged and expected to make money or earn more money than what they spend. For the financial health and longevity of the organization, these [entities must build reserves](https://www.investopedia.com/native-american-taxes-8382438) and have excess cash reside in bank accounts. The purpose of being tax-exempt is to have this net profit not be taxed by the IRS. ## The Bottom Line A tax-exempt organization is a type of entity that is recognized by the IRS as being exempt from paying federal income taxes on its earnings. To be considered tax-exempt, an organization must meet certain requirements set forth by the IRS and must apply for tax-exempt status. Taxpayers can be exempt from paying certain amounts of ordinary income or capital gains.	What Does It Mean to Be Tax-Exempt? Tax-exempt refers to income or transactions that are free from tax at the federal, state, or local level. The reporting of tax-free items may be on a taxpayer's individual or business tax return and shown for informational purposes only. The tax-exempt article is not part of any tax calculations. Tax-exempt may also refer to the status of a business or organization which has limits on the amount of income or gifts which are taxable. These organizations include religious and charitable institutions. Key Takeaways Tax-exempt status allows a taxpayer to file a return with the IRS that exempts them from paying taxes on any net income or profit.A taxpayer can offset capital gains and avoid taxes on disposed assets, though this often allows a taxpayer to be exempt up to their current or prior losses.Taxpayers who avoid taxes may still be required to pay alternative minimum taxes. Most commonly, organizations gain tax-exempt status by requesting the status from the IRS.To maintain the status, organizations must meet ongoing filing and reporting requirements. Common Tax-Exempt Earnings Not to be confused with a tax deduction, tax exemption frees the taxpayer of any tax obligation to submit taxes on the tax-free transaction or income. Whereas the use of a tax deduction is to reduce the tax obligation by lowering gross income. One common type of tax-exempt income is interest earned on municipal bonds, which are bonds issued by states and cities to raise funds for general operations or a specific project. When a taxpayer makes interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes. Taxpayers receive IRS Form 1099-INT for any investment interest they earn during the tax year. The reporting of tax-exempt interest is in box 8 of the 1099 form. This information is only data and is not included in the calculation of personal income taxes. Other Tax-Exempt Income There's a range of types of income that may be tax-exempt based on your specific situation. In addition, tax rules may continually evolve and change. When crafting your personal tax strategy, consult with a tax prepared to best understand the latest news and widest scope on other tax-exempt income. The list below contains other common tax-exempt income sources. The list is not meant to be exhaustive, and some of those additional items may include: Health Savings Account (HSA) Withdrawals: Withdrawals from HSAs used to pay for qualified medical expenses are tax-exempt. Contributions to HSAs may also be tax-deductible, and any earnings within the account grow tax-free. Qualified Roth IRA Distributions: Distributions from Roth IRAs are tax-exempt if certain conditions are met. Certain Social Security Benefits: A portion of Social Security benefits may be tax-exempt, depending on the recipient's total income and filing status. Generally, if Social Security benefits are the only source of income, they are likely to be tax-exempt as the taxpayer may not meet a taxable threshold. Certain Veterans Benefits: Some benefits provided to veterans, their dependents, and survivors by the Department of Veterans Affairs are tax-exempt. Capital Gains Tax-Exemption A taxpayer may buy an asset and subsequently sell that asset for a profit. The profit is a capital gain, which creates a taxable event. However, several types of capital gains are exempt from taxation. A taxpayer can offset capital gains with other capital losses for the tax year. For example, an investor with $5,000 in profits and $3,000 in losses pays taxes on only $2,000 in capital gains. The amount of capital losses a taxpayer may claim in a given year has a cap of $3,000. When capital losses exceed this cap, the excess may be carried forward to offset gains in future years. The tax code also allows taxpayers to exclude from federal taxes a specific portion of capital gains from the sale of a home. Alternative Minimum Tax and Exemptions The alternative minimum tax (AMT) is an alternative method for determining tax liability. AMT adds back specific tax-exempt items into the personal tax calculation. Interest from private activity bonds exempt from regular tax, for example, is added to the AMT tax calculation. Individual taxpayers must include the AMT calculation with their original tax return and pay tax on the higher tax liability. Tax-Exempt Organizations An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay an estimated tax if it expects its tax for the year to be $500 or more. A 501(c)(3) nonprofit corporation is a charitable organization that the IRS recognizes as tax-exempt. This type of organization does not pay income tax on its earnings or on the donations it receives. Also, any taxpayer donations may reduce a taxpayer's taxable income by the donation amount. This incentive encourages private charity and makes it easier for nonprofits to raise money. A 501(c)(3) is a charitable organization involved in religious, charitable, educational, literary, preventing cruelty to animals and children, fostering amateur local and international sports competitions, testing for public safety, and scientific activities or operations. To gain the exemption, an organization must demonstrate how the exemption will serve the public and provide a benefit to a community. Becoming Tax-Exempt An entity can become tax-exempt by meeting the requirements set forth by the IRS. There are several categories of tax-exempt status for charitable, religious, educational, and scientific organizations. The type of tax-exempt status needed will depend on the nature of the organization's activities. The organization must be formed as a legal entity, and the organization must obtain an EIN from the IRS. With this EIN, the organization is able to file an application with the IRS to obtain tax-exempt status. The most common form is Form 1023 for 501(c)(3) organizations. The application must provide detailed information about the organization's activities, governance, finances, and other relevant information. The IRS will review the application and make a determination about the organization's tax-exempt status. The process can take several months, and the IRS may request additional information or clarification during the review process. Once tax-exempt status is granted, the organization must maintain compliance with IRS rules and regulations via filing annual tax returns and other forms, meeting governance and operational requirements, and avoiding prohibited activities that could jeopardize tax-exempt status. Tax-Exempt Organization vs. Nonprofit Organization Though often interchanged to describe the same entity, there are worthwhile differences to mention between a tax-exempt organization and a nonprofit organization. A nonprofit organization is a type of entity that is organized for a specific purpose. Nonprofits can be structured in a variety of ways such as a corporation, trust, or unincorporated association. They are not required to pay federal income taxes on their earnings. A tax-exempt entity, on the other hand, is an organization that has been granted exemption from federal income tax by the IRS. Though this includes most nonprofit organizations, not all nonprofits are automatically tax-exempt. In addition, a nonprofit must apply to become tax-exempt; without the review and approval by the IRS, the nonprofit will technically not be tax-exempt. Limitations of Tax-Exempt Status Keep in mind there are some downsides to obtaining a tax-exempt status. Tax-exempt organizations, particularly those classified as 501(c)(3) organizations, are subject to strict limitations and reporting requirements when engaging in political activities. This includes endorsing or opposing political candidates, contributing funds to political campaigns, and engaging in partisan activities. Tax-exempt entities must adhere to regulations regarding transactions with insiders such as board members, officers, and key employees. These regulations are designed to prevent conflicts of interest, self-dealing, and private inurement, where individuals in positions of authority benefit personally from the organization's resources. Engaging in prohibited transactions can result in penalties, fines, or loss of tax-exempt status. Last, tax-exempt entities are generally prohibited from distributing profits or assets to individuals or shareholders. Any excess, ungranted funds are to be kept internally with potentially minimal flexibility. Though this restriction ensures that the organization's resources are dedicated to its tax-exempt purpose, it puts an onus on the entity to disburse funds for a specific purpose. The tax-exempt entity risks jeopardizing future funding from donors or grantors if disbursement is slow. Is a Tax-Exempt Organization the Same As a 501(c)(3) Organization? A 501(c)(3) is a tax-exempt organization recognized by the IRS. However, there are other forms of organization an entity can file for and be awarded that are also tax-exempt. Therefore, while a 501(c) is tax-exempt, not all tax-exempt organizations are 501(c)(3) organizations. What Is the Downside of Being Tax-Exempt? Administratively, there may be additional requirements a company must meet such as annual reporting and meeting stipulated criteria. To become and maintain its status as tax-exempt, there is an additional burden to an organization from a time and labor standpoint. Outside of this reporting and filing requirement, there are often little to no downsides to becoming tax-exempt. Why Do Nonprofit Organizations Not Pay Taxes? Nonprofit organizations do not pay taxes because they are engaged in public or private interests. The purpose of a nonprofit is to further extend the benefit to a community; for this reason, the IRS recognizes and awards these entities tax-exempt as any collected taxes would be used for a similar purpose (i.e. would be redistributed to benefit the community). Can a Tax-Exempt Organization Make Money? Yes, tax-exempt organizations such as nonprofits are often encouraged and expected to make money or earn more money than what they spend. For the financial health and longevity of the organization, these entities must build reserves and have excess cash reside in bank accounts. The purpose of being tax-exempt is to have this net profit not be taxed by the IRS. The Bottom Line A tax-exempt organization is a type of entity that is recognized by the IRS as being exempt from paying federal income taxes on its earnings. To be considered tax-exempt, an organization must meet certain requirements set forth by the IRS and must apply for tax-exempt status. Taxpayers can be exempt from paying certain amounts of ordinary income or capital gains.	[ [ "tax deduction", "https://www.investopedia.com/terms/t/tax-deduction.asp" ], [ "tax-exempt income", "https://www.investopedia.com/articles/personal-finance/062716/types-income-irs-cant-touch.asp" ], [ "1099-INT", "https://www.investopedia.com/terms/f/form-1099-int.asp" ], [ "HSAs", "https://www.investopedia.com/terms/h/hsa.asp" ], [ "Roth IRAs", "https://www.investopedia.com/terms/r/rothira.asp" ], [ "capital gains", "https://www.investopedia.com/articles/tax/09/tax-effects-capital-gains.asp" ], [ "capital losses", "https://www.investopedia.com/terms/c/capitalloss.asp" ], [ "alternative minimum tax (AMT)", "https://www.investopedia.com/terms/a/alternativeminimumtax.asp" ], [ "501(c)(3)", "https://www.investopedia.com/terms/1/501c3-organizations.asp" ], [ "categories of tax-exempt status", "https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx" ], [ "tax-exempt organization", "https://www.investopedia.com/financial-edge/0411/5-groups-that-dont-pay-taxes.aspx" ], [ "political campaigns", "https://www.investopedia.com/articles/markets/042716/what-happens-campaign-funds-after-elections.asp" ], [ "entities must build reserves", "https://www.investopedia.com/native-american-taxes-8382438" ] ]
https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp	Credit Cards vs. Debit Cards: What’s the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-credit-cards-vs-debit-cards-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Credit Cards vs. Debit Cards: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Credit cards and debit cards typically look almost identical, with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-identification-number.asp">16-digit card numbers</a>, expiration dates, magnetic strips, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emv.asp">EMV</a> chips. Both can make it easy and convenient to make purchases in stores or online, with one key difference. Debit cards allow you to spend money by <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050415/what-happens-when-my-bank-account-debited.asp">drawing on funds you have deposited at the bank</a>. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash. </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"> You probably have at least one credit card and one debit card in your wallet. The convenience and protection that they offer are hard to beat, but <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/050415/what-are-differences-between-debit-cards-and-credit-cards.asp">they have important differences</a> that could substantially affect your pocketbook. Here’s how to decide which one to use to meet your spending needs. </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>Credit cards give you access to a line of credit issued by a bank, while debit cards deduct money directly from your bank account.</li><li>Credit cards offer better consumer protections against fraud compared with debit cards linked to a bank account.</li><li>Newer debit cards offer more credit card-like protection, while many credit cards no longer charge annual fees.</li><li>When comparing credit cards with debit cards linked to a bank account, it’s important to consider the fees and benefits.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Credit Cards vs. Debit Cards" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/bLnVfYZeWaAn2Ut5BNv3SUczM5s=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/8-m9KcSGPVsrHMPd_sIaBe66gLM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg" data-srcset="https://www.investopedia.com/thmb/nMyc-hXFqWUEqKonA1Kzbmq2-KQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg 750w" data-tracking-container="true" height="800" id="mntl-sc-block-image_1-0" width="1200"/> <noscript> <img alt="Credit Cards vs. Debit Cards" class="img--noscript universal-image__image" height="800" sizes="750px" src="https://www.investopedia.com/thmb/8-m9KcSGPVsrHMPd_sIaBe66gLM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg" srcset="https://www.investopedia.com/thmb/nMyc-hXFqWUEqKonA1Kzbmq2-KQ=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg 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>Investopedia / Sabrina Jiang</p></span> </figcaption></figure> <span class="heading-toc" id="toc-what-is-a-credit-card"></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 a Credit Card? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit card</a> is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a>, according to the institution’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/terms-and-conditions-credit-card.asp">terms</a>. Credit cards are issued in the following variety of categories: </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><strong>Standard cards</strong> simply extend a line of credit to their users for making purchases, balance transfers, and/or cash advances, and they often have no annual fee.</li> <li><strong>Premium cards</strong> offer perks such as concierge services, airport lounge access, special event access, and more, but they usually have higher annual fees.</li> <li><strong>Rewards cards</strong> offer cash back, travel points, or other benefits to customers based on how they spend.</li> <li><strong>Balance transfer cards</strong> have low introductory interest rates and fees on balance transfers from another credit card.</li> <li><strong>Secured credit cards</strong> require an initial cash deposit that is held by the issuer 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>.</li> <li><strong>Charge cards</strong> have no preset spending limit but often don’t allow unpaid balances to carry over from month to month.</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"> Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit cardholders by using rewards cards. Rewards can be applied on a flat-rate basis or at tiered rates. For example, you might have a card that offers unlimited two miles per dollar on purchases and another that offers three miles per dollar for travel spending, two miles per dollar for dining, and one mile per dollar for everything else. You could then use miles earned to book future travel arrangements. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When choosing rewards cards, pay attention to whether rewards can expire and what options you have for redeeming them.</p></div></div></div> <span class="heading-toc" id="toc-pros-of-using-credit-cards"></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"> Pros of Using Credit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Credit cards can offer certain advantages over debit cards, though they can also have some downsides. Here’s a closer look at the pros and cons of spending with credit cards. </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"> Build Credit History </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Credit card use is reflected on your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a>. That includes positive history, such as on-time payments and low <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-utilization-rate.asp">credit utilization ratios</a>, as well as negative items, such as late payments or delinquencies. Your credit report information is then used to calculate your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a>. Responsible spenders can raise their scores with a history of expenditures and timely payments, and by keeping their card balances low relative to their card limits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" 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>Many credit card companies offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-monitoring-services-4846982">free credit score monitoring</a> and tracking as a card perk, so you can keep an eye on your progress when building credit.</p></div></div></div> <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"> Warranty and Purchase Protections </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Some credit cards also may provide additional warranties or insurance on purchased items that go beyond those that the retailer or brand is offering. For example, if an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, it is worth checking with the credit card company to see if it will provide coverage. Or you may have purchase and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/priceprotection.asp">price protection</a> built-in to help you either replace items that are stolen or lost, or refund price differences when the item that you purchased is sold elsewhere for less. </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"> Fraud Protection </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/electronic-funds-transfer-act.asp">Electronic Fund Transfer Act</a> gives debit card customers the same protection from loss or theft—but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user’s liability rises to $500; after 60 days, there is no limit.<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> <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-note" 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 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>In most cases, credit cards offer much greater fraud protection than debit cards.</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"> Other Credit Card Advantages </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/f/fair-credit-billing-act-fcba.asp">Fair Credit Billing Act</a> allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping.<span class="ql-inline-citation" data-cite="2"></span> If the item was bought with a debit card, then the charge cannot be reversed unless the merchant is willing to do so. What’s more, debit card theft victims do not get their refund until an investigation has been completed.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> The credit cardholder, on the other hand, is not responsible for the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant’s favor. Though some credit and debit card providers offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zero-liability-policy.asp">zero liability protection</a> to their customers, the law is much more forgiving for credit cardholders. </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 need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on a bank account debit card as a form of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/surety.asp">surety</a> deposit. </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-cons-of-using-credit-cards"></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"> Cons of Using Credit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> The main drawbacks of using credit cards involve debt, credit score impacts, and cost. </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"> Spending Can Lead to Debt </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> When you make purchases with a credit card, you’re spending the bank’s money, not your own. This money has to be repaid, with interest. At the very least, you’re required to make the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum-monthly-payment.asp">minimum payment</a> due each month. Racking up high balances on multiple cards could make it difficult to keep up with monthly payments and strain your budget. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_5-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>If you have multiple credit cards, it's not a bad idea to have a primary one you use for most purchases and save any others for emergencies or specific purchases. For example, a card that offers 1% cash back on all purchases makes for a good everyday card, while another that offers 2% <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp">back on gas purchases</a> makes sense to use for that expense alone.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_49-0"> <span class="mntl-sc-block-subheading__text"> Credit Score Impacts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Paying your bill on time and keeping balances on credit cards low can help your <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/ficoscore.asp">FICO scores</a>. However, misusing credit cards could hurt your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit-history.asp">credit history</a> if you get into the habit of paying late, max out one or more of your cards, close down older accounts, or apply for new credit too often. </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-callout mntl-block" id="mntl-sc-block_52-0"><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_53-0"><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>Set up credit card alerts to notify you of payment due dates and card balances, so you can pay on time and avoid maxing out your credit limit.</p></div></div></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"> Interest and Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Because a credit card is essentially a short-term loan, you’ll have to pay back what you spend with interest. The interest rate and the fees that the credit company charges are used to calculate your <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</a> (APR). The higher the card’s APR, the more it will cost you to carry a balance from month to month. </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"> You should be aware of whether your card charges an annual fee, a foreign transaction fee, a balance transfer fee, a cash advance fee, a late payment fee, or a returned-payment fee. As a general rule of thumb, the better a credit card’s rewards program is and the more benefits it offers, the higher the annual fee will be. </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-what-is-a-debit-card"></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 Is a Debit Card? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> A <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> is a payment card that makes payments by deducting money directly from a consumer’s checking account, rather than on loan from a bank or card issuer. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or Mastercard. </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"> There are two types of debit cards that do not require the customer to have a checking or savings account, in addition to one standard type. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> <li><strong>Standard debit cards</strong> draw on your bank account.</li><li><strong>Electronic benefits transfer (EBT) cards </strong>are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.</li><li><strong>Prepaid debit cards </strong>give people without access to a bank account a way to make electronic purchases up to the amount that was preloaded onto the card.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> fee. (The no-fee advantage does not hold for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp">prepaid debit cards</a>, which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late payment fees, and a plethora of other penalties in addition to monthly interest on the card’s outstanding balance. </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"> Further, your debit card could be an offline card. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/offlinedebitcard.asp">Offline debit cards</a> are not electronically connected to your account. There will be a lag time between making a purchase and when the funds are taken from your account. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <span class="heading-toc" id="toc-pros-of-using-debit-cards"></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"> Pros of Using Debit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Debit cards can have upsides and downsides, just like credit cards. </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"> Avoid Debt </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> A debit card draws on money that the user already has, eliminating the danger of racking up debt. People typically spend more when using plastic than if they were paying cash.<span class="ql-inline-citation" data-cite="9"></span> By using debit cards, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt. </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"> Fraud Protections </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> In the past, credit cards offered far greater fraud protection than debit cards. Some debit cards—particularly those issued by payment processors, such as Visa or Mastercard—are starting to offer more of the protections enjoyed by credit card users. </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"> The key is reporting fraud or theft as soon as you realize it has occurred. Your liability for fraudulent purchases is determined by the time frame in which it’s reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for some or all losses. </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"> Since a debit card is linked directly to a bank account, fraudulent purchases can quickly drain an account dry or lead to an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a>. This cannot occur with credit cards since those are paid back at a later date. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <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"> No Annual Fee </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Though many credit cards charge an annual fee, debit cards don’t. There’s also no fee for withdrawing cash using your debit card at your bank’s ATM. Credit cards, on the other hand, can charge a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashadvance.asp">cash advance</a> fee plus a steep interest rate for that convenience. However, you may pay other fees to maintain your checking account. </p> <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-callout mntl-block" id="mntl-sc-block_86-0"><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_87-0"><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>Cash advances from a credit card don’t have a grace period; instead, interest begins accruing right away.</p></div></div></div> <span class="heading-toc" id="toc-cons-of-using-debit-cards"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-heading__text"> Cons of Using Debit Cards </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> The biggest downsides of using debit cards involve the lack of impact on credit scores and the potential fees. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_91-0"> <span class="mntl-sc-block-subheading__text"> No Rewards </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Unless you have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-rewards-checking-accounts-5069834">rewards checking account</a>, you won’t earn any points, miles, or cash back on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you could be missing out if you only spend with a debit card. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-subheading__text"> Won’t Build Credit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> Building good credit means demonstrating to lenders that you can responsibly repay the money that you borrow. When you’re spending with a debit card linked to your bank account, you don’t have the opportunity to do that, so using a debit card alone won’t help you establish or build a credit history. </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-callout mntl-block" id="mntl-sc-block_97-0"><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_98-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_8-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_8-0"><p>Having a solid credit history can help with more than just applying for loans. For example, a recent college graduate is more likely to secure a smaller security deposit for an apartment if their credit report shows that they never made a late payment on their credit card bill.</p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-subheading__text"> Fees </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Though debit cards don’t have annual fees, you may pay other fees to have a checking account. Those can include monthly maintenance fees, overdraft fees if you overspend from your account, returned-item fees, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_102-0"><span class="heading-toc" id="toc-are-debit-cards-the-same-as-credit-cards"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are Debit Cards the Same as Credit Cards?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While they may look the same and feature similar features like 16-digit card numbers, expiration dates, and branded Visa or MasterCard logos, credit cards and debit cards differ in important ways. The key difference is that debit cards are linked to a bank account and draw directly from those funds (similar to a check). A credit card, on the other hand, does not draw any money immediately and must be paid back in the future, subject to any interest charges accrued.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_104-0"><span class="heading-toc" id="toc-can-you-earn-rewards-with-a-debit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Earn Rewards With a Debit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Typically, no. While debit cards don’t earn points or miles for each purchase, the accounts from which they draw funds may offer users perks in exchange for a certain number of transactions. Standard debit cards also often offer a round-up feature that allows users to transfer small amounts of money to a savings account, a feature that’s impossible with credit cards.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_106-0"><span class="heading-toc" id="toc-do-all-credit-cards-charge-interest"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do All Credit Cards Charge Interest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While you may see 0% interest promotions, all credit cards eventually charge interest on balances that carry over from month to month. This interest rate is based on the annual percentage rate (APR). To avoid paying interest in the long term, pay your balance in full every month.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_108-0"><span class="heading-toc" id="toc-can-anyone-get-a-credit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Anyone Get a Credit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Most people can apply for and receive a credit card, but if they have a history of bad credit or no credit, the credit cards for which they are eligible may not be as useful. Those without credit or with very bad credit may apply for a secured credit card, where the credit line is secured by a deposit when opening the card. For more attractive rewards cards, higher credit scores are needed.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_110-0"><span class="heading-toc" id="toc-is-a-credit-card-safer-than-a-debit-card"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Credit Card Safer Than a Debit Card?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Credit cards usually offer greater consumer protections on purchases related to fraud than debit cards. These fraud protections may not extend as generously or easily to debit card purchases.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_112-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Credit and debit cards may look alike, but their benefits and drawbacks are very different. If building credit and cashing in rewards is important to you, then credit cards are essential tools for your financial journey. If you prefer to keep a tighter rein on your finances, then a debit card is a better bet. No matter which you choose, make sure that you know the fees associated with each account. </p></div>	## Credit Cards vs. Debit Cards: An Overview Credit cards and debit cards typically look almost identical, with [16-digit card numbers](https://www.investopedia.com/terms/b/bank-identification-number.asp), expiration dates, magnetic strips, and [EMV](https://www.investopedia.com/terms/e/emv.asp) chips. Both can make it easy and convenient to make purchases in stores or online, with one key difference. Debit cards allow you to spend money by [drawing on funds you have deposited at the bank](https://www.investopedia.com/ask/answers/050415/what-happens-when-my-bank-account-debited.asp). Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash. You probably have at least one credit card and one debit card in your wallet. The convenience and protection that they offer are hard to beat, but [they have important differences](https://www.investopedia.com/ask/answers/050415/what-are-differences-between-debit-cards-and-credit-cards.asp) that could substantially affect your pocketbook. Here’s how to decide which one to use to meet your spending needs. ### Key Takeaways * Credit cards give you access to a line of credit issued by a bank, while debit cards deduct money directly from your bank account. * Credit cards offer better consumer protections against fraud compared with debit cards linked to a bank account. * Newer debit cards offer more credit card-like protection, while many credit cards no longer charge annual fees. * When comparing credit cards with debit cards linked to a bank account, it’s important to consider the fees and benefits. ![Credit Cards vs. Debit Cards]() ![Credit Cards vs. Debit Cards](https://www.investopedia.com/thmb/8-m9KcSGPVsrHMPd_sIaBe66gLM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-050214-credit-vs-debit-cards-which-better-v2-02f37e6f74944e5689f9aa7c1468b62b.jpg) Investopedia / Sabrina Jiang ## What Is a Credit Card? A [credit card](https://www.investopedia.com/terms/c/creditcard.asp) is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back with [interest](https://www.investopedia.com/terms/i/interest.asp), according to the institution’s [terms](https://www.investopedia.com/terms/t/terms-and-conditions-credit-card.asp). Credit cards are issued in the following variety of categories: * Standard cards simply extend a line of credit to their users for making purchases, balance transfers, and/or cash advances, and they often have no annual fee. * Premium cards offer perks such as concierge services, airport lounge access, special event access, and more, but they usually have higher annual fees. * Rewards cards offer cash back, travel points, or other benefits to customers based on how they spend. * Balance transfer cards have low introductory interest rates and fees on balance transfers from another credit card. * Secured credit cards require an initial cash deposit that is held by the issuer as [collateral](https://www.investopedia.com/terms/c/collateral.asp). * Charge cards have no preset spending limit but often don’t allow unpaid balances to carry over from month to month. Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit cardholders by using rewards cards. Rewards can be applied on a flat-rate basis or at tiered rates. For example, you might have a card that offers unlimited two miles per dollar on purchases and another that offers three miles per dollar for travel spending, two miles per dollar for dining, and one mile per dollar for everything else. You could then use miles earned to book future travel arrangements. ### When choosing rewards cards, pay attention to whether rewards can expire and what options you have for redeeming them. ## Pros of Using Credit Cards Credit cards can offer certain advantages over debit cards, though they can also have some downsides. Here’s a closer look at the pros and cons of spending with credit cards. ### Build Credit History Credit card use is reflected on your [credit report](https://www.investopedia.com/terms/c/creditreport.asp). That includes positive history, such as on-time payments and low [credit utilization ratios](https://www.investopedia.com/terms/c/credit-utilization-rate.asp), as well as negative items, such as late payments or delinquencies. Your credit report information is then used to calculate your [credit scores](https://www.investopedia.com/terms/c/credit_score.asp). Responsible spenders can raise their scores with a history of expenditures and timely payments, and by keeping their card balances low relative to their card limits. ### Many credit card companies offer [free credit score monitoring](https://www.investopedia.com/best-credit-monitoring-services-4846982) and tracking as a card perk, so you can keep an eye on your progress when building credit. ### Warranty and Purchase Protections Some credit cards also may provide additional warranties or insurance on purchased items that go beyond those that the retailer or brand is offering. For example, if an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, it is worth checking with the credit card company to see if it will provide coverage. Or you may have purchase and [price protection](https://www.investopedia.com/terms/p/priceprotection.asp) built-in to help you either replace items that are stolen or lost, or refund price differences when the item that you purchased is sold elsewhere for less. ### Fraud Protection As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50. The [Electronic Fund Transfer Act](https://www.investopedia.com/terms/e/electronic-funds-transfer-act.asp) gives debit card customers the same protection from loss or theft—but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user’s liability rises to $500; after 60 days, there is no limit. ### In most cases, credit cards offer much greater fraud protection than debit cards. ### Other Credit Card Advantages The [Fair Credit Billing Act](https://www.investopedia.com/terms/f/fair-credit-billing-act-fcba.asp) allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. If the item was bought with a debit card, then the charge cannot be reversed unless the merchant is willing to do so. What’s more, debit card theft victims do not get their refund until an investigation has been completed. The credit cardholder, on the other hand, is not responsible for the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant’s favor. Though some credit and debit card providers offer [zero liability protection](https://www.investopedia.com/terms/z/zero-liability-policy.asp) to their customers, the law is much more forgiving for credit cardholders. If you need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on a bank account debit card as a form of [surety](https://www.investopedia.com/terms/s/surety.asp) deposit. ## Cons of Using Credit Cards The main drawbacks of using credit cards involve debt, credit score impacts, and cost. ### Spending Can Lead to Debt When you make purchases with a credit card, you’re spending the bank’s money, not your own. This money has to be repaid, with interest. At the very least, you’re required to make the [minimum payment](https://www.investopedia.com/terms/m/minimum-monthly-payment.asp) due each month. Racking up high balances on multiple cards could make it difficult to keep up with monthly payments and strain your budget. ### If you have multiple credit cards, it's not a bad idea to have a primary one you use for most purchases and save any others for emergencies or specific purchases. For example, a card that offers 1% cash back on all purchases makes for a good everyday card, while another that offers 2% [back on gas purchases](https://www.investopedia.com/articles/investing/092215/debit-vs-credit-card-paying-gas.asp) makes sense to use for that expense alone. ### Credit Score Impacts Paying your bill on time and keeping balances on credit cards low can help your [FICO scores](https://www.investopedia.com/terms/f/ficoscore.asp). However, misusing credit cards could hurt your [credit history](https://www.investopedia.com/terms/c/credit-history.asp) if you get into the habit of paying late, max out one or more of your cards, close down older accounts, or apply for new credit too often. ### Set up credit card alerts to notify you of payment due dates and card balances, so you can pay on time and avoid maxing out your credit limit. ### Interest and Fees Because a credit card is essentially a short-term loan, you’ll have to pay back what you spend with interest. The interest rate and the fees that the credit company charges are used to calculate your [annual percentage rate](https://www.investopedia.com/terms/a/apr.asp) (APR). The higher the card’s APR, the more it will cost you to carry a balance from month to month. You should be aware of whether your card charges an annual fee, a foreign transaction fee, a balance transfer fee, a cash advance fee, a late payment fee, or a returned-payment fee. As a general rule of thumb, the better a credit card’s rewards program is and the more benefits it offers, the higher the annual fee will be. ## What Is a Debit Card? A [debit card](https://www.investopedia.com/terms/d/debitcard.asp) is a payment card that makes payments by deducting money directly from a consumer’s checking account, rather than on loan from a bank or card issuer. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or Mastercard. There are two types of debit cards that do not require the customer to have a checking or savings account, in addition to one standard type. * Standard debit cards draw on your bank account. * Electronic benefits transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases. * Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was preloaded onto the card. Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) fee. (The no-fee advantage does not hold for [prepaid debit cards](https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp), which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late payment fees, and a plethora of other penalties in addition to monthly interest on the card’s outstanding balance. Further, your debit card could be an offline card. [Offline debit cards](https://www.investopedia.com/terms/o/offlinedebitcard.asp) are not electronically connected to your account. There will be a lag time between making a purchase and when the funds are taken from your account. ## Pros of Using Debit Cards Debit cards can have upsides and downsides, just like credit cards. ### Avoid Debt A debit card draws on money that the user already has, eliminating the danger of racking up debt. People typically spend more when using plastic than if they were paying cash. By using debit cards, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt. ### Fraud Protections In the past, credit cards offered far greater fraud protection than debit cards. Some debit cards—particularly those issued by payment processors, such as Visa or Mastercard—are starting to offer more of the protections enjoyed by credit card users. The key is reporting fraud or theft as soon as you realize it has occurred. Your liability for fraudulent purchases is determined by the time frame in which it’s reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for some or all losses. Since a debit card is linked directly to a bank account, fraudulent purchases can quickly drain an account dry or lead to an [overdraft](https://www.investopedia.com/terms/o/overdraft.asp). This cannot occur with credit cards since those are paid back at a later date. ### No Annual Fee Though many credit cards charge an annual fee, debit cards don’t. There’s also no fee for withdrawing cash using your debit card at your bank’s ATM. Credit cards, on the other hand, can charge a [cash advance](https://www.investopedia.com/terms/c/cashadvance.asp) fee plus a steep interest rate for that convenience. However, you may pay other fees to maintain your checking account. ### Cash advances from a credit card don’t have a grace period; instead, interest begins accruing right away. ## Cons of Using Debit Cards The biggest downsides of using debit cards involve the lack of impact on credit scores and the potential fees. ### No Rewards Unless you have a [rewards checking account](https://www.investopedia.com/best-rewards-checking-accounts-5069834), you won’t earn any points, miles, or cash back on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you could be missing out if you only spend with a debit card. ### Won’t Build Credit Building good credit means demonstrating to lenders that you can responsibly repay the money that you borrow. When you’re spending with a debit card linked to your bank account, you don’t have the opportunity to do that, so using a debit card alone won’t help you establish or build a credit history. ### Having a solid credit history can help with more than just applying for loans. For example, a recent college graduate is more likely to secure a smaller security deposit for an apartment if their credit report shows that they never made a late payment on their credit card bill. ### Fees Though debit cards don’t have annual fees, you may pay other fees to have a checking account. Those can include monthly maintenance fees, overdraft fees if you overspend from your account, returned-item fees, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine. ## Are Debit Cards the Same as Credit Cards? While they may look the same and feature similar features like 16-digit card numbers, expiration dates, and branded Visa or MasterCard logos, credit cards and debit cards differ in important ways. The key difference is that debit cards are linked to a bank account and draw directly from those funds (similar to a check). A credit card, on the other hand, does not draw any money immediately and must be paid back in the future, subject to any interest charges accrued. ## Can You Earn Rewards With a Debit Card? Typically, no. While debit cards don’t earn points or miles for each purchase, the accounts from which they draw funds may offer users perks in exchange for a certain number of transactions. Standard debit cards also often offer a round-up feature that allows users to transfer small amounts of money to a savings account, a feature that’s impossible with credit cards. ## Do All Credit Cards Charge Interest? While you may see 0% interest promotions, all credit cards eventually charge interest on balances that carry over from month to month. This interest rate is based on the annual percentage rate (APR). To avoid paying interest in the long term, pay your balance in full every month. ## Can Anyone Get a Credit Card? Most people can apply for and receive a credit card, but if they have a history of bad credit or no credit, the credit cards for which they are eligible may not be as useful. Those without credit or with very bad credit may apply for a secured credit card, where the credit line is secured by a deposit when opening the card. For more attractive rewards cards, higher credit scores are needed. ## Is a Credit Card Safer Than a Debit Card? Credit cards usually offer greater consumer protections on purchases related to fraud than debit cards. These fraud protections may not extend as generously or easily to debit card purchases. ## The Bottom Line Credit and debit cards may look alike, but their benefits and drawbacks are very different. If building credit and cashing in rewards is important to you, then credit cards are essential tools for your financial journey. If you prefer to keep a tighter rein on your finances, then a debit card is a better bet. No matter which you choose, make sure that you know the fees associated with each account.	Credit Cards vs. Debit Cards: An Overview Credit cards and debit cards typically look almost identical, with 16-digit card numbers, expiration dates, magnetic strips, and EMV chips. Both can make it easy and convenient to make purchases in stores or online, with one key difference. Debit cards allow you to spend money by drawing on funds you have deposited at the bank. Credit cards allow you to borrow money from the card issuer up to a certain limit to purchase items or withdraw cash. You probably have at least one credit card and one debit card in your wallet. The convenience and protection that they offer are hard to beat, but they have important differences that could substantially affect your pocketbook. Here’s how to decide which one to use to meet your spending needs. Key Takeaways Credit cards give you access to a line of credit issued by a bank, while debit cards deduct money directly from your bank account.Credit cards offer better consumer protections against fraud compared with debit cards linked to a bank account.Newer debit cards offer more credit card-like protection, while many credit cards no longer charge annual fees.When comparing credit cards with debit cards linked to a bank account, it’s important to consider the fees and benefits. Investopedia / Sabrina Jiang What Is a Credit Card? A credit card is a card issued by a financial institution, typically a bank, and it enables the cardholder to borrow funds from that institution. Cardholders agree to pay the money back with interest, according to the institution’s terms. Credit cards are issued in the following variety of categories: Standard cards simply extend a line of credit to their users for making purchases, balance transfers, and/or cash advances, and they often have no annual fee. Premium cards offer perks such as concierge services, airport lounge access, special event access, and more, but they usually have higher annual fees. Rewards cards offer cash back, travel points, or other benefits to customers based on how they spend. Balance transfer cards have low introductory interest rates and fees on balance transfers from another credit card. Secured credit cards require an initial cash deposit that is held by the issuer as collateral. Charge cards have no preset spending limit but often don’t allow unpaid balances to carry over from month to month. Credit card users can reap cash, discounts, travel points, and many other perks unavailable to debit cardholders by using rewards cards. Rewards can be applied on a flat-rate basis or at tiered rates. For example, you might have a card that offers unlimited two miles per dollar on purchases and another that offers three miles per dollar for travel spending, two miles per dollar for dining, and one mile per dollar for everything else. You could then use miles earned to book future travel arrangements. When choosing rewards cards, pay attention to whether rewards can expire and what options you have for redeeming them. Pros of Using Credit Cards Credit cards can offer certain advantages over debit cards, though they can also have some downsides. Here’s a closer look at the pros and cons of spending with credit cards. Build Credit History Credit card use is reflected on your credit report. That includes positive history, such as on-time payments and low credit utilization ratios, as well as negative items, such as late payments or delinquencies. Your credit report information is then used to calculate your credit scores. Responsible spenders can raise their scores with a history of expenditures and timely payments, and by keeping their card balances low relative to their card limits. Many credit card companies offer free credit score monitoring and tracking as a card perk, so you can keep an eye on your progress when building credit. Warranty and Purchase Protections Some credit cards also may provide additional warranties or insurance on purchased items that go beyond those that the retailer or brand is offering. For example, if an item bought with a credit card becomes defective after the manufacturer’s warranty has expired, it is worth checking with the credit card company to see if it will provide coverage. Or you may have purchase and price protection built-in to help you either replace items that are stolen or lost, or refund price differences when the item that you purchased is sold elsewhere for less. Fraud Protection As long as the customer reports the loss or theft in a timely manner, their maximum liability for purchases made after the card disappeared is $50. The Electronic Fund Transfer Act gives debit card customers the same protection from loss or theft—but only if the customer reports it within 48 hours of discovery. After 48 hours, the card user’s liability rises to $500; after 60 days, there is no limit. In most cases, credit cards offer much greater fraud protection than debit cards. Other Credit Card Advantages The Fair Credit Billing Act allows credit card users to dispute unauthorized purchases or purchases of goods that are damaged or lost during shipping. If the item was bought with a debit card, then the charge cannot be reversed unless the merchant is willing to do so. What’s more, debit card theft victims do not get their refund until an investigation has been completed. The credit cardholder, on the other hand, is not responsible for the disputed charges; the amount is usually deducted immediately and restored only if the dispute is withdrawn or settled in the merchant’s favor. Though some credit and debit card providers offer zero liability protection to their customers, the law is much more forgiving for credit cardholders. If you need to rent a car, many credit cards provide some sort of waiver for collisions. Even if you want to use a debit card, many car rental agencies require customers to provide credit card information as a backup. The only way out for a customer may be allowing the rental agency to put a hold of perhaps a few hundred dollars on a bank account debit card as a form of surety deposit. Cons of Using Credit Cards The main drawbacks of using credit cards involve debt, credit score impacts, and cost. Spending Can Lead to Debt When you make purchases with a credit card, you’re spending the bank’s money, not your own. This money has to be repaid, with interest. At the very least, you’re required to make the minimum payment due each month. Racking up high balances on multiple cards could make it difficult to keep up with monthly payments and strain your budget. If you have multiple credit cards, it's not a bad idea to have a primary one you use for most purchases and save any others for emergencies or specific purchases. For example, a card that offers 1% cash back on all purchases makes for a good everyday card, while another that offers 2% back on gas purchases makes sense to use for that expense alone. Credit Score Impacts Paying your bill on time and keeping balances on credit cards low can help your FICO scores. However, misusing credit cards could hurt your credit history if you get into the habit of paying late, max out one or more of your cards, close down older accounts, or apply for new credit too often. Set up credit card alerts to notify you of payment due dates and card balances, so you can pay on time and avoid maxing out your credit limit. Interest and Fees Because a credit card is essentially a short-term loan, you’ll have to pay back what you spend with interest. The interest rate and the fees that the credit company charges are used to calculate your annual percentage rate (APR). The higher the card’s APR, the more it will cost you to carry a balance from month to month. You should be aware of whether your card charges an annual fee, a foreign transaction fee, a balance transfer fee, a cash advance fee, a late payment fee, or a returned-payment fee. As a general rule of thumb, the better a credit card’s rewards program is and the more benefits it offers, the higher the annual fee will be. What Is a Debit Card? A debit card is a payment card that makes payments by deducting money directly from a consumer’s checking account, rather than on loan from a bank or card issuer. Debit cards offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors such as Visa or Mastercard. There are two types of debit cards that do not require the customer to have a checking or savings account, in addition to one standard type. Standard debit cards draw on your bank account.Electronic benefits transfer (EBT) cards are issued by state and federal agencies to allow qualifying users to use their benefits to make purchases.Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was preloaded onto the card. Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. (The no-fee advantage does not hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs.) By contrast, credit cards generally charge annual fees, over-limit fees, late payment fees, and a plethora of other penalties in addition to monthly interest on the card’s outstanding balance. Further, your debit card could be an offline card. Offline debit cards are not electronically connected to your account. There will be a lag time between making a purchase and when the funds are taken from your account. Pros of Using Debit Cards Debit cards can have upsides and downsides, just like credit cards. Avoid Debt A debit card draws on money that the user already has, eliminating the danger of racking up debt. People typically spend more when using plastic than if they were paying cash. By using debit cards, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt. Fraud Protections In the past, credit cards offered far greater fraud protection than debit cards. Some debit cards—particularly those issued by payment processors, such as Visa or Mastercard—are starting to offer more of the protections enjoyed by credit card users. The key is reporting fraud or theft as soon as you realize it has occurred. Your liability for fraudulent purchases is determined by the time frame in which it’s reported. Waiting too long to let the bank know that your card has been used for unauthorized purchases could result in you being held responsible for some or all losses. Since a debit card is linked directly to a bank account, fraudulent purchases can quickly drain an account dry or lead to an overdraft. This cannot occur with credit cards since those are paid back at a later date. No Annual Fee Though many credit cards charge an annual fee, debit cards don’t. There’s also no fee for withdrawing cash using your debit card at your bank’s ATM. Credit cards, on the other hand, can charge a cash advance fee plus a steep interest rate for that convenience. However, you may pay other fees to maintain your checking account. Cash advances from a credit card don’t have a grace period; instead, interest begins accruing right away. Cons of Using Debit Cards The biggest downsides of using debit cards involve the lack of impact on credit scores and the potential fees. No Rewards Unless you have a rewards checking account, you won’t earn any points, miles, or cash back on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you could be missing out if you only spend with a debit card. Won’t Build Credit Building good credit means demonstrating to lenders that you can responsibly repay the money that you borrow. When you’re spending with a debit card linked to your bank account, you don’t have the opportunity to do that, so using a debit card alone won’t help you establish or build a credit history. Having a solid credit history can help with more than just applying for loans. For example, a recent college graduate is more likely to secure a smaller security deposit for an apartment if their credit report shows that they never made a late payment on their credit card bill. Fees Though debit cards don’t have annual fees, you may pay other fees to have a checking account. Those can include monthly maintenance fees, overdraft fees if you overspend from your account, returned-item fees, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine. Are Debit Cards the Same as Credit Cards? While they may look the same and feature similar features like 16-digit card numbers, expiration dates, and branded Visa or MasterCard logos, credit cards and debit cards differ in important ways. The key difference is that debit cards are linked to a bank account and draw directly from those funds (similar to a check). A credit card, on the other hand, does not draw any money immediately and must be paid back in the future, subject to any interest charges accrued. Can You Earn Rewards With a Debit Card? Typically, no. While debit cards don’t earn points or miles for each purchase, the accounts from which they draw funds may offer users perks in exchange for a certain number of transactions. Standard debit cards also often offer a round-up feature that allows users to transfer small amounts of money to a savings account, a feature that’s impossible with credit cards. Do All Credit Cards Charge Interest? While you may see 0% interest promotions, all credit cards eventually charge interest on balances that carry over from month to month. This interest rate is based on the annual percentage rate (APR). To avoid paying interest in the long term, pay your balance in full every month. Can Anyone Get a Credit Card? Most people can apply for and receive a credit card, but if they have a history of bad credit or no credit, the credit cards for which they are eligible may not be as useful. Those without credit or with very bad credit may apply for a secured credit card, where the credit line is secured by a deposit when opening the card. For more attractive rewards cards, higher credit scores are needed. Is a Credit Card Safer Than a Debit Card? Credit cards usually offer greater consumer protections on purchases related to fraud than debit cards. These fraud protections may not extend as generously or easily to debit card purchases. The Bottom Line Credit and debit cards may look alike, but their benefits and drawbacks are very different. If building credit and cashing in rewards is important to you, then credit cards are essential tools for your financial journey. If you prefer to keep a tighter rein on your finances, then a debit card is a better bet. No matter which you choose, make sure that you know the fees associated with each account.	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https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp	Advantages of Exchange-Traded Funds (ETFs)	<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"> Exchange-traded funds (ETFs) combine some of the best characteristics of stocks and mutual funds into a single investment. They offer real-time trading flexibility like stocks and the built-in diversification of mutual funds. </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"> ETFs have been traded in U.S. markets since the early 1990s. Trading in them began to take off around the turn of the millennium, when there were about 80 ETFs and $66 billion in assets under management (AUM). In the mid-2020s, there are more than 2,800 ETFs with over $8 trillion in AUM. ETFs are also a significant part of the wider market, representing about 30% of the annual trading volume on U.S. exchanges.<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_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> However, like any investment, ETFs have drawbacks that you should review carefully before adding them to your portfolio. </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>ETFs offer easy access to a diversified portfolio of assets.</li><li>They're traded on stock exchanges throughout the trading day, providing you with the flexibility to buy or sell shares at market prices.</li><li>ETFs typically have lower expense ratios than mutual funds because more of them are passively managed.</li><li>In recent years, though, mutual funds fees have dropped their fees, which are now closer to ETF fees.</li><li>These funds disclose their holdings daily, allowing investors to see the underlying assets and make informed investment decisions.</li><li>There are a few downsides to ETFs to be mindful of as well.<br/></li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-etfs"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding ETFs </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/articles/01/082901.asp">ETFs</a> have characteristics of both mutual funds and individual stocks. Their purpose is to provide investors with a convenient way to achieve diversification. Most, but not all, ETFs track a specific index, such as a stock market or bond index. Only about one in 20 ETFs <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">actively manage</a> their holdings.<span class="ql-inline-citation" data-cite="19"></span> The reason is historical: early on, all ETFs were used to invest in broad indexes. However, in the 2000s, fund managers found these funds convenient for investors wanting exposure to off-exchange assets through their regular brokerage accounts. For example, the first bond, commodity, and volatility index ETFs opened in 2002, 2007, and 2009, respectively. The first actively managed ETFs didn't appear until 2008.<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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Unlike <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>, ETFs trade on public exchanges like individual stocks. This means that investors can buy and sell ETF shares at prices based on supply and demand throughout the trading day. Meanwhile, mutual fund prices, valued according to their net asset values (NAVs), are calculated only at the end of each trading day. Here's a comparison of ETFs and mutual funds on these differences: </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> <thead> <tr> <th>Feature</th> <th>ETFs</th> <th>Mutual Funds</th> </tr> </thead> <tbody data-check="0"> <tr> <td><b>Frequency of Disclosure</b></td> <td>Daily disclosure of holdings for most ETFs</td> <td>Less frequent, perhaps monthly or quarterly</td> </tr> <tr> <td><b>Method of Disclosure</b></td> <td>Publicly available on ETF issuer and financial websites</td> <td>Often found on the fund company website or in reports</td> </tr> <tr> <td><b>Transparency</b></td> <td>Highly transparent: you know exactly what's in the fund at any given time</td> <td>Less transparency: you see a snapshot of holdings from the past reporting period</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"> While ETFs aim to replicate the returns of the indexes they track, there might be slight discrepancies between each ETF's performance and that of the index, which is called a tracking error. ETFs can be used to target specific sectors, themes, or asset classes.<span class="ql-inline-citation" data-cite="20"></span> They can also be used to cover equities, fixed-income securities, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodities</a>, or alternative investments. Here are the major types, and below that is a chart of their relative market share: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> <li><strong>Index or broad market ETFs</strong>: These track the performance of broad market indexes, such as the S&P 500 or the whole of the market, packaged with slight differences by different funds as total stock market indexes. They provide investors with diversified exposure to a wide range of companies across various sectors and market capitalizations. In recent decades, index ETFs have often outperformed their actively managed peers.<span class="ql-inline-citation" data-cite="36"></span></li> <li><strong>Sector-based ETFs</strong>: These focus on specific industries such as technology, healthcare, or energy. You can use these ETFs to target areas of the economy you believe will outperform others or to balance out other parts of your portfolio.</li> <li><strong>Factor-based ETFs</strong>: Also known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-beta-etf.asp">smart-beta ETFs</a>, factor-based ETFs seek to outperform traditional market-cap-weighted indexes by selecting stocks based on value, growth, quality, or momentum.<span class="ql-inline-citation" data-cite="21"></span> These ETFs offer investors a rule-based approach to capturing returns.</li> <li><strong>Bond ETFs</strong>: These invest in fixed-income securities such as government, corporate, or municipal bonds. Certain funds concentrate on specific segments of the bond market, such as short-term, long-term, or high-yield bonds.<span class="ql-inline-citation" data-cite="26"></span></li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>Commodity ETFs</strong>: These track the performance of underlying commodities or related indexes such as gold, silver, oil, or agricultural products. They provide investors with exposure to the price changes of physical commodities without having to directly invest in or hold them or trade commodity futures contracts.<span class="ql-inline-citation" data-cite="22"></span></li> <li><strong>International or global equity ETFs</strong>: As is easy to guess, these invest in stocks or bonds issued by companies or governments outside the investor's home country. These ETFs offer exposure to foreign markets and currencies, enabling you to diversify your portfolio geographically.<span class="ql-inline-citation" data-cite="23"></span></li> <li><strong>Thematic ETFs</strong>: These are different from sector ETFs in that they focus on topics or trends that are found across different industries, like clean energy or artificial intelligence. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/benefits-and-risks-thematic-etfs/">Thematic ETFs</a> can be worthwhile for investing in holdings that match your values, e.g., climate-friendly firms, or to speculate on a strong new direction in the economy.</li> <li><strong>Inverse and Leveraged ETFs</strong>: Not for the inexperienced or the faint of heart, these funds are far from the passive index trading strategies of most ETFs. Inverse ETFs seek to profit from the decline in the value of an underlying index or asset by using derivatives or short-selling. Leveraged ETFs aim to amplify the returns of an underlying index or asset, often by using financial derivatives or borrowing. If you think a set of stocks is due to go up, you might buy shares in a leveraged ETF that offers two or three times the returns of simply buying the stocks.<span class="ql-inline-citation" data-cite="24"></span> But returns can go both ways—you could also be doubling or tripling your losses.<br/></li> </ol> <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/9kk8R/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="ETFs by Type"></iframe></div> <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"> Crypto ETFs </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> In recent years, cryptocurrencies have gained significant attention, even as their ETFs still have a small market share post-approval, as the chart above shows. Like funds for commodities, volatility, and real estate, these ETFs allow access within U.S. exchanges of off-exchange assets. Still, it's important to set out cryptocurrency ETFs from other such funds. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/pros-and-cons-of-crypto-etfs-8362499#:~:text=Crypto%20ETFs%20make%20it%20easier,does%20not%20hold%20digital%20tokens.">Cryptocurrency ETFs</a> are designed to track the performance of one or more cryptocurrencies, such as bitcoin. However, the U.S. Securities and Exchange Commission (SEC) has attempted to keep a protective wall between American retail investors and the crypto world's well-publicized incidents of market manipulation and outright fraud.<span class="ql-inline-citation" data-cite="27"></span> The regulator's concerns initially prevented futures-based crypto ETFs from being listed on U.S. exchanges. However, after rejecting applications for years, the SEC allowed bitcoin and ether futures ETFs to begin trading in 2021 and 2023, respectively. The thinking was that futures markets are far more regulated and offer greater investor protection than spot cryptocurrency markets (these funds can hold cryptocurrencies directly, not futures contracts tied to their expected value).<span class="ql-inline-citation" data-cite="25"></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"> In January 2024, the SEC authorized 11 new spot market bitcoin ETFs to begin trading on the NYSE Arca, Cboe BZX, and Nasdaq exchanges.<span class="ql-inline-citation" data-cite="16"></span> These moves led to a massive influx of capital into these funds, spiking the price of bitcoin and these ETFs' returns in the first quarter of trading. Soon, however, bitcoin prices pulled back, and trading settled into the usual volatility expected of these currencies—which is to say, a lot. </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"> Fidelity, Grayscale, and other fund managers followed this action with applications for spot ether ETFs. If approved, these funds would directly hold the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a> platform's native currency, ether (ETH). However, the SEC seems unlikely to approve these applications in the short to medium term.<span class="ql-inline-citation" data-cite="28"></span> In addition to the concerns the SEC had previously over spot bitcoin funds, the regulator seems to think that, unlike bitcoin, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">ETH</a> could be securities. This is because Ethereum uses a staking mechanism in which randomly selected ether holders lock up their funds as collateral and are rewarded with additional ether for supporting the blockchain network.<span class="ql-inline-citation" data-cite="29"></span> As <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-spot-ether-etfs-could-face-a-difficult-path-to-approval-8609104">we've reported</a>, the SEC thinks this could make ether a security. This would mean that trading in ether would need to meet the same U.S. regulations for transparency, reporting, and so on, as your typical stocks and bonds before ETFs holding them could begin trading. </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 spot ether ETFs to be granted SEC approval, the applicants must, among other things, show that ether is a commodity and that these funds can resist the effects of fraud and manipulation in the wider crypto world. Proving these things won’t be easy.<span class="ql-inline-citation" data-cite="17"></span><br> </br></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-callout mntl-block" id="mntl-sc-block_31-0"><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_32-0"><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>ETFs are professionally managed by SEC-registered investment advisors.<span class="ql-inline-citation" data-cite="13"></span></p></div></div></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-etfs"></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"> Advantages and Disadvantages of ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> We can now discuss not just what ETFs are but their specific advantages and disadvantages. Tax efficiency and liquidity are seen as advantages, popular disadvantages are potentially lower returns and higher costs. </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-comparisonlist mntl-block" id="mntl-sc-block_36-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_37-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of ETFs</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>Offers exposure to a diverse group of securities</p></li> <li><p>Generally cheaper than actively-managed funds</p></li> <li><p>Greater trading flexibility and price transparency than mutual funds<br/></p></li> <li><p>You can invest in pretty much anything</p></li> <li><p>No minimum investment amounts beyond the share price</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>Lower risk means lower potential returns</p></li> <li><p>Not all ETFs track their benchmark well</p></li> <li><p>Not all areas of the market are well covered</p></li> <li><p>Additional costs from commissions and transaction costs</p></li> <li><p>Some ETFs are complex and carry higher risks</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-advantages-of-etfs"></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"> Advantages of ETFs </span> </h2> <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"> Tax Efficiency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> ETFs minimize <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/capitalgain.asp#:~:text=A%20capital%20gains%20distribution%20is,of%20stocks%20and%20other%20assets.">capital gains distributions</a> through the creation and redemption processes. This strategy is not available for mutual funds.<span class="ql-inline-citation" data-cite="31"></span> That said, mutual funds have worked to catch up to offering the tax efficiency that ETFs have. The conventional wisdom that ETFs are more tax-efficient is still true—we'll touch on the data in a second—but not so much that the fund manager or family and other differences might outweigh tax efficiency when choosing between a mutual fund and an ETF.<span class="ql-inline-citation" data-cite="37"></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"> A 2024 Villanova and University of Pennsylvania study put the average annual after-tax advantage of ETFs over mutual funds at 0.92%, a significant difference.<span class="ql-inline-citation" data-cite="31"></span> However, the study used a method that could overemphasize the differences between the funds and was based on data up to 2017. Other researchers have found the average differences to be narrower.<span class="ql-inline-citation" data-cite="30"></span> For example, one study showed that ETFs have a 0.20% better post-tax performance than their mutual fund counterparts. The differences vary across asset classes, from 0.33% for international equity to 0.03% for fixed-income ETFs and 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"> Liquidity </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> ETFs are traded on stock exchanges at market prices throughout the trading day. You can buy and sell shares when the market opens and throughout the day. Mutual funds trade during the day, too, but you do so based on an estimate. The exact cost is calculated at the end of the day, along with the mutual fund's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">NAV</a>.<span class="ql-inline-citation" data-cite="33"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> Lower Expenses </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> ETFs are usually passively managed. The portfolio manager doesn't need to analyze the specific stocks to know which to trade and how much since the index sets that. Actively managed exchange-traded and mutual funds need more staff and expertise. This dramatically reduces costs for analysts and other resources. As such, ETFs generally have lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratios</a> than mutual funds. </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"> Nevertheless, it's best to compare similar mutual and exchange-traded funds since they are often comparable, given the significant cut in mutual fund fees in recent decades.<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_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"> Transparency </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> ETFs usually have to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/disclosure.asp">disclose</a> their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios. This won't make much of a difference for many investors, especially when it's a passive index fund. </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"> Where transparency greatly helps is when funds are invested in off-exchange assets like currencies, crypto, real estate, and so on, where reporting requirements give you far more knowledge—or at least more comfort in the veracity of fund claims—than you might when accessing these assets in other ways. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-subheading__text"> Diversification </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> ETFs are designed to offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversification</a> by tracking a particular index or asset class. You can thus access a broad range of assets without having the cost in time or money of buying these different stocks on your own. This diversification is a key part of modern portfolio theory. While an investment in one stock or set of assets might plunge and take your entire portfolio with it, a diverse basket of assets will have some rise while others fall and vice versa.<span class="ql-inline-citation" data-cite="34"></span> Be mindful that the underlying components of an ETF may still be correlated with each other, and you might still need to diversify—a large-cap equity index should be balanced against other assets. This is especially true if they're all related to the same industry, such as an ETF investing in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercialrealestate.asp">commercial real estate</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> No Minimums </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Many ETFs have no <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum_investment.asp">minimum investment</a>, making them more accessible to those without a lot of upfront capital. This accessibility allows new investors to test the waters with diversified funds. </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-etf-drawbacks"></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"> ETF Drawbacks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> ETFs come with a wide range of benefits but also some downsides. </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"> Intraday price volatility and bid-ask spreads can occur because ETFs are traded throughout the day and face the same market risks as other securities. Investors have flexibility in selling their ETF shares exactly when they want, but this can mean the ETF's prices can be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatile</a>. </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"> Some ETFs, like leveraged and inverse ETFs, can be complex and have higher risks. You'll want to have a thorough understanding of their strategies before investing. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leveraged-etf.asp">Leveraged ETFs</a> magnify the potential return of another ETF, providing greater potential returns and losses. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inverse-etf.asp">Inverse ETFs</a> attempt to take the opposite position and bet on the inverse of a stock or index. </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"> Another drawback to ETFs is that with most, you can only match the market—most are index funds, after all—not beat it. </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-examples-of-popular-etfs"></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"> Examples of Popular ETFs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> These are among the most traded ETFs: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> <li>The SPDR S&P 500 (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY">SPY</a>) is the best-known ETF. It tracks the S&P 500 Index.<span class="ql-inline-citation" data-cite="12"></span></li> <li>iShares Russell 2000 (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=IWM">IWM</a>) tracks the Russell 2000 small-cap index.<span class="ql-inline-citation" data-cite="4"></span></li> <li>Invesco QQQ (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=QQQ">QQQ</a>) tracks the Nasdaq 100.<span class="ql-inline-citation" data-cite="5"></span></li> <li>The SPDR Dow Jones Industrial Average (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DIA">DIA</a>) tracks the Dow Jones Industrial Average, which includes 30 stocks.<span class="ql-inline-citation" data-cite="15"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_78-0"><span class="heading-toc" id="toc-what-are-real-estate-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Real Estate ETFs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Real estate ETFs invest in publicly traded real estate investment trusts (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">REITs</a>) or companies active in the real estate market through development, management, and ownership. These ETFs offer investors exposure to the real estate market without the need to directly invest in physical properties. Real estate ETFs often focus on specific types of properties, such as residential, commercial, or industrial real estate, or geographic regions.<span class="ql-inline-citation" data-cite="35"></span></p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_80-0"><span class="heading-toc" id="toc-can-i-receive-dividends-through-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Receive Dividends Through ETFs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. There's even a category of ETFs that focus on providing them. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend-etf.asp#:~:text=A%20dividend%20ETF%20is%20an,individuals%20that%20purchase%20the%20ETF.">Dividend ETFs</a> look to hold stocks across various sectors that pay these distributions. They can provide regular income and the potential for capital appreciation. Dividend funds are especially attractive to income-seeking investors, including retirees.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_82-0"><span class="heading-toc" id="toc-what-is-tracking-error-in-etfs"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Tracking Error in ETFs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Tracking error is the deviation between an ETF's performance and that of its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/benchmark.asp">benchmark</a> index. This can occur because of management fees, dividend reinvestment, or the bid-ask spread. Although tracking errors are typically small, they're important for investors to consider when evaluating an ETF's performance relative to its benchmark.<span class="ql-inline-citation" data-cite="38"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_84-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> ETFs have elements of both mutual funds and stocks. Listed on stock exchanges, they can be traded throughout the day like individual stocks. ETFs typically track a specific market index, sector, commodity, or other asset class, exposing investors to a range of securities in a single investment. Their benefits include liquidity, lower expenses than mutual funds, diversification, and tax advantages. </p></div>	Exchange-traded funds (ETFs) combine some of the best characteristics of stocks and mutual funds into a single investment. They offer real-time trading flexibility like stocks and the built-in diversification of mutual funds. ETFs have been traded in U.S. markets since the early 1990s. Trading in them began to take off around the turn of the millennium, when there were about 80 ETFs and $66 billion in assets under management (AUM). In the mid-2020s, there are more than 2,800 ETFs with over $8 trillion in AUM. ETFs are also a significant part of the wider market, representing about 30% of the annual trading volume on U.S. exchanges. However, like any investment, ETFs have drawbacks that you should review carefully before adding them to your portfolio. ### Key Takeaways * ETFs offer easy access to a diversified portfolio of assets. * They're traded on stock exchanges throughout the trading day, providing you with the flexibility to buy or sell shares at market prices. * ETFs typically have lower expense ratios than mutual funds because more of them are passively managed. * In recent years, though, mutual funds fees have dropped their fees, which are now closer to ETF fees. * These funds disclose their holdings daily, allowing investors to see the underlying assets and make informed investment decisions. * There are a few downsides to ETFs to be mindful of as well. ## Understanding ETFs [ETFs](https://www.investopedia.com/articles/01/082901.asp) have characteristics of both mutual funds and individual stocks. Their purpose is to provide investors with a convenient way to achieve diversification. Most, but not all, ETFs track a specific index, such as a stock market or bond index. Only about one in 20 ETFs [actively manage](https://www.investopedia.com/terms/a/activemanagement.asp) their holdings. The reason is historical: early on, all ETFs were used to invest in broad indexes. However, in the 2000s, fund managers found these funds convenient for investors wanting exposure to off-exchange assets through their regular brokerage accounts. For example, the first bond, commodity, and volatility index ETFs opened in 2002, 2007, and 2009, respectively. The first actively managed ETFs didn't appear until 2008. Unlike [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), ETFs trade on public exchanges like individual stocks. This means that investors can buy and sell ETF shares at prices based on supply and demand throughout the trading day. Meanwhile, mutual fund prices, valued according to their net asset values (NAVs), are calculated only at the end of each trading day. Here's a comparison of ETFs and mutual funds on these differences: \| Feature \| ETFs \| Mutual Funds \| \| --- \| --- \| --- \| \| Frequency of Disclosure \| Daily disclosure of holdings for most ETFs \| Less frequent, perhaps monthly or quarterly \| \| Method of Disclosure \| Publicly available on ETF issuer and financial websites \| Often found on the fund company website or in reports \| \| Transparency \| Highly transparent: you know exactly what's in the fund at any given time \| Less transparency: you see a snapshot of holdings from the past reporting period \| While ETFs aim to replicate the returns of the indexes they track, there might be slight discrepancies between each ETF's performance and that of the index, which is called a tracking error. ETFs can be used to target specific sectors, themes, or asset classes. They can also be used to cover equities, fixed-income securities, [commodities](https://www.investopedia.com/terms/c/commodity.asp), or alternative investments. Here are the major types, and below that is a chart of their relative market share: 1. Index or broad market ETFs: These track the performance of broad market indexes, such as the S&P 500 or the whole of the market, packaged with slight differences by different funds as total stock market indexes. They provide investors with diversified exposure to a wide range of companies across various sectors and market capitalizations. In recent decades, index ETFs have often outperformed their actively managed peers. 2. Sector-based ETFs: These focus on specific industries such as technology, healthcare, or energy. You can use these ETFs to target areas of the economy you believe will outperform others or to balance out other parts of your portfolio. 3. Factor-based ETFs: Also known as [smart-beta ETFs](https://www.investopedia.com/terms/s/smart-beta-etf.asp), factor-based ETFs seek to outperform traditional market-cap-weighted indexes by selecting stocks based on value, growth, quality, or momentum. These ETFs offer investors a rule-based approach to capturing returns. 4. Bond ETFs: These invest in fixed-income securities such as government, corporate, or municipal bonds. Certain funds concentrate on specific segments of the bond market, such as short-term, long-term, or high-yield bonds. 6. Commodity ETFs: These track the performance of underlying commodities or related indexes such as gold, silver, oil, or agricultural products. They provide investors with exposure to the price changes of physical commodities without having to directly invest in or hold them or trade commodity futures contracts. 7. International or global equity ETFs: As is easy to guess, these invest in stocks or bonds issued by companies or governments outside the investor's home country. These ETFs offer exposure to foreign markets and currencies, enabling you to diversify your portfolio geographically. 8. Thematic ETFs: These are different from sector ETFs in that they focus on topics or trends that are found across different industries, like clean energy or artificial intelligence. [Thematic ETFs](https://www.investopedia.com/investing/benefits-and-risks-thematic-etfs/) can be worthwhile for investing in holdings that match your values, e.g., climate-friendly firms, or to speculate on a strong new direction in the economy. 9. Inverse and Leveraged ETFs: Not for the inexperienced or the faint of heart, these funds are far from the passive index trading strategies of most ETFs. Inverse ETFs seek to profit from the decline in the value of an underlying index or asset by using derivatives or short-selling. Leveraged ETFs aim to amplify the returns of an underlying index or asset, often by using financial derivatives or borrowing. If you think a set of stocks is due to go up, you might buy shares in a leveraged ETF that offers two or three times the returns of simply buying the stocks. But returns can go both ways—you could also be doubling or tripling your losses. ### Crypto ETFs In recent years, cryptocurrencies have gained significant attention, even as their ETFs still have a small market share post-approval, as the chart above shows. Like funds for commodities, volatility, and real estate, these ETFs allow access within U.S. exchanges of off-exchange assets. Still, it's important to set out cryptocurrency ETFs from other such funds. [Cryptocurrency ETFs](https://www.investopedia.com/pros-and-cons-of-crypto-etfs-8362499#:~:text=Crypto%20ETFs%20make%20it%20easier,does%20not%20hold%20digital%20tokens.) are designed to track the performance of one or more cryptocurrencies, such as bitcoin. However, the U.S. Securities and Exchange Commission (SEC) has attempted to keep a protective wall between American retail investors and the crypto world's well-publicized incidents of market manipulation and outright fraud. The regulator's concerns initially prevented futures-based crypto ETFs from being listed on U.S. exchanges. However, after rejecting applications for years, the SEC allowed bitcoin and ether futures ETFs to begin trading in 2021 and 2023, respectively. The thinking was that futures markets are far more regulated and offer greater investor protection than spot cryptocurrency markets (these funds can hold cryptocurrencies directly, not futures contracts tied to their expected value). In January 2024, the SEC authorized 11 new spot market bitcoin ETFs to begin trading on the NYSE Arca, Cboe BZX, and Nasdaq exchanges. These moves led to a massive influx of capital into these funds, spiking the price of bitcoin and these ETFs' returns in the first quarter of trading. Soon, however, bitcoin prices pulled back, and trading settled into the usual volatility expected of these currencies—which is to say, a lot. Fidelity, Grayscale, and other fund managers followed this action with applications for spot ether ETFs. If approved, these funds would directly hold the [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp) platform's native currency, ether (ETH). However, the SEC seems unlikely to approve these applications in the short to medium term. In addition to the concerns the SEC had previously over spot bitcoin funds, the regulator seems to think that, unlike bitcoin, [ETH](https://www.investopedia.com/terms/e/ethereum.asp) could be securities. This is because Ethereum uses a staking mechanism in which randomly selected ether holders lock up their funds as collateral and are rewarded with additional ether for supporting the blockchain network. As [we've reported](https://www.investopedia.com/why-spot-ether-etfs-could-face-a-difficult-path-to-approval-8609104), the SEC thinks this could make ether a security. This would mean that trading in ether would need to meet the same U.S. regulations for transparency, reporting, and so on, as your typical stocks and bonds before ETFs holding them could begin trading. For spot ether ETFs to be granted SEC approval, the applicants must, among other things, show that ether is a commodity and that these funds can resist the effects of fraud and manipulation in the wider crypto world. Proving these things won’t be easy. ### ETFs are professionally managed by SEC-registered investment advisors. ## Advantages and Disadvantages of ETFs We can now discuss not just what ETFs are but their specific advantages and disadvantages. Tax efficiency and liquidity are seen as advantages, popular disadvantages are potentially lower returns and higher costs. ### Pros and Cons of ETFs Pros * Offers exposure to a diverse group of securities * Generally cheaper than actively-managed funds * Greater trading flexibility and price transparency than mutual funds * You can invest in pretty much anything * No minimum investment amounts beyond the share price Cons * Lower risk means lower potential returns * Not all ETFs track their benchmark well * Not all areas of the market are well covered * Additional costs from commissions and transaction costs * Some ETFs are complex and carry higher risks ## Advantages of ETFs ### Tax Efficiency ETFs minimize [capital gains distributions](https://www.investopedia.com/terms/c/capitalgain.asp#:~:text=A%20capital%20gains%20distribution%20is,of%20stocks%20and%20other%20assets.) through the creation and redemption processes. This strategy is not available for mutual funds. That said, mutual funds have worked to catch up to offering the tax efficiency that ETFs have. The conventional wisdom that ETFs are more tax-efficient is still true—we'll touch on the data in a second—but not so much that the fund manager or family and other differences might outweigh tax efficiency when choosing between a mutual fund and an ETF. A 2024 Villanova and University of Pennsylvania study put the average annual after-tax advantage of ETFs over mutual funds at 0.92%, a significant difference. However, the study used a method that could overemphasize the differences between the funds and was based on data up to 2017. Other researchers have found the average differences to be narrower. For example, one study showed that ETFs have a 0.20% better post-tax performance than their mutual fund counterparts. The differences vary across asset classes, from 0.33% for international equity to 0.03% for fixed-income ETFs and mutual funds. ### Liquidity ETFs are traded on stock exchanges at market prices throughout the trading day. You can buy and sell shares when the market opens and throughout the day. Mutual funds trade during the day, too, but you do so based on an estimate. The exact cost is calculated at the end of the day, along with the mutual fund's [NAV](https://www.investopedia.com/terms/n/nav.asp). ### Lower Expenses ETFs are usually passively managed. The portfolio manager doesn't need to analyze the specific stocks to know which to trade and how much since the index sets that. Actively managed exchange-traded and mutual funds need more staff and expertise. This dramatically reduces costs for analysts and other resources. As such, ETFs generally have lower [expense ratios](https://www.investopedia.com/terms/e/expenseratio.asp) than mutual funds. Nevertheless, it's best to compare similar mutual and exchange-traded funds since they are often comparable, given the significant cut in mutual fund fees in recent decades. ### Transparency ETFs usually have to [disclose](https://www.investopedia.com/terms/d/disclosure.asp) their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios. This won't make much of a difference for many investors, especially when it's a passive index fund. Where transparency greatly helps is when funds are invested in off-exchange assets like currencies, crypto, real estate, and so on, where reporting requirements give you far more knowledge—or at least more comfort in the veracity of fund claims—than you might when accessing these assets in other ways. ### Diversification ETFs are designed to offer [diversification](https://www.investopedia.com/terms/d/diversification.asp) by tracking a particular index or asset class. You can thus access a broad range of assets without having the cost in time or money of buying these different stocks on your own. This diversification is a key part of modern portfolio theory. While an investment in one stock or set of assets might plunge and take your entire portfolio with it, a diverse basket of assets will have some rise while others fall and vice versa. Be mindful that the underlying components of an ETF may still be correlated with each other, and you might still need to diversify—a large-cap equity index should be balanced against other assets. This is especially true if they're all related to the same industry, such as an ETF investing in [commercial real estate](https://www.investopedia.com/terms/c/commercialrealestate.asp). ### No Minimums Many ETFs have no [minimum investment](https://www.investopedia.com/terms/m/minimum_investment.asp), making them more accessible to those without a lot of upfront capital. This accessibility allows new investors to test the waters with diversified funds. ## ETF Drawbacks ETFs come with a wide range of benefits but also some downsides. Intraday price volatility and bid-ask spreads can occur because ETFs are traded throughout the day and face the same market risks as other securities. Investors have flexibility in selling their ETF shares exactly when they want, but this can mean the ETF's prices can be [volatile](https://www.investopedia.com/terms/v/volatility.asp). Some ETFs, like leveraged and inverse ETFs, can be complex and have higher risks. You'll want to have a thorough understanding of their strategies before investing. [Leveraged ETFs](https://www.investopedia.com/terms/l/leveraged-etf.asp) magnify the potential return of another ETF, providing greater potential returns and losses. [Inverse ETFs](https://www.investopedia.com/terms/i/inverse-etf.asp) attempt to take the opposite position and bet on the inverse of a stock or index. Another drawback to ETFs is that with most, you can only match the market—most are index funds, after all—not beat it. ## Examples of Popular ETFs These are among the most traded ETFs: * The SPDR S&P 500 ([SPY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SPY)) is the best-known ETF. It tracks the S&P 500 Index. * iShares Russell 2000 ([IWM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=IWM)) tracks the Russell 2000 small-cap index. * Invesco QQQ ([QQQ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=QQQ)) tracks the Nasdaq 100. * The SPDR Dow Jones Industrial Average ([DIA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DIA)) tracks the Dow Jones Industrial Average, which includes 30 stocks. ## What Are Real Estate ETFs? Real estate ETFs invest in publicly traded real estate investment trusts ([REITs](https://www.investopedia.com/terms/r/reit.asp)) or companies active in the real estate market through development, management, and ownership. These ETFs offer investors exposure to the real estate market without the need to directly invest in physical properties. Real estate ETFs often focus on specific types of properties, such as residential, commercial, or industrial real estate, or geographic regions. ## Can I Receive Dividends Through ETFs? Yes. There's even a category of ETFs that focus on providing them. [Dividend ETFs](https://www.investopedia.com/terms/d/dividend-etf.asp#:~:text=A%20dividend%20ETF%20is%20an,individuals%20that%20purchase%20the%20ETF.) look to hold stocks across various sectors that pay these distributions. They can provide regular income and the potential for capital appreciation. Dividend funds are especially attractive to income-seeking investors, including retirees. ## What Is Tracking Error in ETFs? Tracking error is the deviation between an ETF's performance and that of its [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) index. This can occur because of management fees, dividend reinvestment, or the bid-ask spread. Although tracking errors are typically small, they're important for investors to consider when evaluating an ETF's performance relative to its benchmark. ## The Bottom Line ETFs have elements of both mutual funds and stocks. Listed on stock exchanges, they can be traded throughout the day like individual stocks. ETFs typically track a specific market index, sector, commodity, or other asset class, exposing investors to a range of securities in a single investment. Their benefits include liquidity, lower expenses than mutual funds, diversification, and tax advantages.	Exchange-traded funds (ETFs) combine some of the best characteristics of stocks and mutual funds into a single investment. They offer real-time trading flexibility like stocks and the built-in diversification of mutual funds. ETFs have been traded in U.S. markets since the early 1990s. Trading in them began to take off around the turn of the millennium, when there were about 80 ETFs and $66 billion in assets under management (AUM). In the mid-2020s, there are more than 2,800 ETFs with over $8 trillion in AUM. ETFs are also a significant part of the wider market, representing about 30% of the annual trading volume on U.S. exchanges. However, like any investment, ETFs have drawbacks that you should review carefully before adding them to your portfolio. Key Takeaways ETFs offer easy access to a diversified portfolio of assets.They're traded on stock exchanges throughout the trading day, providing you with the flexibility to buy or sell shares at market prices.ETFs typically have lower expense ratios than mutual funds because more of them are passively managed.In recent years, though, mutual funds fees have dropped their fees, which are now closer to ETF fees.These funds disclose their holdings daily, allowing investors to see the underlying assets and make informed investment decisions.There are a few downsides to ETFs to be mindful of as well. Understanding ETFs ETFs have characteristics of both mutual funds and individual stocks. Their purpose is to provide investors with a convenient way to achieve diversification. Most, but not all, ETFs track a specific index, such as a stock market or bond index. Only about one in 20 ETFs actively manage their holdings. The reason is historical: early on, all ETFs were used to invest in broad indexes. However, in the 2000s, fund managers found these funds convenient for investors wanting exposure to off-exchange assets through their regular brokerage accounts. For example, the first bond, commodity, and volatility index ETFs opened in 2002, 2007, and 2009, respectively. The first actively managed ETFs didn't appear until 2008. Unlike mutual funds, ETFs trade on public exchanges like individual stocks. This means that investors can buy and sell ETF shares at prices based on supply and demand throughout the trading day. Meanwhile, mutual fund prices, valued according to their net asset values (NAVs), are calculated only at the end of each trading day. Here's a comparison of ETFs and mutual funds on these differences: Feature ETFs Mutual Funds Frequency of Disclosure Daily disclosure of holdings for most ETFs Less frequent, perhaps monthly or quarterly Method of Disclosure Publicly available on ETF issuer and financial websites Often found on the fund company website or in reports Transparency Highly transparent: you know exactly what's in the fund at any given time Less transparency: you see a snapshot of holdings from the past reporting period While ETFs aim to replicate the returns of the indexes they track, there might be slight discrepancies between each ETF's performance and that of the index, which is called a tracking error. ETFs can be used to target specific sectors, themes, or asset classes. They can also be used to cover equities, fixed-income securities, commodities, or alternative investments. Here are the major types, and below that is a chart of their relative market share: Index or broad market ETFs: These track the performance of broad market indexes, such as the S&P 500 or the whole of the market, packaged with slight differences by different funds as total stock market indexes. They provide investors with diversified exposure to a wide range of companies across various sectors and market capitalizations. In recent decades, index ETFs have often outperformed their actively managed peers. Sector-based ETFs: These focus on specific industries such as technology, healthcare, or energy. You can use these ETFs to target areas of the economy you believe will outperform others or to balance out other parts of your portfolio. Factor-based ETFs: Also known as smart-beta ETFs, factor-based ETFs seek to outperform traditional market-cap-weighted indexes by selecting stocks based on value, growth, quality, or momentum. These ETFs offer investors a rule-based approach to capturing returns. Bond ETFs: These invest in fixed-income securities such as government, corporate, or municipal bonds. Certain funds concentrate on specific segments of the bond market, such as short-term, long-term, or high-yield bonds. Commodity ETFs: These track the performance of underlying commodities or related indexes such as gold, silver, oil, or agricultural products. They provide investors with exposure to the price changes of physical commodities without having to directly invest in or hold them or trade commodity futures contracts. International or global equity ETFs: As is easy to guess, these invest in stocks or bonds issued by companies or governments outside the investor's home country. These ETFs offer exposure to foreign markets and currencies, enabling you to diversify your portfolio geographically. Thematic ETFs: These are different from sector ETFs in that they focus on topics or trends that are found across different industries, like clean energy or artificial intelligence. Thematic ETFs can be worthwhile for investing in holdings that match your values, e.g., climate-friendly firms, or to speculate on a strong new direction in the economy. Inverse and Leveraged ETFs: Not for the inexperienced or the faint of heart, these funds are far from the passive index trading strategies of most ETFs. Inverse ETFs seek to profit from the decline in the value of an underlying index or asset by using derivatives or short-selling. Leveraged ETFs aim to amplify the returns of an underlying index or asset, often by using financial derivatives or borrowing. If you think a set of stocks is due to go up, you might buy shares in a leveraged ETF that offers two or three times the returns of simply buying the stocks. But returns can go both ways—you could also be doubling or tripling your losses. Crypto ETFs In recent years, cryptocurrencies have gained significant attention, even as their ETFs still have a small market share post-approval, as the chart above shows. Like funds for commodities, volatility, and real estate, these ETFs allow access within U.S. exchanges of off-exchange assets. Still, it's important to set out cryptocurrency ETFs from other such funds. Cryptocurrency ETFs are designed to track the performance of one or more cryptocurrencies, such as bitcoin. However, the U.S. Securities and Exchange Commission (SEC) has attempted to keep a protective wall between American retail investors and the crypto world's well-publicized incidents of market manipulation and outright fraud. The regulator's concerns initially prevented futures-based crypto ETFs from being listed on U.S. exchanges. However, after rejecting applications for years, the SEC allowed bitcoin and ether futures ETFs to begin trading in 2021 and 2023, respectively. The thinking was that futures markets are far more regulated and offer greater investor protection than spot cryptocurrency markets (these funds can hold cryptocurrencies directly, not futures contracts tied to their expected value). In January 2024, the SEC authorized 11 new spot market bitcoin ETFs to begin trading on the NYSE Arca, Cboe BZX, and Nasdaq exchanges. These moves led to a massive influx of capital into these funds, spiking the price of bitcoin and these ETFs' returns in the first quarter of trading. Soon, however, bitcoin prices pulled back, and trading settled into the usual volatility expected of these currencies—which is to say, a lot. Fidelity, Grayscale, and other fund managers followed this action with applications for spot ether ETFs. If approved, these funds would directly hold the Ethereum platform's native currency, ether (ETH). However, the SEC seems unlikely to approve these applications in the short to medium term. In addition to the concerns the SEC had previously over spot bitcoin funds, the regulator seems to think that, unlike bitcoin, ETH could be securities. This is because Ethereum uses a staking mechanism in which randomly selected ether holders lock up their funds as collateral and are rewarded with additional ether for supporting the blockchain network. As we've reported, the SEC thinks this could make ether a security. This would mean that trading in ether would need to meet the same U.S. regulations for transparency, reporting, and so on, as your typical stocks and bonds before ETFs holding them could begin trading. For spot ether ETFs to be granted SEC approval, the applicants must, among other things, show that ether is a commodity and that these funds can resist the effects of fraud and manipulation in the wider crypto world. Proving these things won’t be easy. ETFs are professionally managed by SEC-registered investment advisors. Advantages and Disadvantages of ETFs We can now discuss not just what ETFs are but their specific advantages and disadvantages. Tax efficiency and liquidity are seen as advantages, popular disadvantages are potentially lower returns and higher costs. Pros and Cons of ETFs Pros Offers exposure to a diverse group of securities Generally cheaper than actively-managed funds Greater trading flexibility and price transparency than mutual funds You can invest in pretty much anything No minimum investment amounts beyond the share price Cons Lower risk means lower potential returns Not all ETFs track their benchmark well Not all areas of the market are well covered Additional costs from commissions and transaction costs Some ETFs are complex and carry higher risks Advantages of ETFs Tax Efficiency ETFs minimize capital gains distributions through the creation and redemption processes. This strategy is not available for mutual funds. That said, mutual funds have worked to catch up to offering the tax efficiency that ETFs have. The conventional wisdom that ETFs are more tax-efficient is still true—we'll touch on the data in a second—but not so much that the fund manager or family and other differences might outweigh tax efficiency when choosing between a mutual fund and an ETF. A 2024 Villanova and University of Pennsylvania study put the average annual after-tax advantage of ETFs over mutual funds at 0.92%, a significant difference. However, the study used a method that could overemphasize the differences between the funds and was based on data up to 2017. Other researchers have found the average differences to be narrower. For example, one study showed that ETFs have a 0.20% better post-tax performance than their mutual fund counterparts. The differences vary across asset classes, from 0.33% for international equity to 0.03% for fixed-income ETFs and mutual funds. Liquidity ETFs are traded on stock exchanges at market prices throughout the trading day. You can buy and sell shares when the market opens and throughout the day. Mutual funds trade during the day, too, but you do so based on an estimate. The exact cost is calculated at the end of the day, along with the mutual fund's NAV. Lower Expenses ETFs are usually passively managed. The portfolio manager doesn't need to analyze the specific stocks to know which to trade and how much since the index sets that. Actively managed exchange-traded and mutual funds need more staff and expertise. This dramatically reduces costs for analysts and other resources. As such, ETFs generally have lower expense ratios than mutual funds. Nevertheless, it's best to compare similar mutual and exchange-traded funds since they are often comparable, given the significant cut in mutual fund fees in recent decades. Transparency ETFs usually have to disclose their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios. This won't make much of a difference for many investors, especially when it's a passive index fund. Where transparency greatly helps is when funds are invested in off-exchange assets like currencies, crypto, real estate, and so on, where reporting requirements give you far more knowledge—or at least more comfort in the veracity of fund claims—than you might when accessing these assets in other ways. Diversification ETFs are designed to offer diversification by tracking a particular index or asset class. You can thus access a broad range of assets without having the cost in time or money of buying these different stocks on your own. This diversification is a key part of modern portfolio theory. While an investment in one stock or set of assets might plunge and take your entire portfolio with it, a diverse basket of assets will have some rise while others fall and vice versa. Be mindful that the underlying components of an ETF may still be correlated with each other, and you might still need to diversify—a large-cap equity index should be balanced against other assets. This is especially true if they're all related to the same industry, such as an ETF investing in commercial real estate. No Minimums Many ETFs have no minimum investment, making them more accessible to those without a lot of upfront capital. This accessibility allows new investors to test the waters with diversified funds. ETF Drawbacks ETFs come with a wide range of benefits but also some downsides. Intraday price volatility and bid-ask spreads can occur because ETFs are traded throughout the day and face the same market risks as other securities. Investors have flexibility in selling their ETF shares exactly when they want, but this can mean the ETF's prices can be volatile. Some ETFs, like leveraged and inverse ETFs, can be complex and have higher risks. You'll want to have a thorough understanding of their strategies before investing. Leveraged ETFs magnify the potential return of another ETF, providing greater potential returns and losses. Inverse ETFs attempt to take the opposite position and bet on the inverse of a stock or index. Another drawback to ETFs is that with most, you can only match the market—most are index funds, after all—not beat it. Examples of Popular ETFs These are among the most traded ETFs: The SPDR S&P 500 (SPY) is the best-known ETF. It tracks the S&P 500 Index. iShares Russell 2000 (IWM) tracks the Russell 2000 small-cap index. Invesco QQQ (QQQ) tracks the Nasdaq 100. The SPDR Dow Jones Industrial Average (DIA) tracks the Dow Jones Industrial Average, which includes 30 stocks. What Are Real Estate ETFs? Real estate ETFs invest in publicly traded real estate investment trusts (REITs) or companies active in the real estate market through development, management, and ownership. These ETFs offer investors exposure to the real estate market without the need to directly invest in physical properties. Real estate ETFs often focus on specific types of properties, such as residential, commercial, or industrial real estate, or geographic regions. Can I Receive Dividends Through ETFs? Yes. There's even a category of ETFs that focus on providing them. Dividend ETFs look to hold stocks across various sectors that pay these distributions. They can provide regular income and the potential for capital appreciation. Dividend funds are especially attractive to income-seeking investors, including retirees. What Is Tracking Error in ETFs? Tracking error is the deviation between an ETF's performance and that of its benchmark index. This can occur because of management fees, dividend reinvestment, or the bid-ask spread. Although tracking errors are typically small, they're important for investors to consider when evaluating an ETF's performance relative to its benchmark. The Bottom Line ETFs have elements of both mutual funds and stocks. Listed on stock exchanges, they can be traded throughout the day like individual stocks. ETFs typically track a specific market index, sector, commodity, or other asset class, exposing investors to a range of securities in a single investment. Their benefits include liquidity, lower expenses than mutual funds, diversification, and tax advantages.	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https://www.investopedia.com/tech-stocks-on-the-move-today-squarespace-arm-and-more-8647435	Tech Stocks on the Move Today: Squarespace, Arm, and 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"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Tech stocks rose in intraday trading Monday, with the S&P 500 Information Technology Sector Index 0.6% higher as of noon ET, while the tech-heavy Nasdaq was 0.2% higher. The broader S&P 500 was flat. </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"> Squarespace (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SQSP">SQSP</a>) shares soared after <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 Permira said it was buying the website building and hosting software maker and taking it private. A different private equity firm, Apollo Global Management, is reportedly in advanced talks with Intel (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC">INTC</a>) to provide funding for a new factory in Ireland, sending shares of the chipmaker higher. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adr.asp">American depositary receipts (ADRs)</a> of Arm Holdings (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ARM">ARM</a>) rose on a report the semiconductor designer plans to launch its first <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI)</a> chip next year. </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-squarespace-is-being-taken-private-by-permira-in-a-69b-deal"></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"> Squarespace Is Being Taken Private by Permira in a $6.9B Deal </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Squarespace shares <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/squarespace-stock-jumps-as-pe-firm-permira-buys-it-for-usd6-9b-8647360">jumped 13%</a> after private equity firm Permira announced it was buying the provider of software to build and host websites for $6.9 billion in cash. The acquisition will pay Squarespace investors $44 per share, 15.2% above Friday’s closing price. Squarespace founder and CEO Anthony Casalena will retain his position and remain a major stakeholder. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <span class="heading-toc" id="toc-intel-reportedly-in-advanced-talks-with-apollo-to-get-over-11b-in-funding-for-plant-in-ireland"></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"> Intel Reportedly in Advanced Talks With Apollo to Get Over $11B in Funding for Plant in Ireland </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Intel shares added 3% after <em>The Wall Street Journal </em>reported it is in advanced negotiations with Apollo Global Management that would have the private equity firm supply more than $11 billion funding for the chipmaker to build a plant in Ireland.<span class="ql-inline-citation" data-cite="1"></span> The paper noted that an agreement could happen in the coming weeks. Intel already has a large presence in Ireland, which CEO Pat Gelsinger has called “The Silicon Isle.”<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> <span class="heading-toc" id="toc-arm-rises-following-report-it-plans-to-launch-its-first-ai-chip-next-year"></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"> Arm Rises Following Report It Plans To Launch Its First AI Chip Next Year </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> ADRs of Arm gained 6% following reports that the U.K.-based chip designer has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/arm-stock-in-focus-after-reportedly-planning-to-launch-ai-chips-8647288">plans to launch its first AI chip</a> in 2025.<span class="ql-inline-citation" data-cite="3"></span> Arm is expected to have a prototype ready by next spring, with the company set to have the chips produced by contract manufacturers and start mass production in the fall. <br/> </p></div>	Tech stocks rose in intraday trading Monday, with the S&P 500 Information Technology Sector Index 0.6% higher as of noon ET, while the tech-heavy Nasdaq was 0.2% higher. The broader S&P 500 was flat. Squarespace ([SQSP](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SQSP)) shares soared after [private equity](https://www.investopedia.com/terms/p/privateequity.asp) firm Permira said it was buying the website building and hosting software maker and taking it private. A different private equity firm, Apollo Global Management, is reportedly in advanced talks with Intel ([INTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC)) to provide funding for a new factory in Ireland, sending shares of the chipmaker higher. [American depositary receipts (ADRs)](https://www.investopedia.com/terms/a/adr.asp) of Arm Holdings ([ARM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ARM)) rose on a report the semiconductor designer plans to launch its first [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp) chip next year. ## Squarespace Is Being Taken Private by Permira in a $6.9B Deal Squarespace shares [jumped 13%](https://www.investopedia.com/squarespace-stock-jumps-as-pe-firm-permira-buys-it-for-usd6-9b-8647360) after private equity firm Permira announced it was buying the provider of software to build and host websites for $6.9 billion in cash. The acquisition will pay Squarespace investors $44 per share, 15.2% above Friday’s closing price. Squarespace founder and CEO Anthony Casalena will retain his position and remain a major stakeholder. ## Intel Reportedly in Advanced Talks With Apollo to Get Over $11B in Funding for Plant in Ireland Intel shares added 3% after The Wall Street Journal reported it is in advanced negotiations with Apollo Global Management that would have the private equity firm supply more than $11 billion funding for the chipmaker to build a plant in Ireland. The paper noted that an agreement could happen in the coming weeks. Intel already has a large presence in Ireland, which CEO Pat Gelsinger has called “The Silicon Isle.” ## Arm Rises Following Report It Plans To Launch Its First AI Chip Next Year ADRs of Arm gained 6% following reports that the U.K.-based chip designer has [plans to launch its first AI chip](https://www.investopedia.com/arm-stock-in-focus-after-reportedly-planning-to-launch-ai-chips-8647288) in 2025. Arm is expected to have a prototype ready by next spring, with the company set to have the chips produced by contract manufacturers and start mass production in the fall.	Tech stocks rose in intraday trading Monday, with the S&P 500 Information Technology Sector Index 0.6% higher as of noon ET, while the tech-heavy Nasdaq was 0.2% higher. The broader S&P 500 was flat. Squarespace (SQSP) shares soared after private equity firm Permira said it was buying the website building and hosting software maker and taking it private. A different private equity firm, Apollo Global Management, is reportedly in advanced talks with Intel (INTC) to provide funding for a new factory in Ireland, sending shares of the chipmaker higher. American depositary receipts (ADRs) of Arm Holdings (ARM) rose on a report the semiconductor designer plans to launch its first artificial intelligence (AI) chip next year. Squarespace Is Being Taken Private by Permira in a $6.9B Deal Squarespace shares jumped 13% after private equity firm Permira announced it was buying the provider of software to build and host websites for $6.9 billion in cash. The acquisition will pay Squarespace investors $44 per share, 15.2% above Friday’s closing price. Squarespace founder and CEO Anthony Casalena will retain his position and remain a major stakeholder. Intel Reportedly in Advanced Talks With Apollo to Get Over $11B in Funding for Plant in Ireland Intel shares added 3% after The Wall Street Journal reported it is in advanced negotiations with Apollo Global Management that would have the private equity firm supply more than $11 billion funding for the chipmaker to build a plant in Ireland. The paper noted that an agreement could happen in the coming weeks. Intel already has a large presence in Ireland, which CEO Pat Gelsinger has called “The Silicon Isle.” Arm Rises Following Report It Plans To Launch Its First AI Chip Next Year ADRs of Arm gained 6% following reports that the U.K.-based chip designer has plans to launch its first AI chip in 2025. Arm is expected to have a prototype ready by next spring, with the company set to have the chips produced by contract manufacturers and start mass production in the fall.	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https://www.investopedia.com/terms/b/bollingerbands.asp	Bollinger Bands: What They Are, and What They Tell Investors	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Bollinger Bands, a popular tool among investors and traders, helps gauge the volatility of stocks and other securities to determine if they are over- or undervalued. Developed in the 1980s by financial analyst John Bollinger, the bands appear on stock charts as three lines that move with the price. The center line is the stock price's 20-day simple moving average (SMA). The upper and lower bands are set at a certain number of standard deviations, usually two, above and below the middle line. </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 bands widen when a stock's price becomes more volatile and contract when it is more stable. Many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band, signaling an opportune time to trade.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> While valuable, Bollinger Bands are a secondary indicator that is best used to confirm other analysis methods. Below, we guide you through how to interpret Bollinger Bands, when the tool is best used, and what other indicators are best matched with it. </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>Bollinger Bands is a technical analysis tool used to determine where prices are high and low relative to each other.</li><li>These bands are composed of three lines: a simple moving average (the middle band) and an upper and lower band.</li><li>The upper and lower bands are typically two standard deviations above or below a 20-period simple moving average (SMA).</li><li>The bands widen and narrow as the volatility of the underlying asset changes.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_9-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.4%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/c3jMIBuvTXXje0yeVCHggUlvtEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/c3jMIBuvTXXje0yeVCHggUlvtEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg" data-srcset="https://www.investopedia.com/thmb/do_nA4-uCWkUv-EAmbra4F-kSkg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg 750w" data-tracking-container="true" height="1897" id="mntl-sc-block-image_1-0" width="2853"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="1897" sizes="750px" src="https://www.investopedia.com/thmb/c3jMIBuvTXXje0yeVCHggUlvtEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg" srcset="https://www.investopedia.com/thmb/do_nA4-uCWkUv-EAmbra4F-kSkg=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg 750w" width="2853"/> </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>Image by Sabrina Jiang © Investopedia 2021</p></span> </figcaption></figure> <span class="heading-toc" id="toc-who-is-john-bollinger"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> Who Is John Bollinger? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> John Bollinger, CFA, CMT, has been a major influence in technical analysis and is best known for developing Bollinger Bands in the 1980s. Bollinger combined his background in mathematics and engineering with financial market analysis to create this tool, which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices.<span class="ql-inline-citation" data-cite="13"></span> The tool has since become a staple in technical analysis. He is also the founder of Bollinger Capital Management, a money management company, and has been a prominent commentator and analyst on market conditions.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <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:66.6%;"> <img alt="Bollinger Band" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/Fy5viTxzZUDQR_ksxXNHch1b64w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/Fy5viTxzZUDQR_ksxXNHch1b64w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg" data-srcset="https://www.investopedia.com/thmb/yg6PeeQIl0jwoOYY3rnHOcQKefM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_2-0" width="1500"/> <noscript> <img alt="Bollinger Band" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/Fy5viTxzZUDQR_ksxXNHch1b64w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg" srcset="https://www.investopedia.com/thmb/yg6PeeQIl0jwoOYY3rnHOcQKefM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Investopedia / Joules Garcia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-constructing-bollinger-bands"></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"> Constructing Bollinger Bands </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The three lines that make up Bollinger Bands are based on a security's price moves. The center line is the intermediate-term trend and is typically a 20-day <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sma.asp">SMA</a> of the closing prices. The upper and lower bands are plotted a distance from the SMA set by a certain number of standard deviations, usually two, above and below the center line.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> To calculate the bands, you first determine the number of periods used for both the SMA and standard deviation, and the number of standard deviations for the upper and lower bands should be from the center line. While the settings can be adjusted based on your strategy, most times, you would use a 20-day SMA and two standard deviations.<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_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The upper band is found by adding two standard deviations to the center SMA line, while the lower band is calculated by subtracting two standard deviations from the center line. The bands automatically widen when price volatility increases and narrow when volatility goes down. </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 don't need to break out your calculator and graph paper: Many popular trading platforms, like TradingView, include this technical indicator as a standard feature. Thus, you can easily overlay Bollinger Bands onto price charts. You can also usually customize the Bollinger Bands' settings (increasing or lowering the periods and standard deviations) to fit your needs. </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"> Given that the bands are plotted two standard deviations away from the SMA, they can indicate when prices are statistically high or low. Many traders consider the area near the upper band to be overbought territory—the price is poised to fall—and a potential resistance level where sellers may step in. Conversely, the area near the lower band is often seen as oversold—the price is poised to go up—and a potential support level where buyers could enter the market. </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-how-to-trade-with-bollinger-bands"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_25-0"> <span class="mntl-sc-block-heading__text"> How To Trade With Bollinger Bands </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Traders and investors use Bollinger Bands to assess market volatility and identify potential entry and exit points. The tool is premised on the idea that prices tend to remain within the bands' upper and lower limits. </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"> One use is for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trendanalysis.asp">trend analysis</a>. The direction of the middle band can indicate a trend's strength: when the middle band is heading upward, this suggests an uptrend, and the converse when heading downward. In addition, the width of the bands reflects market volatility. Narrow bands indicate less volatility, which means a significant price move could be imminent. This is known as a "squeeze." Conversely, wide bands indicate more volatility.<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_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Another way to use the tool is to figure out when an asset is overbought and oversold. As the price touches or moves outside the upper band, it could be overbought, suggesting a potential selling or short opportunity. Similarly, if the price touches or falls outside the lower band, the asset may be oversold, indicating a possible buying opportunity. </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 bands can also help find price targets. For instance, after a price "bounces" off the lower band, the upper band becomes a potential exit point if the price trend reverses. Likewise, after a price move that touches the upper bands, the lower band becomes a possible target if a reversal occurs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Another strategy is called the "Bollinger Bounce." This is based on the idea that prices tend to return to the middle band. Traders may buy or sell based on the rebound from the upper or lower bands toward the middle band, especially in a ranging market.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_35-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Below is a table of different ways the Bollinger Bands can move, what they indicate, and how traders often react. We then go through these moves in more detail so you understand the strategies better. </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> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="3">Bollinger Bands Cheat Sheet</th> </tr> <tr> <th>Bollinger Band Action</th> <th>What This Indicates</th> <th>Potential Reaction</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Upward middle band</td> <td>Indicates an uptrend</td> <td>Buy or hold long positions</td> </tr> <tr> <td>Downward middle band</td> <td>Suggests a downtrend</td> <td>Sell or hold short positions</td> </tr> <tr> <td>Narrow bands (squeeze)</td> <td>Less volatility; potential for significant price move</td> <td>Prepare for a breakout; consider entry points</td> </tr> <tr> <td>Price touching or moving outside the upper band</td> <td>Potentially overbought (poised to fall in price)</td> <td>Consider selling, shorting, or tightening stop-loss orders</td> </tr> <tr> <td>Price touching or falling outside the lower band</td> <td>Potentially oversold (poised to go up)</td> <td>Buying or tightening stop-loss orders</td> </tr> <tr> <td>Price bounces off the lower band</td> <td>The upper band becomes a potential exit point if the trend reverses</td> <td>Consider taking profits or setting up a trailing stop-loss</td> </tr> <tr> <td>Price touches the upper band</td> <td>The lower band becomes a potential target if the reversal occurs</td> <td>Consider taking profits or setting a trailing stop-loss</td> </tr> <tr> <td>Price rebounds from upper or lower bands toward the middle band</td> <td>Potential buying or selling opportunity, especially in ranging markets ("Bollinger Bounce")</td> <td>Enter long or short positions; set stop-loss orders</td> </tr> <tr> <td>Price move starting at the upper band and continuing outside it, with increased volume</td> <td>Signals a potential breakout</td> <td>Enter long positions; set stop-loss orders below recent lows</td> </tr> <tr> <td>Decisive move below the lower band, with high volume</td> <td>Could mean a breakdown or the start of a new bearish trend</td> <td>Enter short positions; set stop-loss orders above recent highs</td> </tr> <tr> <td>Widening bands after a squeeze</td> <td>Could indicate an imminent breakout</td> <td>Prepare for entry, watch for confirmation signals</td> </tr> <tr> <td>Widening bands</td> <td>Signals increase in volatility and the potential beginning of a strong price trend</td> <td>Adjust risk management; consider <a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/optioninvestor/10/trend-following-indicators.asp">trend-following strategies</a></td> </tr> <tr> <td>Tightening bands (squeeze)</td> <td>Suggests a period of lower volatility and consolidation; often a precursor to a major price move or breakout</td> <td>Prepare for a breakout; consider entry points; tighten stop-loss orders</td> </tr> <tr> <td>Longer squeeze</td> <td>Could indicate a more potent breakout coming</td> <td>Prepare for a larger price move; increase position size</td> </tr> <tr> <td>Tightening bands</td> <td>Could mean there's no consensus in the market about the future price direction</td> <td>Adjust risk management; wait for clearer signals before entering positions</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> <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"> Moves Within the Bands </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Using two standard deviations in constructing Bollinger Bands is based on the statistical properties of the normal distribution and the concept of volatility. In this context, standard deviation measures how far prices typically deviate from SMA, the middle band.<span class="ql-inline-citation" data-cite="13"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period. This assumption is based on the statistical rule that about 95% of the data points will fall within two standard deviations of the mean for a normally distributed data set. Choosing two standard deviations provides a statistically significant measure of volatility while remaining practical for market analysis. The bands can adapt to changes in volatility, making them suitable for various market conditions. </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"> When prices move outside the upper or lower bands, this suggests that the security is trading at a statistically high or low level relative to its recent price history. This indicates potentially overbought or oversold conditions, respectively. However, prices can remain outside the bands for extended periods during strong trends.<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_46-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_47-0"> <span class="mntl-sc-block-subheading__text"> Signals at the Upper Band </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> By examining the relationship between the price and the upper band, you can look for overbought conditions, check for potential price reversals or a slowdown in momentum, find out when volatility is expanding, set price targets based on mean reversion strategies, and determine the strength of a trend.<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_49-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> When the price touches or pushes through the upper band, this is often read as the security is overbought. This is because the asset is priced higher than its typical valuation range, indicating a potential reversal or slowdown in momentum. </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"> When the price reaches or goes above the upper band, this indicates increased volatility. Since Bollinger Bands adjusts to volatility, a widening gap between the upper and lower bands means that the market is experiencing wider price fluctuations, which could be due to economic and market news, earnings reports, and other market events. </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"> For investors using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/meanreversion.asp">mean reversion</a> strategies, the upper band can act as a price target in a ranging market.<span class="ql-inline-citation" data-cite="16"></span> If the price oscillates between the upper and lower bands without a clear trend, hitting the upper band can signal to sell or go short because traders expect the price to move back toward the middle band or below. </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"> In addition, when there's a strong uptrend, the price might repeatedly touch or stay above the upper band for extended periods. This persistence above the upper band might indicate strong buyer enthusiasm and signal that the trend is likely to continue. However, traders and investors often look to confirm this with other indicators or techniques.<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_57-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> The upper band can also be the site for a breakout. A price move that starts at the upper band and continues to push outside of it can signal one, especially if there's been an increase in trading volume. This indicates that the asset is starting a new trend or accelerating an existing one. You could use this signal to trade in the direction of the breakout. </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"> Signals at the Lower Band </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> The lower band of the Bollinger Bands helps identify oversold conditions. It is also a reference line for those using mean reversion strategies or looking for potential reversals. If prices stay below this band, this could mean the start of a new bearish trend, especially if there's a lot of trading volume. </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"> When the price of an asset touches or falls below the lower band, this could mean the asset is undervalued or that the selling pressure has gone too far, potentially leading to a reversal or pause in the downward trend.<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_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> Just as touching the upper band signals an increase in volatility, the price reaching the lower band indicates greater volatility in the context of a downward move. However, when the bands narrow after a period of wide fluctuation, there's decreased volatility, which might mean a significant price move as the price consolidates.<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_66-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> For investors employing mean reversion strategies or looking for bounce-back opportunities, the lower band can be used as a target for buying prospects. The rationale is that if the price has moved down to the lower band, it might rebound toward the middle band or higher, especially in a ranging market without a strong downtrend.<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_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> That said, if the price stays below the lower band, this signals a strong downtrend. Continual contact with the band or new lows below could indicate the bearish sentiment is strong and likely to continue. However, you should confirm this with other indicators to avoid false signals or traps.<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_70-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> A decisive move below the lower band can signify a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/breakdown.asp">breakdown</a> or the start of a new bearish trend, especially if the volume is high and there are other bearish signals. Since further declines could occur, you can use this as a potential signal to sell or enter a short position. </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"> What Widening Bands Mean </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> When the bands widen, this signals an increase in volatility because the standard deviation of the price increases. Thus, the price moves are more significant than in the recent past.<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_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Economic announcements, earnings reports, geopolitical events, or sudden shifts in market sentiment can be behind these changes. Traders see increased volatility as an opportunity for substantial gains and a risk of greater losses.<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_77-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> The widening of the bands could signal the beginning of a substantial price trend. As volatility increases, the chance of a significant and sustained price move in one direction also increases. However, you should confirm this with other indicators or price patterns before proceeding. </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"> When the bands widen after a period of contraction during a "squeeze," many consider this a sign that a breakout is about to occur. While the bands themselves do not indicate the direction of the breakout, investors can assess the potential direction by comparing the price's movement to the bands and other indicators. </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 increased volatility signaled by widening Bollinger Bands might prompt investors to reassess their risk management strategies. They might cut their positions or diversify their holdings to manage the higher risk associated with greater price fluctuations. </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"> What Tightening Bands Mean </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> A contraction of the bands suggests that the market is experiencing less volatility. Price movements are more contained, and there may be less trading volume or market interest in the short term. This reduced volatility period can be seen as a time of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/consolidation.asp">consolidation</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_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> While tightening bands indicate less volatility, market analysts often consider this a precursor to major price moves or breakouts. Traders monitor squeezes closely since they suggest the market is building energy for a significant change. The longer the squeeze, the more potent the subsequent breakout is expected to be. This is based on the principle that periods of low volatility are frequently followed by periods of high volatility. However, this doesn't mean you'll know where the breakout will head. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> During a tightening period, traders may adjust their risk management strategies, such as pulling in stop-loss orders to reflect lower volatility while preparing for a potential increase ahead. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> The tightening of Bollinger Bands could also mean there's no consensus among market participants about the future direction of the price. This indecision can result in the price oscillating within a tighter range until new information arrives or the market forces a breakout. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_92-0"></div> <span class="heading-toc" id="toc-how-reliable-are-bollinger-bands"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-heading__text"> How Reliable are Bollinger Bands? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> The effectiveness of this tool depends on the asset involved, the settings used, and other factors:<span class="ql-inline-citation" data-cite="12"></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_95-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> <li><strong>Asset involved</strong>: Each security has different volatility characteristics, affecting how well the tool helps with predictions. Assets that typically experience sudden shifts in volatility might not have the expected behavior within the bands.</li> <li><strong>Parameters</strong>: The default setting for Bollinger Bands is a 20-period SMA with bands set at two standard deviations away. However, this may not be the best option for all trading scenarios or time frames. Adjusting the settings could improve their effectiveness but requires a good understanding of the markets and assets.</li> <li><strong>Other indicators</strong>: Bollinger Bands are most effective when used with different tools and indicators. For instance, volume indicators and momentum oscillators like the relative strength index <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rsi.asp">(RSI)</a> or moving average convergence divergence <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macd.asp">(MACD)</a> can give the needed context or help confirm signals from the Bollinger Bands.<span class="ql-inline-citation" data-cite="17"></span></li> <li><strong>Outlier situations</strong>: The bands are based on a statistical measure of standard deviation, which assumes that asset price returns follow a normal distribution. However, financial markets are known for having fat tails that sometimes lead to unexpected moves beyond the bands.<br/></li> </ul> <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-what-technical-indicators-are-similar-to-bollinger-bands"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Technical Indicators Are Similar to Bollinger Bands?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are several, including the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/keltnerchannel.asp">Keltner channels</a>, moving average envelopes, the Donchian channels, the average true range, and the standard deviation indicator.<span class="ql-inline-citation" data-cite="19"></span> Each tool offers a different view of the market's changes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <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-are-some-limitations-to-using-bollinger-bands"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Limitations To Using Bollinger Bands?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>First, Bollinger Bands are a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/laggingindicator.asp">lagging indicator</a>, which means they respond to rather than predict price changes, potentially informing you of changes after they've already happened. In addition, they can generate false signals during highly volatile market periods when the bands expand. Third, the standard settings of Bollinger Bands (20-day simple moving average and two standard deviations) might not be the best for all trading scenarios. Finally, Bollinger Bands are often more effective when used with other indicators, such as volume or momentum oscillators. Relying only on Bollinger Bands without further confirmation can lead to poor trading decisions.<br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_101-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_102-0"><span class="heading-toc" id="toc-how-can-i-avoid-false-signals-from-the-bollinger-bands"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Avoid False Signals From the Bollinger Bands?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You should consider using them with other technical analysis tools to confirm trends and signals. Employing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/oscillator.asp#:~:text=Oscillators%20are%20momentum%20indicators%20used,or%20oversold%20signals%20to%20traders.">momentum oscillators</a> like the RSI or MACD can help identify whether the market is overbought or oversold as prices reach or break through the bands. In addition, volume indicators can tell you about the strength behind a move, as significant price changes with a high volume could confirm signals from the Bollinger Bands. You can also adjust the settings of the Bollinger Bands by increasing the period of the moving average or the number of standard deviations, which might filter out less significant price moves.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_104-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Bollinger Bands is a versatile technical analysis tool that can provide greater clarity about market volatility and price trends. By framing price movements with upper and lower boundaries set at standard deviations around a central moving average, the indicator adapts to volatility in real-time, offering a visual representation of how prices are moving relative to historical norms. While it's valuable for highlighting potential reversals, breakouts, and trend strengths, Bollinger Bands is usually more effective when used with other indicators and methods. </p></div>	Bollinger Bands, a popular tool among investors and traders, helps gauge the volatility of stocks and other securities to determine if they are over- or undervalued. Developed in the 1980s by financial analyst John Bollinger, the bands appear on stock charts as three lines that move with the price. The center line is the stock price's 20-day simple moving average (SMA). The upper and lower bands are set at a certain number of standard deviations, usually two, above and below the middle line. The bands widen when a stock's price becomes more volatile and contract when it is more stable. Many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band, signaling an opportune time to trade. While valuable, Bollinger Bands are a secondary indicator that is best used to confirm other analysis methods. Below, we guide you through how to interpret Bollinger Bands, when the tool is best used, and what other indicators are best matched with it. ### Key Takeaways * Bollinger Bands is a technical analysis tool used to determine where prices are high and low relative to each other. * These bands are composed of three lines: a simple moving average (the middle band) and an upper and lower band. * The upper and lower bands are typically two standard deviations above or below a 20-period simple moving average (SMA). * The bands widen and narrow as the volatility of the underlying asset changes. ![Image]() ![Image](https://www.investopedia.com/thmb/c3jMIBuvTXXje0yeVCHggUlvtEw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_INV-final-Bollinger-Band-Definition-June-2021-01-518977e3031d405497003f1747a3c250.jpg) Image by Sabrina Jiang © Investopedia 2021 ## Who Is John Bollinger? John Bollinger, CFA, CMT, has been a major influence in technical analysis and is best known for developing Bollinger Bands in the 1980s. Bollinger combined his background in mathematics and engineering with financial market analysis to create this tool, which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices. The tool has since become a staple in technical analysis. He is also the founder of Bollinger Capital Management, a money management company, and has been a prominent commentator and analyst on market conditions. ![Bollinger Band]() ![Bollinger Band](https://www.investopedia.com/thmb/Fy5viTxzZUDQR_ksxXNHch1b64w=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/bollinger-band-4200502-06f2a74c1c9d471085cf8c2f3a4fc514.jpg) Investopedia / Joules Garcia ## Constructing Bollinger Bands The three lines that make up Bollinger Bands are based on a security's price moves. The center line is the intermediate-term trend and is typically a 20-day [SMA](https://www.investopedia.com/terms/s/sma.asp) of the closing prices. The upper and lower bands are plotted a distance from the SMA set by a certain number of standard deviations, usually two, above and below the center line. To calculate the bands, you first determine the number of periods used for both the SMA and standard deviation, and the number of standard deviations for the upper and lower bands should be from the center line. While the settings can be adjusted based on your strategy, most times, you would use a 20-day SMA and two standard deviations. The upper band is found by adding two standard deviations to the center SMA line, while the lower band is calculated by subtracting two standard deviations from the center line. The bands automatically widen when price volatility increases and narrow when volatility goes down. You don't need to break out your calculator and graph paper: Many popular trading platforms, like TradingView, include this technical indicator as a standard feature. Thus, you can easily overlay Bollinger Bands onto price charts. You can also usually customize the Bollinger Bands' settings (increasing or lowering the periods and standard deviations) to fit your needs. Given that the bands are plotted two standard deviations away from the SMA, they can indicate when prices are statistically high or low. Many traders consider the area near the upper band to be overbought territory—the price is poised to fall—and a potential resistance level where sellers may step in. Conversely, the area near the lower band is often seen as oversold—the price is poised to go up—and a potential support level where buyers could enter the market. ## How To Trade With Bollinger Bands Traders and investors use Bollinger Bands to assess market volatility and identify potential entry and exit points. The tool is premised on the idea that prices tend to remain within the bands' upper and lower limits. One use is for [trend analysis](https://www.investopedia.com/terms/t/trendanalysis.asp). The direction of the middle band can indicate a trend's strength: when the middle band is heading upward, this suggests an uptrend, and the converse when heading downward. In addition, the width of the bands reflects market volatility. Narrow bands indicate less volatility, which means a significant price move could be imminent. This is known as a "squeeze." Conversely, wide bands indicate more volatility. Another way to use the tool is to figure out when an asset is overbought and oversold. As the price touches or moves outside the upper band, it could be overbought, suggesting a potential selling or short opportunity. Similarly, if the price touches or falls outside the lower band, the asset may be oversold, indicating a possible buying opportunity. The bands can also help find price targets. For instance, after a price "bounces" off the lower band, the upper band becomes a potential exit point if the price trend reverses. Likewise, after a price move that touches the upper bands, the lower band becomes a possible target if a reversal occurs. Another strategy is called the "Bollinger Bounce." This is based on the idea that prices tend to return to the middle band. Traders may buy or sell based on the rebound from the upper or lower bands toward the middle band, especially in a ranging market. Below is a table of different ways the Bollinger Bands can move, what they indicate, and how traders often react. We then go through these moves in more detail so you understand the strategies better. \| Bollinger Bands Cheat Sheet \| \| \| \| --- \| --- \| --- \| \| Bollinger Band Action \| What This Indicates \| Potential Reaction \| \| Upward middle band \| Indicates an uptrend \| Buy or hold long positions \| \| Downward middle band \| Suggests a downtrend \| Sell or hold short positions \| \| Narrow bands (squeeze) \| Less volatility; potential for significant price move \| Prepare for a breakout; consider entry points \| \| Price touching or moving outside the upper band \| Potentially overbought (poised to fall in price) \| Consider selling, shorting, or tightening stop-loss orders \| \| Price touching or falling outside the lower band \| Potentially oversold (poised to go up) \| Buying or tightening stop-loss orders \| \| Price bounces off the lower band \| The upper band becomes a potential exit point if the trend reverses \| Consider taking profits or setting up a trailing stop-loss \| \| Price touches the upper band \| The lower band becomes a potential target if the reversal occurs \| Consider taking profits or setting a trailing stop-loss \| \| Price rebounds from upper or lower bands toward the middle band \| Potential buying or selling opportunity, especially in ranging markets ("Bollinger Bounce") \| Enter long or short positions; set stop-loss orders \| \| Price move starting at the upper band and continuing outside it, with increased volume \| Signals a potential breakout \| Enter long positions; set stop-loss orders below recent lows \| \| Decisive move below the lower band, with high volume \| Could mean a breakdown or the start of a new bearish trend \| Enter short positions; set stop-loss orders above recent highs \| \| Widening bands after a squeeze \| Could indicate an imminent breakout \| Prepare for entry, watch for confirmation signals \| \| Widening bands \| Signals increase in volatility and the potential beginning of a strong price trend \| Adjust risk management; consider [trend-following strategies](https://www.investopedia.com/articles/optioninvestor/10/trend-following-indicators.asp) \| \| Tightening bands (squeeze) \| Suggests a period of lower volatility and consolidation; often a precursor to a major price move or breakout \| Prepare for a breakout; consider entry points; tighten stop-loss orders \| \| Longer squeeze \| Could indicate a more potent breakout coming \| Prepare for a larger price move; increase position size \| \| Tightening bands \| Could mean there's no consensus in the market about the future price direction \| Adjust risk management; wait for clearer signals before entering positions \| ### Moves Within the Bands Using two standard deviations in constructing Bollinger Bands is based on the statistical properties of the normal distribution and the concept of volatility. In this context, standard deviation measures how far prices typically deviate from SMA, the middle band. By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period. This assumption is based on the statistical rule that about 95% of the data points will fall within two standard deviations of the mean for a normally distributed data set. Choosing two standard deviations provides a statistically significant measure of volatility while remaining practical for market analysis. The bands can adapt to changes in volatility, making them suitable for various market conditions. When prices move outside the upper or lower bands, this suggests that the security is trading at a statistically high or low level relative to its recent price history. This indicates potentially overbought or oversold conditions, respectively. However, prices can remain outside the bands for extended periods during strong trends. ### Signals at the Upper Band By examining the relationship between the price and the upper band, you can look for overbought conditions, check for potential price reversals or a slowdown in momentum, find out when volatility is expanding, set price targets based on mean reversion strategies, and determine the strength of a trend. When the price touches or pushes through the upper band, this is often read as the security is overbought. This is because the asset is priced higher than its typical valuation range, indicating a potential reversal or slowdown in momentum. When the price reaches or goes above the upper band, this indicates increased volatility. Since Bollinger Bands adjusts to volatility, a widening gap between the upper and lower bands means that the market is experiencing wider price fluctuations, which could be due to economic and market news, earnings reports, and other market events. For investors using [mean reversion](https://www.investopedia.com/terms/m/meanreversion.asp) strategies, the upper band can act as a price target in a ranging market. If the price oscillates between the upper and lower bands without a clear trend, hitting the upper band can signal to sell or go short because traders expect the price to move back toward the middle band or below. In addition, when there's a strong uptrend, the price might repeatedly touch or stay above the upper band for extended periods. This persistence above the upper band might indicate strong buyer enthusiasm and signal that the trend is likely to continue. However, traders and investors often look to confirm this with other indicators or techniques. The upper band can also be the site for a breakout. A price move that starts at the upper band and continues to push outside of it can signal one, especially if there's been an increase in trading volume. This indicates that the asset is starting a new trend or accelerating an existing one. You could use this signal to trade in the direction of the breakout. ### Signals at the Lower Band The lower band of the Bollinger Bands helps identify oversold conditions. It is also a reference line for those using mean reversion strategies or looking for potential reversals. If prices stay below this band, this could mean the start of a new bearish trend, especially if there's a lot of trading volume. When the price of an asset touches or falls below the lower band, this could mean the asset is undervalued or that the selling pressure has gone too far, potentially leading to a reversal or pause in the downward trend. Just as touching the upper band signals an increase in volatility, the price reaching the lower band indicates greater volatility in the context of a downward move. However, when the bands narrow after a period of wide fluctuation, there's decreased volatility, which might mean a significant price move as the price consolidates. For investors employing mean reversion strategies or looking for bounce-back opportunities, the lower band can be used as a target for buying prospects. The rationale is that if the price has moved down to the lower band, it might rebound toward the middle band or higher, especially in a ranging market without a strong downtrend. That said, if the price stays below the lower band, this signals a strong downtrend. Continual contact with the band or new lows below could indicate the bearish sentiment is strong and likely to continue. However, you should confirm this with other indicators to avoid false signals or traps. A decisive move below the lower band can signify a [breakdown](https://www.investopedia.com/terms/b/breakdown.asp) or the start of a new bearish trend, especially if the volume is high and there are other bearish signals. Since further declines could occur, you can use this as a potential signal to sell or enter a short position. ### What Widening Bands Mean When the bands widen, this signals an increase in volatility because the standard deviation of the price increases. Thus, the price moves are more significant than in the recent past. Economic announcements, earnings reports, geopolitical events, or sudden shifts in market sentiment can be behind these changes. Traders see increased volatility as an opportunity for substantial gains and a risk of greater losses. The widening of the bands could signal the beginning of a substantial price trend. As volatility increases, the chance of a significant and sustained price move in one direction also increases. However, you should confirm this with other indicators or price patterns before proceeding. When the bands widen after a period of contraction during a "squeeze," many consider this a sign that a breakout is about to occur. While the bands themselves do not indicate the direction of the breakout, investors can assess the potential direction by comparing the price's movement to the bands and other indicators. The increased volatility signaled by widening Bollinger Bands might prompt investors to reassess their risk management strategies. They might cut their positions or diversify their holdings to manage the higher risk associated with greater price fluctuations. ### What Tightening Bands Mean A contraction of the bands suggests that the market is experiencing less volatility. Price movements are more contained, and there may be less trading volume or market interest in the short term. This reduced volatility period can be seen as a time of [consolidation](https://www.investopedia.com/terms/c/consolidation.asp). While tightening bands indicate less volatility, market analysts often consider this a precursor to major price moves or breakouts. Traders monitor squeezes closely since they suggest the market is building energy for a significant change. The longer the squeeze, the more potent the subsequent breakout is expected to be. This is based on the principle that periods of low volatility are frequently followed by periods of high volatility. However, this doesn't mean you'll know where the breakout will head. During a tightening period, traders may adjust their risk management strategies, such as pulling in stop-loss orders to reflect lower volatility while preparing for a potential increase ahead. The tightening of Bollinger Bands could also mean there's no consensus among market participants about the future direction of the price. This indecision can result in the price oscillating within a tighter range until new information arrives or the market forces a breakout. ## How Reliable are Bollinger Bands? The effectiveness of this tool depends on the asset involved, the settings used, and other factors: * Asset involved: Each security has different volatility characteristics, affecting how well the tool helps with predictions. Assets that typically experience sudden shifts in volatility might not have the expected behavior within the bands. * Parameters: The default setting for Bollinger Bands is a 20-period SMA with bands set at two standard deviations away. However, this may not be the best option for all trading scenarios or time frames. Adjusting the settings could improve their effectiveness but requires a good understanding of the markets and assets. * Other indicators: Bollinger Bands are most effective when used with different tools and indicators. For instance, volume indicators and momentum oscillators like the relative strength index [(RSI)](https://www.investopedia.com/terms/r/rsi.asp) or moving average convergence divergence [(MACD)](https://www.investopedia.com/terms/m/macd.asp) can give the needed context or help confirm signals from the Bollinger Bands. * Outlier situations: The bands are based on a statistical measure of standard deviation, which assumes that asset price returns follow a normal distribution. However, financial markets are known for having fat tails that sometimes lead to unexpected moves beyond the bands. ## What Technical Indicators Are Similar to Bollinger Bands? There are several, including the [Keltner channels](https://www.investopedia.com/terms/k/keltnerchannel.asp), moving average envelopes, the Donchian channels, the average true range, and the standard deviation indicator. Each tool offers a different view of the market's changes. ## What Are Some Limitations To Using Bollinger Bands? First, Bollinger Bands are a [lagging indicator](https://www.investopedia.com/terms/l/laggingindicator.asp), which means they respond to rather than predict price changes, potentially informing you of changes after they've already happened. In addition, they can generate false signals during highly volatile market periods when the bands expand. Third, the standard settings of Bollinger Bands (20-day simple moving average and two standard deviations) might not be the best for all trading scenarios. Finally, Bollinger Bands are often more effective when used with other indicators, such as volume or momentum oscillators. Relying only on Bollinger Bands without further confirmation can lead to poor trading decisions. ## How Can I Avoid False Signals From the Bollinger Bands? You should consider using them with other technical analysis tools to confirm trends and signals. Employing [momentum oscillators](https://www.investopedia.com/terms/o/oscillator.asp#:~:text=Oscillators%20are%20momentum%20indicators%20used,or%20oversold%20signals%20to%20traders.) like the RSI or MACD can help identify whether the market is overbought or oversold as prices reach or break through the bands. In addition, volume indicators can tell you about the strength behind a move, as significant price changes with a high volume could confirm signals from the Bollinger Bands. You can also adjust the settings of the Bollinger Bands by increasing the period of the moving average or the number of standard deviations, which might filter out less significant price moves. ## The Bottom Line Bollinger Bands is a versatile technical analysis tool that can provide greater clarity about market volatility and price trends. By framing price movements with upper and lower boundaries set at standard deviations around a central moving average, the indicator adapts to volatility in real-time, offering a visual representation of how prices are moving relative to historical norms. While it's valuable for highlighting potential reversals, breakouts, and trend strengths, Bollinger Bands is usually more effective when used with other indicators and methods.	Bollinger Bands, a popular tool among investors and traders, helps gauge the volatility of stocks and other securities to determine if they are over- or undervalued. Developed in the 1980s by financial analyst John Bollinger, the bands appear on stock charts as three lines that move with the price. The center line is the stock price's 20-day simple moving average (SMA). The upper and lower bands are set at a certain number of standard deviations, usually two, above and below the middle line. The bands widen when a stock's price becomes more volatile and contract when it is more stable. Many traders see stocks as overbought as their price nears the upper band and oversold as they approach the lower band, signaling an opportune time to trade. While valuable, Bollinger Bands are a secondary indicator that is best used to confirm other analysis methods. Below, we guide you through how to interpret Bollinger Bands, when the tool is best used, and what other indicators are best matched with it. Key Takeaways Bollinger Bands is a technical analysis tool used to determine where prices are high and low relative to each other.These bands are composed of three lines: a simple moving average (the middle band) and an upper and lower band.The upper and lower bands are typically two standard deviations above or below a 20-period simple moving average (SMA).The bands widen and narrow as the volatility of the underlying asset changes. Image by Sabrina Jiang © Investopedia 2021 Who Is John Bollinger? John Bollinger, CFA, CMT, has been a major influence in technical analysis and is best known for developing Bollinger Bands in the 1980s. Bollinger combined his background in mathematics and engineering with financial market analysis to create this tool, which uses a moving average and the statistical measure of standard deviation to assess the volatility and trends of stock prices. The tool has since become a staple in technical analysis. He is also the founder of Bollinger Capital Management, a money management company, and has been a prominent commentator and analyst on market conditions. Investopedia / Joules Garcia Constructing Bollinger Bands The three lines that make up Bollinger Bands are based on a security's price moves. The center line is the intermediate-term trend and is typically a 20-day SMA of the closing prices. The upper and lower bands are plotted a distance from the SMA set by a certain number of standard deviations, usually two, above and below the center line. To calculate the bands, you first determine the number of periods used for both the SMA and standard deviation, and the number of standard deviations for the upper and lower bands should be from the center line. While the settings can be adjusted based on your strategy, most times, you would use a 20-day SMA and two standard deviations. The upper band is found by adding two standard deviations to the center SMA line, while the lower band is calculated by subtracting two standard deviations from the center line. The bands automatically widen when price volatility increases and narrow when volatility goes down. You don't need to break out your calculator and graph paper: Many popular trading platforms, like TradingView, include this technical indicator as a standard feature. Thus, you can easily overlay Bollinger Bands onto price charts. You can also usually customize the Bollinger Bands' settings (increasing or lowering the periods and standard deviations) to fit your needs. Given that the bands are plotted two standard deviations away from the SMA, they can indicate when prices are statistically high or low. Many traders consider the area near the upper band to be overbought territory—the price is poised to fall—and a potential resistance level where sellers may step in. Conversely, the area near the lower band is often seen as oversold—the price is poised to go up—and a potential support level where buyers could enter the market. How To Trade With Bollinger Bands Traders and investors use Bollinger Bands to assess market volatility and identify potential entry and exit points. The tool is premised on the idea that prices tend to remain within the bands' upper and lower limits. One use is for trend analysis. The direction of the middle band can indicate a trend's strength: when the middle band is heading upward, this suggests an uptrend, and the converse when heading downward. In addition, the width of the bands reflects market volatility. Narrow bands indicate less volatility, which means a significant price move could be imminent. This is known as a "squeeze." Conversely, wide bands indicate more volatility. Another way to use the tool is to figure out when an asset is overbought and oversold. As the price touches or moves outside the upper band, it could be overbought, suggesting a potential selling or short opportunity. Similarly, if the price touches or falls outside the lower band, the asset may be oversold, indicating a possible buying opportunity. The bands can also help find price targets. For instance, after a price "bounces" off the lower band, the upper band becomes a potential exit point if the price trend reverses. Likewise, after a price move that touches the upper bands, the lower band becomes a possible target if a reversal occurs. Another strategy is called the "Bollinger Bounce." This is based on the idea that prices tend to return to the middle band. Traders may buy or sell based on the rebound from the upper or lower bands toward the middle band, especially in a ranging market. Below is a table of different ways the Bollinger Bands can move, what they indicate, and how traders often react. We then go through these moves in more detail so you understand the strategies better. Bollinger Bands Cheat Sheet Bollinger Band Action What This Indicates Potential Reaction Upward middle band Indicates an uptrend Buy or hold long positions Downward middle band Suggests a downtrend Sell or hold short positions Narrow bands (squeeze) Less volatility; potential for significant price move Prepare for a breakout; consider entry points Price touching or moving outside the upper band Potentially overbought (poised to fall in price) Consider selling, shorting, or tightening stop-loss orders Price touching or falling outside the lower band Potentially oversold (poised to go up) Buying or tightening stop-loss orders Price bounces off the lower band The upper band becomes a potential exit point if the trend reverses Consider taking profits or setting up a trailing stop-loss Price touches the upper band The lower band becomes a potential target if the reversal occurs Consider taking profits or setting a trailing stop-loss Price rebounds from upper or lower bands toward the middle band Potential buying or selling opportunity, especially in ranging markets ("Bollinger Bounce") Enter long or short positions; set stop-loss orders Price move starting at the upper band and continuing outside it, with increased volume Signals a potential breakout Enter long positions; set stop-loss orders below recent lows Decisive move below the lower band, with high volume Could mean a breakdown or the start of a new bearish trend Enter short positions; set stop-loss orders above recent highs Widening bands after a squeeze Could indicate an imminent breakout Prepare for entry, watch for confirmation signals Widening bands Signals increase in volatility and the potential beginning of a strong price trend Adjust risk management; consider trend-following strategies Tightening bands (squeeze) Suggests a period of lower volatility and consolidation; often a precursor to a major price move or breakout Prepare for a breakout; consider entry points; tighten stop-loss orders Longer squeeze Could indicate a more potent breakout coming Prepare for a larger price move; increase position size Tightening bands Could mean there's no consensus in the market about the future price direction Adjust risk management; wait for clearer signals before entering positions Moves Within the Bands Using two standard deviations in constructing Bollinger Bands is based on the statistical properties of the normal distribution and the concept of volatility. In this context, standard deviation measures how far prices typically deviate from SMA, the middle band. By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period. This assumption is based on the statistical rule that about 95% of the data points will fall within two standard deviations of the mean for a normally distributed data set. Choosing two standard deviations provides a statistically significant measure of volatility while remaining practical for market analysis. The bands can adapt to changes in volatility, making them suitable for various market conditions. When prices move outside the upper or lower bands, this suggests that the security is trading at a statistically high or low level relative to its recent price history. This indicates potentially overbought or oversold conditions, respectively. However, prices can remain outside the bands for extended periods during strong trends. Signals at the Upper Band By examining the relationship between the price and the upper band, you can look for overbought conditions, check for potential price reversals or a slowdown in momentum, find out when volatility is expanding, set price targets based on mean reversion strategies, and determine the strength of a trend. When the price touches or pushes through the upper band, this is often read as the security is overbought. This is because the asset is priced higher than its typical valuation range, indicating a potential reversal or slowdown in momentum. When the price reaches or goes above the upper band, this indicates increased volatility. Since Bollinger Bands adjusts to volatility, a widening gap between the upper and lower bands means that the market is experiencing wider price fluctuations, which could be due to economic and market news, earnings reports, and other market events. For investors using mean reversion strategies, the upper band can act as a price target in a ranging market. If the price oscillates between the upper and lower bands without a clear trend, hitting the upper band can signal to sell or go short because traders expect the price to move back toward the middle band or below. In addition, when there's a strong uptrend, the price might repeatedly touch or stay above the upper band for extended periods. This persistence above the upper band might indicate strong buyer enthusiasm and signal that the trend is likely to continue. However, traders and investors often look to confirm this with other indicators or techniques. The upper band can also be the site for a breakout. A price move that starts at the upper band and continues to push outside of it can signal one, especially if there's been an increase in trading volume. This indicates that the asset is starting a new trend or accelerating an existing one. You could use this signal to trade in the direction of the breakout. Signals at the Lower Band The lower band of the Bollinger Bands helps identify oversold conditions. It is also a reference line for those using mean reversion strategies or looking for potential reversals. If prices stay below this band, this could mean the start of a new bearish trend, especially if there's a lot of trading volume. When the price of an asset touches or falls below the lower band, this could mean the asset is undervalued or that the selling pressure has gone too far, potentially leading to a reversal or pause in the downward trend. Just as touching the upper band signals an increase in volatility, the price reaching the lower band indicates greater volatility in the context of a downward move. However, when the bands narrow after a period of wide fluctuation, there's decreased volatility, which might mean a significant price move as the price consolidates. For investors employing mean reversion strategies or looking for bounce-back opportunities, the lower band can be used as a target for buying prospects. The rationale is that if the price has moved down to the lower band, it might rebound toward the middle band or higher, especially in a ranging market without a strong downtrend. That said, if the price stays below the lower band, this signals a strong downtrend. Continual contact with the band or new lows below could indicate the bearish sentiment is strong and likely to continue. However, you should confirm this with other indicators to avoid false signals or traps. A decisive move below the lower band can signify a breakdown or the start of a new bearish trend, especially if the volume is high and there are other bearish signals. Since further declines could occur, you can use this as a potential signal to sell or enter a short position. What Widening Bands Mean When the bands widen, this signals an increase in volatility because the standard deviation of the price increases. Thus, the price moves are more significant than in the recent past. Economic announcements, earnings reports, geopolitical events, or sudden shifts in market sentiment can be behind these changes. Traders see increased volatility as an opportunity for substantial gains and a risk of greater losses. The widening of the bands could signal the beginning of a substantial price trend. As volatility increases, the chance of a significant and sustained price move in one direction also increases. However, you should confirm this with other indicators or price patterns before proceeding. When the bands widen after a period of contraction during a "squeeze," many consider this a sign that a breakout is about to occur. While the bands themselves do not indicate the direction of the breakout, investors can assess the potential direction by comparing the price's movement to the bands and other indicators. The increased volatility signaled by widening Bollinger Bands might prompt investors to reassess their risk management strategies. They might cut their positions or diversify their holdings to manage the higher risk associated with greater price fluctuations. What Tightening Bands Mean A contraction of the bands suggests that the market is experiencing less volatility. Price movements are more contained, and there may be less trading volume or market interest in the short term. This reduced volatility period can be seen as a time of consolidation. While tightening bands indicate less volatility, market analysts often consider this a precursor to major price moves or breakouts. Traders monitor squeezes closely since they suggest the market is building energy for a significant change. The longer the squeeze, the more potent the subsequent breakout is expected to be. This is based on the principle that periods of low volatility are frequently followed by periods of high volatility. However, this doesn't mean you'll know where the breakout will head. During a tightening period, traders may adjust their risk management strategies, such as pulling in stop-loss orders to reflect lower volatility while preparing for a potential increase ahead. The tightening of Bollinger Bands could also mean there's no consensus among market participants about the future direction of the price. This indecision can result in the price oscillating within a tighter range until new information arrives or the market forces a breakout. How Reliable are Bollinger Bands? The effectiveness of this tool depends on the asset involved, the settings used, and other factors: Asset involved: Each security has different volatility characteristics, affecting how well the tool helps with predictions. Assets that typically experience sudden shifts in volatility might not have the expected behavior within the bands. Parameters: The default setting for Bollinger Bands is a 20-period SMA with bands set at two standard deviations away. However, this may not be the best option for all trading scenarios or time frames. Adjusting the settings could improve their effectiveness but requires a good understanding of the markets and assets. Other indicators: Bollinger Bands are most effective when used with different tools and indicators. For instance, volume indicators and momentum oscillators like the relative strength index (RSI) or moving average convergence divergence (MACD) can give the needed context or help confirm signals from the Bollinger Bands. Outlier situations: The bands are based on a statistical measure of standard deviation, which assumes that asset price returns follow a normal distribution. However, financial markets are known for having fat tails that sometimes lead to unexpected moves beyond the bands. What Technical Indicators Are Similar to Bollinger Bands? There are several, including the Keltner channels, moving average envelopes, the Donchian channels, the average true range, and the standard deviation indicator. Each tool offers a different view of the market's changes. What Are Some Limitations To Using Bollinger Bands? First, Bollinger Bands are a lagging indicator, which means they respond to rather than predict price changes, potentially informing you of changes after they've already happened. In addition, they can generate false signals during highly volatile market periods when the bands expand. Third, the standard settings of Bollinger Bands (20-day simple moving average and two standard deviations) might not be the best for all trading scenarios. Finally, Bollinger Bands are often more effective when used with other indicators, such as volume or momentum oscillators. Relying only on Bollinger Bands without further confirmation can lead to poor trading decisions. How Can I Avoid False Signals From the Bollinger Bands? You should consider using them with other technical analysis tools to confirm trends and signals. Employing momentum oscillators like the RSI or MACD can help identify whether the market is overbought or oversold as prices reach or break through the bands. In addition, volume indicators can tell you about the strength behind a move, as significant price changes with a high volume could confirm signals from the Bollinger Bands. You can also adjust the settings of the Bollinger Bands by increasing the period of the moving average or the number of standard deviations, which might filter out less significant price moves. The Bottom Line Bollinger Bands is a versatile technical analysis tool that can provide greater clarity about market volatility and price trends. By framing price movements with upper and lower boundaries set at standard deviations around a central moving average, the indicator adapts to volatility in real-time, offering a visual representation of how prices are moving relative to historical norms. While it's valuable for highlighting potential reversals, breakouts, and trend strengths, Bollinger Bands is usually more effective when used with other indicators and methods.	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https://www.investopedia.com/terms/f/feederfund.asp	Bank Fees: Everything to Know About How Banks Make Money	<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-feeder-fund"></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 Feeder Fund? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A feeder fund is one of several sub-funds that put all of their investment capital into an overarching umbrella fund, known as a master fund, for which a single investment advisor handles all <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio-investment.asp">portfolio investments</a> and trading. This two-tiered investment structure of a feeder fund and a master fund is commonly used by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp">hedge funds</a> as a means of assembling a larger portfolio account by pooling investment capital. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund. </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 feeder fund is one of many smaller investment funds that pool investor money, which is then aggregated under a single centralized master fund.</li><li>Consolidation of feeder funds into a master fund allows for reductions of operation and trading costs, and a larger portfolio has the added benefit of economies of scale.</li><li>Hedge funds commonly use master-feeder structures, where fees generated are pro-rated and distributed to the feeder funds.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-feeder-funds"></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 Feeder Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> In a feeder fund arrangement, all management fees and any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/performance-fee.asp">performance fees</a> due are paid by investors at the feeder fund level. </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 primary purpose served by the feeder fund-master fund structure is the reduction of trading costs and overall <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>. The master fund effectively achieves <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economiesofscale.asp">economies of scale</a> through having access to the large pool of investment capital provided by a number of feeder funds, which enables it to operate less expensively than would be possible for any of the feeder funds investing on their own. </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 use of this two-tiered fund structure can be very advantageous when the feeder funds share common investment goals and strategies but are not appropriate for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with other funds within a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/masterfund.asp">master fund</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-structure-of-feeder-funds-and-master-funds"></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"> Structure of Feeder Funds and Master Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The feeder funds that invest capital in a master fund operate as separate legal entities from the master fund and may be invested in more than one master fund. Various feeder funds invested in a master fund often differ substantially from one another in terms of things such as expense fees or investment minimums and do not usually have identical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nav.asp">net asset values</a> (NAV). In the same way that a feeder fund is free to invest in more than one master fund, a master fund is likewise free to accept investments from a number of feeder funds. </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 regard to feeder funds operating in the United States, it is common for the master fund to be established as an offshore entity. This frees up the master fund to accept investment capital from both tax-exempt and U.S.-taxable investors. If, however, an offshore master fund elects to be taxed as a partnership or limited liability company (LLC) for U.S. tax purposes, then onshore feeder funds receive pass-through treatment of their share of the master fund's gains or losses, thus avoiding double taxation. </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-new-rules-on-international-feeder-funds"></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"> New Rules on International Feeder Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In March 2017, 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</a> (SEC) ruled to allow foreign-regulated companies (foreign feeder funds) to invest in open-end master funds (U.S. Master Fund), making it easier for global managers to market their investment products in different foreign jurisdictions employing a master fund. </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 letter modified parts 12(d)(1)(A) and (B) of the 1940 Act, which previously limited the use of foreign feeder funds into U.S.-registered funds. The SEC regulated the practice for several reasons. First, it wanted to prevent master funds from exerting too much influence over an acquired fund. It also aimed to protect investors in the funds from layered fees and the possibility of fund structures becoming so complex that they became difficult to understand. </p></div>	## What Is a Feeder Fund? A feeder fund is one of several sub-funds that put all of their investment capital into an overarching umbrella fund, known as a master fund, for which a single investment advisor handles all [portfolio investments](https://www.investopedia.com/terms/p/portfolio-investment.asp) and trading. This two-tiered investment structure of a feeder fund and a master fund is commonly used by [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) as a means of assembling a larger portfolio account by pooling investment capital. Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund. ### Key Takeaways * A feeder fund is one of many smaller investment funds that pool investor money, which is then aggregated under a single centralized master fund. * Consolidation of feeder funds into a master fund allows for reductions of operation and trading costs, and a larger portfolio has the added benefit of economies of scale. * Hedge funds commonly use master-feeder structures, where fees generated are pro-rated and distributed to the feeder funds. ## Understanding Feeder Funds In a feeder fund arrangement, all management fees and any [performance fees](https://www.investopedia.com/terms/p/performance-fee.asp) due are paid by investors at the feeder fund level. The primary purpose served by the feeder fund-master fund structure is the reduction of trading costs and overall [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp). The master fund effectively achieves [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) through having access to the large pool of investment capital provided by a number of feeder funds, which enables it to operate less expensively than would be possible for any of the feeder funds investing on their own. The use of this two-tiered fund structure can be very advantageous when the feeder funds share common investment goals and strategies but are not appropriate for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with other funds within a [master fund](https://www.investopedia.com/terms/m/masterfund.asp). ## Structure of Feeder Funds and Master Funds The feeder funds that invest capital in a master fund operate as separate legal entities from the master fund and may be invested in more than one master fund. Various feeder funds invested in a master fund often differ substantially from one another in terms of things such as expense fees or investment minimums and do not usually have identical [net asset values](https://www.investopedia.com/terms/n/nav.asp) (NAV). In the same way that a feeder fund is free to invest in more than one master fund, a master fund is likewise free to accept investments from a number of feeder funds. In regard to feeder funds operating in the United States, it is common for the master fund to be established as an offshore entity. This frees up the master fund to accept investment capital from both tax-exempt and U.S.-taxable investors. If, however, an offshore master fund elects to be taxed as a partnership or limited liability company (LLC) for U.S. tax purposes, then onshore feeder funds receive pass-through treatment of their share of the master fund's gains or losses, thus avoiding double taxation. ## New Rules on International Feeder Funds In March 2017, the [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) (SEC) ruled to allow foreign-regulated companies (foreign feeder funds) to invest in open-end master funds (U.S. Master Fund), making it easier for global managers to market their investment products in different foreign jurisdictions employing a master fund. The letter modified parts 12(d)(1)(A) and (B) of the 1940 Act, which previously limited the use of foreign feeder funds into U.S.-registered funds. The SEC regulated the practice for several reasons. First, it wanted to prevent master funds from exerting too much influence over an acquired fund. It also aimed to protect investors in the funds from layered fees and the possibility of fund structures becoming so complex that they became difficult to understand.	What Is a Feeder Fund? A feeder fund is one of several sub-funds that put all of their investment capital into an overarching umbrella fund, known as a master fund, for which a single investment advisor handles all portfolio investments and trading. This two-tiered investment structure of a feeder fund and a master fund is commonly used by hedge funds as a means of assembling a larger portfolio account by pooling investment capital. Profits from the master fund are then split, or distributed, proportionately to the feeder funds based on the percentage of investment capital they have contributed to the master fund. Key Takeaways A feeder fund is one of many smaller investment funds that pool investor money, which is then aggregated under a single centralized master fund.Consolidation of feeder funds into a master fund allows for reductions of operation and trading costs, and a larger portfolio has the added benefit of economies of scale.Hedge funds commonly use master-feeder structures, where fees generated are pro-rated and distributed to the feeder funds. Understanding Feeder Funds In a feeder fund arrangement, all management fees and any performance fees due are paid by investors at the feeder fund level. The primary purpose served by the feeder fund-master fund structure is the reduction of trading costs and overall operating costs. The master fund effectively achieves economies of scale through having access to the large pool of investment capital provided by a number of feeder funds, which enables it to operate less expensively than would be possible for any of the feeder funds investing on their own. The use of this two-tiered fund structure can be very advantageous when the feeder funds share common investment goals and strategies but are not appropriate for a feeder fund with a unique investment strategy or aim since those unique characteristics would be lost in the combination with other funds within a master fund. Structure of Feeder Funds and Master Funds The feeder funds that invest capital in a master fund operate as separate legal entities from the master fund and may be invested in more than one master fund. Various feeder funds invested in a master fund often differ substantially from one another in terms of things such as expense fees or investment minimums and do not usually have identical net asset values (NAV). In the same way that a feeder fund is free to invest in more than one master fund, a master fund is likewise free to accept investments from a number of feeder funds. In regard to feeder funds operating in the United States, it is common for the master fund to be established as an offshore entity. This frees up the master fund to accept investment capital from both tax-exempt and U.S.-taxable investors. If, however, an offshore master fund elects to be taxed as a partnership or limited liability company (LLC) for U.S. tax purposes, then onshore feeder funds receive pass-through treatment of their share of the master fund's gains or losses, thus avoiding double taxation. New Rules on International Feeder Funds In March 2017, the Securities and Exchange Commission (SEC) ruled to allow foreign-regulated companies (foreign feeder funds) to invest in open-end master funds (U.S. Master Fund), making it easier for global managers to market their investment products in different foreign jurisdictions employing a master fund. The letter modified parts 12(d)(1)(A) and (B) of the 1940 Act, which previously limited the use of foreign feeder funds into U.S.-registered funds. The SEC regulated the practice for several reasons. First, it wanted to prevent master funds from exerting too much influence over an acquired fund. It also aimed to protect investors in the funds from layered fees and the possibility of fund structures becoming so complex that they became difficult to understand.	[ [ "portfolio investments", "https://www.investopedia.com/terms/p/portfolio-investment.asp" ], [ "hedge funds", "https://www.investopedia.com/terms/h/hedgefund.asp" ], [ "performance fees", "https://www.investopedia.com/terms/p/performance-fee.asp" ], [ "operating costs", "https://www.investopedia.com/terms/o/operating-cost.asp" ], [ "economies of scale", "https://www.investopedia.com/terms/e/economiesofscale.asp" ], [ "master fund", "https://www.investopedia.com/terms/m/masterfund.asp" ], [ "net asset values", "https://www.investopedia.com/terms/n/nav.asp" ], [ "Securities and Exchange Commission", "https://www.investopedia.com/terms/s/sec.asp" ] ]
https://www.investopedia.com/articles/investing/022416/investment-fundamentals-sp-500-index-vs-russell-1000-index.asp	S&P 500 vs. Russell 1000: What's the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-sp-500-vs-russell-1000-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> S&P 500 vs. Russell 1000: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">Standard & Poor's 500 Index (S&P 500)</a> and the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell_1000index.asp">Russell 1000 Index</a> both track stocks of publicly traded companies and are both considered large-cap stock indices. These two indexes are used as a benchmark for the overall stock market because investors expect them to represent the strength of the largest U.S. companies. However, there are important differences in the eligibility requirements for their components, and in the procedure by which those components are included. </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 S&P 500 and Russell 1000 are both large-cap stock indices.</li><li>The S&P 500 includes only large-cap stocks, while the Russell 1000 contains some companies in the mid-cap range.</li><li>Although the differences are minor, the Russell 1000 is perceived by investors as being more volatile than the S&P 500.</li><li>Both indexes are rebalanced on different schedules.</li><li>The S&P 500 and Russell 1000 have similar performance and volatility metrics despite being very different. </li></ul></div></div></div> <span class="heading-toc" id="toc-sp-500-vs-russell-1000"></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"> S&P 500 vs. Russell 1000 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Outside of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average (DJIA)</a>, the S&P 500 is the best-known barometer for large-cap stocks in the United States. The index has been around since 1923 but assumed its present format in 1957.<span class="ql-inline-citation" data-cite="18"></span> As the name suggests, it is composed of 500 publicly traded large-cap stocks. It is designed to measure the market performance of U.S. stocks trading on U.S. exchanges. The index is used as the benchmark for hundreds of mutual funds and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded funds (ETFs)</a>. </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 Russell 1000 is a relatively newer index, having started in 1984. It is also less well-known than the S&P 500, but it represents a similarly broad stock market performance. Administered by FTSE Russell, it is a subset of the broader Russell 3000 Index, which includes 3,000 stocks.<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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> In total, the Russell U.S. indexes account for approximately 99% of the U.S. equity market. The largest 1,000 stocks go into the Russell 1000 Index, representing 93% of the total U.S. equity market. The smaller 2,000 go into, the more well-known <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/russell2000.asp">Russell 2000</a> small-cap index.<span class="ql-inline-citation" data-cite="8"></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_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> With one index holding 500 stocks and the other holding roughly 1,000, the composition of the two indices is clearly different. While the S&P 500 is composed exclusively of large-cap stocks, the Russell 1000 collects some <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/midcapstock.asp">mid-cap stocks</a> to fill out its portfolio composition.<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_14-0"></div> <span class="heading-toc" id="toc-index-eligibility"></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"> Index Eligibility </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The S&P 500 and Russell 1000 identify the index components with different procedures. Both begin by specifying the eligibility requirements of being included in a larger, more universal index and then collect a subset of the universal index as the final list of components. To be included, both indices require that their components be defined as "U.S. companies."<span class="ql-inline-citation" data-cite="11"></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_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> They both look at factors such as where the company is headquartered, where it derives <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revenue.asp">revenue</a>, and where most of its assets are located.<span class="ql-inline-citation" data-cite="5"></span> Stocks must also trade on either 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> or the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a>.<span class="ql-inline-citation" data-cite="12"></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_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"> S&P 500 </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> S&P Dow Jones Indices determines the eligibility requirements for its Total Market Index and ranks them by float-adjusted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/market-capitalization-defined/">market capitalization</a>.<span class="ql-inline-citation" data-cite="13"></span> The market cap represents the company's total value and is calculated by multiplying the total number of its outstanding shares by its current stock price. </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"> To be considered for inclusion in the S&P 500, companies must usually have $12.7 billion or more in market cap.<span class="ql-inline-citation" data-cite="3"></span> As of February 2023, the S&P 500 had a median market cap of $31.71 billion median, and the companies represented approximately 80% of the U.S. equity market.<span class="ql-inline-citation" data-cite="9"></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"> Although it can vary, depending on the particular type of S&P index—such as the S&P 1500 or S&P 500—companies usually are required to have generated positive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netincome.asp">net income</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnings.asp">earnings</a> for the sum of the previous four consecutive quarters, including the most recent quarter.<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_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A committee composed of full-time professionals from this organization meets monthly to determine which 500 of the Total Market Index will be included in the S&P 500. The committee's decisions are confidential and may or may not follow the top 500 ranked stocks.<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_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"> Russell 1000 </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The FTSE Russell organization uses a rules-based approach to selecting the stocks in the Russell 1000. The largest 4,000 stocks by total market cap are included in the Russell 3000E, which represents the broader <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equitymarket.asp">equity market</a>. Those 4,000 stocks are ranked in descending order by total market capitalization, with the top 1,000 stocks making up the Russell 1000 index.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> More detailed rules apply for stocks near the inclusion threshold, meaning the index might include slightly more or less than 1,000 stocks. Typically, companies with less than $30 million in market cap are not eligible for inclusion in any of the Russell U.S. indexes.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The Russell 1000 had an average market cap of $416.33 billion and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/median.asp">median</a> market cap of $13.2 billion as of Jan. 31, 2023. The Russell 1000's mid-cap composition is represented by the median market capitalization of its stocks, which is important since mid-cap stocks typically maintain a higher-risk, higher-return potential profile. As a result, the Russell 1000 Index is usually considered to be slightly more volatile than the S&P 500.<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_35-0"></div> <span class="heading-toc" id="toc-index-rebalancing"></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"> Index Rebalancing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Stock prices change every minute of every business day. Therefore, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/publiccompany.asp">public company</a> values are constantly changing, and it is up to an index's administrators to keep up with these changes to reflect the current times. The process of changing the weighting of assets in a portfolio is called rebalancing. However, the S&P 500 and Russell 1000 change on different schedules. </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 S&P 500 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rebalancing.asp">rebalances</a> its portfolio on a quarterly basis and is reconstituted annually. In addition to this, the committee review process may approve ad-hoc changes at any point after one of their monthly meetings.<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_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The Russell 1000 is fully reconstituted once a year at the end of the second quarter. The index will also make quarterly changes as a result of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">initial public offering (IPO)</a> additions and float updates. Update frequency can affect how well mutual funds and ETFs benchmarked to an index may perform relative to these market averages.<span class="ql-inline-citation" data-cite="16"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <span class="heading-toc" id="toc-performance-and-volatility"></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"> Performance and Volatility </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Although these indexes have clear differences in construction and eligibility, the performance and volatility metrics are strikingly similar. The chart below shows how the indexes are more than 94% correlated over a 20-year period and how the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividend</a>-adjusted performance of these indexes is also quite similar. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></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_46-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:54.0%;"> <img alt="SPY vs. IWB" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/cykAVdIrrte9cz6g_9n6NwqCyQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/cykAVdIrrte9cz6g_9n6NwqCyQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg" data-srcset="https://www.investopedia.com/thmb/6jMpha7kUy7PjP5jFC0fDQ5uSFw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg 750w" data-tracking-container="true" height="2291" id="mntl-sc-block-image_1-0" width="4238"/> <noscript> <img alt="SPY vs. IWB" class="img--noscript universal-image__image" height="2291" sizes="750px" src="https://www.investopedia.com/thmb/cykAVdIrrte9cz6g_9n6NwqCyQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg" srcset="https://www.investopedia.com/thmb/6jMpha7kUy7PjP5jFC0fDQ5uSFw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg 750w" width="4238"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">SPY vs. IWB showing dividend-adjusted returns.</span> </figcaption></figure></div>	## S&P 500 vs. Russell 1000: An Overview The [Standard & Poor's 500 Index (S&P 500)](https://www.investopedia.com/terms/s/sp500.asp) and the [Russell 1000 Index](https://www.investopedia.com/terms/r/russell_1000index.asp) both track stocks of publicly traded companies and are both considered large-cap stock indices. These two indexes are used as a benchmark for the overall stock market because investors expect them to represent the strength of the largest U.S. companies. However, there are important differences in the eligibility requirements for their components, and in the procedure by which those components are included. ### Key Takeaways * The S&P 500 and Russell 1000 are both large-cap stock indices. * The S&P 500 includes only large-cap stocks, while the Russell 1000 contains some companies in the mid-cap range. * Although the differences are minor, the Russell 1000 is perceived by investors as being more volatile than the S&P 500. * Both indexes are rebalanced on different schedules. * The S&P 500 and Russell 1000 have similar performance and volatility metrics despite being very different. ## S&P 500 vs. Russell 1000 Outside of the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp), the S&P 500 is the best-known barometer for large-cap stocks in the United States. The index has been around since 1923 but assumed its present format in 1957. As the name suggests, it is composed of 500 publicly traded large-cap stocks. It is designed to measure the market performance of U.S. stocks trading on U.S. exchanges. The index is used as the benchmark for hundreds of mutual funds and [exchange traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). The Russell 1000 is a relatively newer index, having started in 1984. It is also less well-known than the S&P 500, but it represents a similarly broad stock market performance. Administered by FTSE Russell, it is a subset of the broader Russell 3000 Index, which includes 3,000 stocks. In total, the Russell U.S. indexes account for approximately 99% of the U.S. equity market. The largest 1,000 stocks go into the Russell 1000 Index, representing 93% of the total U.S. equity market. The smaller 2,000 go into, the more well-known [Russell 2000](https://www.investopedia.com/terms/r/russell2000.asp) small-cap index. With one index holding 500 stocks and the other holding roughly 1,000, the composition of the two indices is clearly different. While the S&P 500 is composed exclusively of large-cap stocks, the Russell 1000 collects some [mid-cap stocks](https://www.investopedia.com/terms/m/midcapstock.asp) to fill out its portfolio composition. ## Index Eligibility The S&P 500 and Russell 1000 identify the index components with different procedures. Both begin by specifying the eligibility requirements of being included in a larger, more universal index and then collect a subset of the universal index as the final list of components. To be included, both indices require that their components be defined as "U.S. companies." They both look at factors such as where the company is headquartered, where it derives [revenue](https://www.investopedia.com/terms/r/revenue.asp), and where most of its assets are located. Stocks must also trade on either the [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp) or the [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp). ### S&P 500 S&P Dow Jones Indices determines the eligibility requirements for its Total Market Index and ranks them by float-adjusted [market capitalization](https://www.investopedia.com/investing/market-capitalization-defined/). The market cap represents the company's total value and is calculated by multiplying the total number of its outstanding shares by its current stock price. To be considered for inclusion in the S&P 500, companies must usually have $12.7 billion or more in market cap. As of February 2023, the S&P 500 had a median market cap of $31.71 billion median, and the companies represented approximately 80% of the U.S. equity market. Although it can vary, depending on the particular type of S&P index—such as the S&P 1500 or S&P 500—companies usually are required to have generated positive [net income](https://www.investopedia.com/terms/n/netincome.asp) or [earnings](https://www.investopedia.com/terms/e/earnings.asp) for the sum of the previous four consecutive quarters, including the most recent quarter. A committee composed of full-time professionals from this organization meets monthly to determine which 500 of the Total Market Index will be included in the S&P 500. The committee's decisions are confidential and may or may not follow the top 500 ranked stocks. ### Russell 1000 The FTSE Russell organization uses a rules-based approach to selecting the stocks in the Russell 1000. The largest 4,000 stocks by total market cap are included in the Russell 3000E, which represents the broader [equity market](https://www.investopedia.com/terms/e/equitymarket.asp). Those 4,000 stocks are ranked in descending order by total market capitalization, with the top 1,000 stocks making up the Russell 1000 index. More detailed rules apply for stocks near the inclusion threshold, meaning the index might include slightly more or less than 1,000 stocks. Typically, companies with less than $30 million in market cap are not eligible for inclusion in any of the Russell U.S. indexes. The Russell 1000 had an average market cap of $416.33 billion and a [median](https://www.investopedia.com/terms/m/median.asp) market cap of $13.2 billion as of Jan. 31, 2023. The Russell 1000's mid-cap composition is represented by the median market capitalization of its stocks, which is important since mid-cap stocks typically maintain a higher-risk, higher-return potential profile. As a result, the Russell 1000 Index is usually considered to be slightly more volatile than the S&P 500. ## Index Rebalancing Stock prices change every minute of every business day. Therefore, [public company](https://www.investopedia.com/terms/p/publiccompany.asp) values are constantly changing, and it is up to an index's administrators to keep up with these changes to reflect the current times. The process of changing the weighting of assets in a portfolio is called rebalancing. However, the S&P 500 and Russell 1000 change on different schedules. The S&P 500 [rebalances](https://www.investopedia.com/terms/r/rebalancing.asp) its portfolio on a quarterly basis and is reconstituted annually. In addition to this, the committee review process may approve ad-hoc changes at any point after one of their monthly meetings. The Russell 1000 is fully reconstituted once a year at the end of the second quarter. The index will also make quarterly changes as a result of [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp) additions and float updates. Update frequency can affect how well mutual funds and ETFs benchmarked to an index may perform relative to these market averages. ## Performance and Volatility Although these indexes have clear differences in construction and eligibility, the performance and volatility metrics are strikingly similar. The chart below shows how the indexes are more than 94% correlated over a 20-year period and how the [dividend](https://www.investopedia.com/terms/d/dividend.asp)-adjusted performance of these indexes is also quite similar. ![SPY vs. IWB]() ![SPY vs. IWB](https://www.investopedia.com/thmb/cykAVdIrrte9cz6g_9n6NwqCyQs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SPYvsIWB5-64d9d9c84fb749b6bc3715a3b0d36f62.jpg) SPY vs. IWB showing dividend-adjusted returns.	S&P 500 vs. Russell 1000: An Overview The Standard & Poor's 500 Index (S&P 500) and the Russell 1000 Index both track stocks of publicly traded companies and are both considered large-cap stock indices. These two indexes are used as a benchmark for the overall stock market because investors expect them to represent the strength of the largest U.S. companies. However, there are important differences in the eligibility requirements for their components, and in the procedure by which those components are included. Key Takeaways The S&P 500 and Russell 1000 are both large-cap stock indices.The S&P 500 includes only large-cap stocks, while the Russell 1000 contains some companies in the mid-cap range.Although the differences are minor, the Russell 1000 is perceived by investors as being more volatile than the S&P 500.Both indexes are rebalanced on different schedules.The S&P 500 and Russell 1000 have similar performance and volatility metrics despite being very different. S&P 500 vs. Russell 1000 Outside of the Dow Jones Industrial Average (DJIA), the S&P 500 is the best-known barometer for large-cap stocks in the United States. The index has been around since 1923 but assumed its present format in 1957. As the name suggests, it is composed of 500 publicly traded large-cap stocks. It is designed to measure the market performance of U.S. stocks trading on U.S. exchanges. The index is used as the benchmark for hundreds of mutual funds and exchange traded funds (ETFs). The Russell 1000 is a relatively newer index, having started in 1984. It is also less well-known than the S&P 500, but it represents a similarly broad stock market performance. Administered by FTSE Russell, it is a subset of the broader Russell 3000 Index, which includes 3,000 stocks. In total, the Russell U.S. indexes account for approximately 99% of the U.S. equity market. The largest 1,000 stocks go into the Russell 1000 Index, representing 93% of the total U.S. equity market. The smaller 2,000 go into, the more well-known Russell 2000 small-cap index. With one index holding 500 stocks and the other holding roughly 1,000, the composition of the two indices is clearly different. While the S&P 500 is composed exclusively of large-cap stocks, the Russell 1000 collects some mid-cap stocks to fill out its portfolio composition. Index Eligibility The S&P 500 and Russell 1000 identify the index components with different procedures. Both begin by specifying the eligibility requirements of being included in a larger, more universal index and then collect a subset of the universal index as the final list of components. To be included, both indices require that their components be defined as "U.S. companies." They both look at factors such as where the company is headquartered, where it derives revenue, and where most of its assets are located. Stocks must also trade on either the New York Stock Exchange (NYSE) or the Nasdaq. S&P 500 S&P Dow Jones Indices determines the eligibility requirements for its Total Market Index and ranks them by float-adjusted market capitalization. The market cap represents the company's total value and is calculated by multiplying the total number of its outstanding shares by its current stock price. To be considered for inclusion in the S&P 500, companies must usually have $12.7 billion or more in market cap. As of February 2023, the S&P 500 had a median market cap of $31.71 billion median, and the companies represented approximately 80% of the U.S. equity market. Although it can vary, depending on the particular type of S&P index—such as the S&P 1500 or S&P 500—companies usually are required to have generated positive net income or earnings for the sum of the previous four consecutive quarters, including the most recent quarter. A committee composed of full-time professionals from this organization meets monthly to determine which 500 of the Total Market Index will be included in the S&P 500. The committee's decisions are confidential and may or may not follow the top 500 ranked stocks. Russell 1000 The FTSE Russell organization uses a rules-based approach to selecting the stocks in the Russell 1000. The largest 4,000 stocks by total market cap are included in the Russell 3000E, which represents the broader equity market. Those 4,000 stocks are ranked in descending order by total market capitalization, with the top 1,000 stocks making up the Russell 1000 index. More detailed rules apply for stocks near the inclusion threshold, meaning the index might include slightly more or less than 1,000 stocks. Typically, companies with less than $30 million in market cap are not eligible for inclusion in any of the Russell U.S. indexes. The Russell 1000 had an average market cap of $416.33 billion and a median market cap of $13.2 billion as of Jan. 31, 2023. The Russell 1000's mid-cap composition is represented by the median market capitalization of its stocks, which is important since mid-cap stocks typically maintain a higher-risk, higher-return potential profile. As a result, the Russell 1000 Index is usually considered to be slightly more volatile than the S&P 500. Index Rebalancing Stock prices change every minute of every business day. Therefore, public company values are constantly changing, and it is up to an index's administrators to keep up with these changes to reflect the current times. The process of changing the weighting of assets in a portfolio is called rebalancing. However, the S&P 500 and Russell 1000 change on different schedules. The S&P 500 rebalances its portfolio on a quarterly basis and is reconstituted annually. In addition to this, the committee review process may approve ad-hoc changes at any point after one of their monthly meetings. The Russell 1000 is fully reconstituted once a year at the end of the second quarter. The index will also make quarterly changes as a result of initial public offering (IPO) additions and float updates. Update frequency can affect how well mutual funds and ETFs benchmarked to an index may perform relative to these market averages. Performance and Volatility Although these indexes have clear differences in construction and eligibility, the performance and volatility metrics are strikingly similar. The chart below shows how the indexes are more than 94% correlated over a 20-year period and how the dividend-adjusted performance of these indexes is also quite similar. SPY vs. IWB showing dividend-adjusted returns.	[ [ "Standard & Poor's 500 Index (S&P 500)", "https://www.investopedia.com/terms/s/sp500.asp" ], [ "Russell 1000 Index", "https://www.investopedia.com/terms/r/russell_1000index.asp" ], [ "Dow Jones Industrial Average (DJIA)", "https://www.investopedia.com/terms/d/djia.asp" ], [ "exchange traded funds (ETFs)", "https://www.investopedia.com/terms/e/etf.asp" ], [ "Russell 2000", "https://www.investopedia.com/terms/r/russell2000.asp" ], [ "mid-cap stocks", "https://www.investopedia.com/terms/m/midcapstock.asp" ], [ "revenue", "https://www.investopedia.com/terms/r/revenue.asp" ], [ "New York Stock Exchange (NYSE)", "https://www.investopedia.com/terms/n/nyse.asp" ], [ "Nasdaq", "https://www.investopedia.com/terms/n/nasdaq.asp" ], [ "market capitalization", "https://www.investopedia.com/investing/market-capitalization-defined/" ], [ "net income", "https://www.investopedia.com/terms/n/netincome.asp" ], [ "earnings", "https://www.investopedia.com/terms/e/earnings.asp" ], [ "equity market", "https://www.investopedia.com/terms/e/equitymarket.asp" ], [ "median", "https://www.investopedia.com/terms/m/median.asp" ], [ "public company", "https://www.investopedia.com/terms/p/publiccompany.asp" ], [ "rebalances", "https://www.investopedia.com/terms/r/rebalancing.asp" ], [ "initial public offering (IPO)", "https://www.investopedia.com/terms/i/ipo.asp" ], [ "dividend", "https://www.investopedia.com/terms/d/dividend.asp" ], [ "SPY vs. IWB", "https://www.investopedia.com/thmb/cykAVdIrrte9cz6g_9n6NwqCyQs=/1500x0/filters:no_upscale(" ] ]
https://www.investopedia.com/ask/answers/033115/what-difference-between-biotechnology-company-and-pharmaceutical-company.asp	Biotechnology vs. Pharmaceuticals: What's the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-biotechnology-vs-pharmaceuticals-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Biotechnology vs. Pharmaceuticals: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Many people often conflate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/biotechnology.asp">biotechnology</a> and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-pharmaceutical-stocks-q2-2023-7499241">pharmaceutical</a> companies and believe that the two are one and the same. Although the two have many similarities, the two are distinct from one another. </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"> Biotechnology and pharmaceutical companies both produce medicines, but the medicines made by companies in the biotech industry are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The coining of the term biopharma further complicates matters. The term describes companies that are using both biotechnology and chemical sources in their medical <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/randd.asp">research and development (R&D)</a> efforts. </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>Many investors often confuse biotechnology and pharmaceutical companies, which are often distinct from one another. </li><li>Biotechnology companies derive their products from the extraction or manipulation of living organisms.</li><li>Pharmaceutical companies create medicines from chemicals and synthetic processes.</li><li>Biotech and phama startups often try to shake up the industry.</li><li>Both are important industry sectors with very different risk profiles despite their broad similarities.</li></ul></div></div></div> <span class="heading-toc" id="toc-biotechnology"></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"> Biotechnology </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Common products such as beer and wine, laundry detergent, and anything made of plastic are all biotechnology products. Humans have employed biotechnology since ancient times to breed animals and improve their crops. Modern <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/122215/worlds-top-10-biotechnology-companies-jnj-rogvx.asp">biotechnology companies</a> comprise a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sector.asp">sector</a> collectively known as biotech. They generally research, develop, and produce a variety of commercial products while most focus on either medical or agricultural applications. </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"> Biotechnology firms use living organisms to manufacture products or solve problems. The identification and sourcing of DNA have helped the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/industry.asp">industry</a> make great leaps. Companies in this sector have developed pest-resistant crops, created biofuels like ethanol, and developed gene cloning. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/will-array-biopharma-break-its-downtrend/">Biopharma</a> drugs have also led to some major product innovations. </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"> Some of the most frequently used biotechnology medical products recently introduced include the following: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li>AbbVie's Humira, which is used to treat arthritis, psoriasis, and Crohn's disease, among other ailments</li><li>Roche's Rituxan is used to slow the growth of tumors in several types of cancer</li><li>Amgen/Pfizer's Enbrel is used to treat several autoimmune diseases<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="3"></span><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_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Investors should keep in mind that the biotech industry is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volatility.asp">volatile</a> and fast-growing. The global market is expected to reach $3.8 billion by 2030, according to Grand View Research.<span class="ql-inline-citation" data-cite="18"></span> Biotech <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/startup.asp">startups</a> have sprouted alongside computer technology companies in Silicon Valley. The aim of most is to use biotechnology processes to create breakthrough drugs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_22-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>There is a substantial overlap between some biotech and pharmaceutical companies. For instance, Johnson & Johnson, Eli Lilly, and Merck are big forces in both industries and are among the top U.S.-based biotech firms by <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>.<span class="ql-inline-citation" data-cite="5"></span></p></div></div></div> <span class="heading-toc" id="toc-pharmaceuticals"></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"> Pharmaceuticals </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> As an industry, pharmaceutical companies research, develop, and market medicines made primarily from artificial sources. The largest companies in this sector provide stable results, but the field continues to grow with new companies appearing regularly. </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"> Some modern pharmaceutical companies have a long history, such as Bayer AG, the German company whose founder trademarked aspirin in 1899.<span class="ql-inline-citation" data-cite="7"></span> As of 2023, the world's top pharmaceutical company was <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/stock-analysis/042114/how-johnson-johnson-became-household-name-jnj-pfe.aspx">Johnson & Johnson</a>, followed by Eli Lilly and Novo Nordisk.<span class="ql-inline-citation" data-cite="8"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Just like the biotech sector, there is also a range of pharma startups that are trying to shake up the industry. These companies often partner up with major firms to get products to market or to gain access to large markets and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/distribution-channel.asp">distribution channels</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Pharmaceutical products can take many years to process through the research and development phases before finally making it to market. Part of the lengthy R&D process includes gaining the approval of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fda.asp">Food and Drug Administration (FDA)</a>.<span class="ql-inline-citation" data-cite="16"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-note" 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 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>Pfizer's revenue grew 23% between the 2021 and 2022 fiscal years from $81.29 billion to $100.33 billion. Revenue is expected to grow by 7% to 9% in 2023. These figures exclude sales for the company's COVID-19-related vaccines.<span class="ql-inline-citation" data-cite="19"></span><br/></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_34-0"> <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_35-0"> Biotech and pharmaceuticals are very different propositions when you consider them purely from an investor's perspective, An analyst tends to look at the amount a firm spends on R&D as a percentage of sales in order to compare one company to another. </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"> Biotech companies generally have high <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> because of the research, development, and testing that takes years to complete. The result could be a historic breakthrough or utter failure. The industry may also come across roadblocks to developing new products, especially when research or the end product is controversial. For instance, several countries ban genetically modified plants and products. As such, investors are along for the ride, whether that's up or down. </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"> Biotech has one advantage to make up for the cost disadvantage: While pharmaceuticals generally hold exclusive rights to manufacture and distribute their drugs for five years, biotech can get patent protection for as many as 12 years.<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_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Major pharmaceutical companies have a steady flow of income from current products while maintaining their R&D effort aimed at improving upon existing products or creating new ones. They also keep a steady pipeline of new products in various stages of development. The process to develop a new drug may take up to 15 years to complete.<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_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-tip" 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>Before investing in any biotech or pharma company, it's important for investors to know that their success can depend entirely on taking products to market. The FDA requires most new drugs to go through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/052215/what-are-major-barriers-entry-new-companies-drugs-sector.asp">several phases of testing</a> which, in itself, can take up to eight years.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="16"></span> Even if a company brings a new medicine to the market, it does not mean it will gain widespread physician approval and use.</p></div></div></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-difference-between-the-biotech-and-pharma-sectors"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Difference Between the Biotech and Pharma Sectors?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>People often confuse biotechnology and pharmaceutical companies. While they may seem similar, they are actually distinct from one another. Biotech companies research, develop, and market products that are generally derived from living organisms. The products of pharma companies tend to be derived from chemicals and artificial sources. Companies in the biotech sector tend to have higher operating costs, which means they can be more volatile than the stocks of pharma companies. Major names in the pharma sector often provide stable results because of their long-standing histories.</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-are-some-examples-of-biotechnology-companies"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Examples of Biotechnology Companies?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The following are some examples of major global biotechnology companies: Moderna and Incyte. Novo Nordisk and Johnson & Johnson are both pharmaceutical companies that also have a focus on biotechnology.<br/></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-are-some-of-the-largest-pharmaceutical-companies"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some of the Largest Pharmaceutical Companies?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Roche, Johnson & Johnson, and Eli Lilly are examples of some of the largest global pharmaceutical companies. Because the line is often blurred (due to the type of research and development), the activities of these companies also intersect with the biotechnology sector.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Both biotech and pharma stocks face a costly process that can produce highly profitable products—even when they're successful. But the process is extremely unpredictable, which can prove detrimental and even unrecoverable for a smaller biotech firm. Pharmaceutical companies, on the other hand, are typically able to withstand setbacks and failures. That's because of their larger size and diversified revenue base, </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"> Competition is more relevant and costly to pharmaceutical companies, creating a need for strong pipelines and non-organic revenues (such as through mergers and acquisitions or alliances). Considering these issues can provide the basis for making a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/prudent-investment.asp">prudent investment</a>. </p></div>	## Biotechnology vs. Pharmaceuticals: An Overview Many people often conflate [biotechnology](https://www.investopedia.com/terms/b/biotechnology.asp) and [pharmaceutical](https://www.investopedia.com/top-pharmaceutical-stocks-q2-2023-7499241) companies and believe that the two are one and the same. Although the two have many similarities, the two are distinct from one another. Biotechnology and pharmaceutical companies both produce medicines, but the medicines made by companies in the biotech industry are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis. The coining of the term biopharma further complicates matters. The term describes companies that are using both biotechnology and chemical sources in their medical [research and development (R&D)](https://www.investopedia.com/terms/r/randd.asp) efforts. ### Key Takeaways * Many investors often confuse biotechnology and pharmaceutical companies, which are often distinct from one another. * Biotechnology companies derive their products from the extraction or manipulation of living organisms. * Pharmaceutical companies create medicines from chemicals and synthetic processes. * Biotech and phama startups often try to shake up the industry. * Both are important industry sectors with very different risk profiles despite their broad similarities. ## Biotechnology Common products such as beer and wine, laundry detergent, and anything made of plastic are all biotechnology products. Humans have employed biotechnology since ancient times to breed animals and improve their crops. Modern [biotechnology companies](https://www.investopedia.com/articles/markets/122215/worlds-top-10-biotechnology-companies-jnj-rogvx.asp) comprise a [sector](https://www.investopedia.com/terms/s/sector.asp) collectively known as biotech. They generally research, develop, and produce a variety of commercial products while most focus on either medical or agricultural applications. Biotechnology firms use living organisms to manufacture products or solve problems. The identification and sourcing of DNA have helped the [industry](https://www.investopedia.com/terms/i/industry.asp) make great leaps. Companies in this sector have developed pest-resistant crops, created biofuels like ethanol, and developed gene cloning. [Biopharma](https://www.investopedia.com/news/will-array-biopharma-break-its-downtrend/) drugs have also led to some major product innovations. Some of the most frequently used biotechnology medical products recently introduced include the following: * AbbVie's Humira, which is used to treat arthritis, psoriasis, and Crohn's disease, among other ailments * Roche's Rituxan is used to slow the growth of tumors in several types of cancer * Amgen/Pfizer's Enbrel is used to treat several autoimmune diseases Investors should keep in mind that the biotech industry is [volatile](https://www.investopedia.com/terms/v/volatility.asp) and fast-growing. The global market is expected to reach $3.8 billion by 2030, according to Grand View Research. Biotech [startups](https://www.investopedia.com/terms/s/startup.asp) have sprouted alongside computer technology companies in Silicon Valley. The aim of most is to use biotechnology processes to create breakthrough drugs. ### There is a substantial overlap between some biotech and pharmaceutical companies. For instance, Johnson & Johnson, Eli Lilly, and Merck are big forces in both industries and are among the top U.S.-based biotech firms by [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp). ## Pharmaceuticals As an industry, pharmaceutical companies research, develop, and market medicines made primarily from artificial sources. The largest companies in this sector provide stable results, but the field continues to grow with new companies appearing regularly. Some modern pharmaceutical companies have a long history, such as Bayer AG, the German company whose founder trademarked aspirin in 1899. As of 2023, the world's top pharmaceutical company was [Johnson & Johnson](https://www.investopedia.com/stock-analysis/042114/how-johnson-johnson-became-household-name-jnj-pfe.aspx), followed by Eli Lilly and Novo Nordisk. Just like the biotech sector, there is also a range of pharma startups that are trying to shake up the industry. These companies often partner up with major firms to get products to market or to gain access to large markets and [distribution channels](https://www.investopedia.com/terms/d/distribution-channel.asp). Pharmaceutical products can take many years to process through the research and development phases before finally making it to market. Part of the lengthy R&D process includes gaining the approval of the [Food and Drug Administration (FDA)](https://www.investopedia.com/terms/f/fda.asp). ### Pfizer's revenue grew 23% between the 2021 and 2022 fiscal years from $81.29 billion to $100.33 billion. Revenue is expected to grow by 7% to 9% in 2023. These figures exclude sales for the company's COVID-19-related vaccines. ## Special Considerations Biotech and pharmaceuticals are very different propositions when you consider them purely from an investor's perspective, An analyst tends to look at the amount a firm spends on R&D as a percentage of sales in order to compare one company to another. Biotech companies generally have high [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp) because of the research, development, and testing that takes years to complete. The result could be a historic breakthrough or utter failure. The industry may also come across roadblocks to developing new products, especially when research or the end product is controversial. For instance, several countries ban genetically modified plants and products. As such, investors are along for the ride, whether that's up or down. Biotech has one advantage to make up for the cost disadvantage: While pharmaceuticals generally hold exclusive rights to manufacture and distribute their drugs for five years, biotech can get patent protection for as many as 12 years. Major pharmaceutical companies have a steady flow of income from current products while maintaining their R&D effort aimed at improving upon existing products or creating new ones. They also keep a steady pipeline of new products in various stages of development. The process to develop a new drug may take up to 15 years to complete. ### Before investing in any biotech or pharma company, it's important for investors to know that their success can depend entirely on taking products to market. The FDA requires most new drugs to go through [several phases of testing](https://www.investopedia.com/ask/answers/052215/what-are-major-barriers-entry-new-companies-drugs-sector.asp) which, in itself, can take up to eight years. Even if a company brings a new medicine to the market, it does not mean it will gain widespread physician approval and use. ## What Is the Difference Between the Biotech and Pharma Sectors? People often confuse biotechnology and pharmaceutical companies. While they may seem similar, they are actually distinct from one another. Biotech companies research, develop, and market products that are generally derived from living organisms. The products of pharma companies tend to be derived from chemicals and artificial sources. Companies in the biotech sector tend to have higher operating costs, which means they can be more volatile than the stocks of pharma companies. Major names in the pharma sector often provide stable results because of their long-standing histories. ## What Are Some Examples of Biotechnology Companies? The following are some examples of major global biotechnology companies: Moderna and Incyte. Novo Nordisk and Johnson & Johnson are both pharmaceutical companies that also have a focus on biotechnology. ## What Are Some of the Largest Pharmaceutical Companies? Roche, Johnson & Johnson, and Eli Lilly are examples of some of the largest global pharmaceutical companies. Because the line is often blurred (due to the type of research and development), the activities of these companies also intersect with the biotechnology sector. ## The Bottom Line Both biotech and pharma stocks face a costly process that can produce highly profitable products—even when they're successful. But the process is extremely unpredictable, which can prove detrimental and even unrecoverable for a smaller biotech firm. Pharmaceutical companies, on the other hand, are typically able to withstand setbacks and failures. That's because of their larger size and diversified revenue base, Competition is more relevant and costly to pharmaceutical companies, creating a need for strong pipelines and non-organic revenues (such as through mergers and acquisitions or alliances). Considering these issues can provide the basis for making a [prudent investment](https://www.investopedia.com/terms/p/prudent-investment.asp).	Biotechnology vs. Pharmaceuticals: An Overview Many people often conflate biotechnology and pharmaceutical companies and believe that the two are one and the same. Although the two have many similarities, the two are distinct from one another. Biotechnology and pharmaceutical companies both produce medicines, but the medicines made by companies in the biotech industry are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis. The coining of the term biopharma further complicates matters. The term describes companies that are using both biotechnology and chemical sources in their medical research and development (R&D) efforts. Key Takeaways Many investors often confuse biotechnology and pharmaceutical companies, which are often distinct from one another. Biotechnology companies derive their products from the extraction or manipulation of living organisms.Pharmaceutical companies create medicines from chemicals and synthetic processes.Biotech and phama startups often try to shake up the industry.Both are important industry sectors with very different risk profiles despite their broad similarities. Biotechnology Common products such as beer and wine, laundry detergent, and anything made of plastic are all biotechnology products. Humans have employed biotechnology since ancient times to breed animals and improve their crops. Modern biotechnology companies comprise a sector collectively known as biotech. They generally research, develop, and produce a variety of commercial products while most focus on either medical or agricultural applications. Biotechnology firms use living organisms to manufacture products or solve problems. The identification and sourcing of DNA have helped the industry make great leaps. Companies in this sector have developed pest-resistant crops, created biofuels like ethanol, and developed gene cloning. Biopharma drugs have also led to some major product innovations. Some of the most frequently used biotechnology medical products recently introduced include the following: AbbVie's Humira, which is used to treat arthritis, psoriasis, and Crohn's disease, among other ailmentsRoche's Rituxan is used to slow the growth of tumors in several types of cancerAmgen/Pfizer's Enbrel is used to treat several autoimmune diseases Investors should keep in mind that the biotech industry is volatile and fast-growing. The global market is expected to reach $3.8 billion by 2030, according to Grand View Research. Biotech startups have sprouted alongside computer technology companies in Silicon Valley. The aim of most is to use biotechnology processes to create breakthrough drugs. There is a substantial overlap between some biotech and pharmaceutical companies. For instance, Johnson & Johnson, Eli Lilly, and Merck are big forces in both industries and are among the top U.S.-based biotech firms by market capitalization. Pharmaceuticals As an industry, pharmaceutical companies research, develop, and market medicines made primarily from artificial sources. The largest companies in this sector provide stable results, but the field continues to grow with new companies appearing regularly. Some modern pharmaceutical companies have a long history, such as Bayer AG, the German company whose founder trademarked aspirin in 1899. As of 2023, the world's top pharmaceutical company was Johnson & Johnson, followed by Eli Lilly and Novo Nordisk. Just like the biotech sector, there is also a range of pharma startups that are trying to shake up the industry. These companies often partner up with major firms to get products to market or to gain access to large markets and distribution channels. Pharmaceutical products can take many years to process through the research and development phases before finally making it to market. Part of the lengthy R&D process includes gaining the approval of the Food and Drug Administration (FDA). Pfizer's revenue grew 23% between the 2021 and 2022 fiscal years from $81.29 billion to $100.33 billion. Revenue is expected to grow by 7% to 9% in 2023. These figures exclude sales for the company's COVID-19-related vaccines. Special Considerations Biotech and pharmaceuticals are very different propositions when you consider them purely from an investor's perspective, An analyst tends to look at the amount a firm spends on R&D as a percentage of sales in order to compare one company to another. Biotech companies generally have high operating costs because of the research, development, and testing that takes years to complete. The result could be a historic breakthrough or utter failure. The industry may also come across roadblocks to developing new products, especially when research or the end product is controversial. For instance, several countries ban genetically modified plants and products. As such, investors are along for the ride, whether that's up or down. Biotech has one advantage to make up for the cost disadvantage: While pharmaceuticals generally hold exclusive rights to manufacture and distribute their drugs for five years, biotech can get patent protection for as many as 12 years. Major pharmaceutical companies have a steady flow of income from current products while maintaining their R&D effort aimed at improving upon existing products or creating new ones. They also keep a steady pipeline of new products in various stages of development. The process to develop a new drug may take up to 15 years to complete. Before investing in any biotech or pharma company, it's important for investors to know that their success can depend entirely on taking products to market. The FDA requires most new drugs to go through several phases of testing which, in itself, can take up to eight years. Even if a company brings a new medicine to the market, it does not mean it will gain widespread physician approval and use. What Is the Difference Between the Biotech and Pharma Sectors? People often confuse biotechnology and pharmaceutical companies. While they may seem similar, they are actually distinct from one another. Biotech companies research, develop, and market products that are generally derived from living organisms. The products of pharma companies tend to be derived from chemicals and artificial sources. Companies in the biotech sector tend to have higher operating costs, which means they can be more volatile than the stocks of pharma companies. Major names in the pharma sector often provide stable results because of their long-standing histories. What Are Some Examples of Biotechnology Companies? The following are some examples of major global biotechnology companies: Moderna and Incyte. Novo Nordisk and Johnson & Johnson are both pharmaceutical companies that also have a focus on biotechnology. What Are Some of the Largest Pharmaceutical Companies? Roche, Johnson & Johnson, and Eli Lilly are examples of some of the largest global pharmaceutical companies. Because the line is often blurred (due to the type of research and development), the activities of these companies also intersect with the biotechnology sector. The Bottom Line Both biotech and pharma stocks face a costly process that can produce highly profitable products—even when they're successful. But the process is extremely unpredictable, which can prove detrimental and even unrecoverable for a smaller biotech firm. Pharmaceutical companies, on the other hand, are typically able to withstand setbacks and failures. That's because of their larger size and diversified revenue base, Competition is more relevant and costly to pharmaceutical companies, creating a need for strong pipelines and non-organic revenues (such as through mergers and acquisitions or alliances). Considering these issues can provide the basis for making a prudent investment.	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https://www.investopedia.com/articles/investing/090915/are-your-investments-right-your-age.asp	How To Invest at Every Age	<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 retirement experts and financial planners recommend you save at least 10% of your annual income for retirement. But how you save and invest in the decades before you leave your nine-to-five job impacts how you’ll spend your post-work years. It’s important to know that the asset allocation strategy you use in your 20s and 30s won’t work when you’re close to (or in) retirement. Here’s how to invest at every age to reach your retirement goals. </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 mntl-sc-block-featuredlink mntl-block download-link" data-tracking-container="true" id="mntl-sc-block_4-0"><a class="mntl-sc-block-featuredlink__link mntl-text-link" data-tracking-container="true" data-tracking-id="featured-link" href="https://drive.google.com/file/d/18MV_k-JQgDX4vcd-i8IJ3j_AqSn2TU-4/view?usp=sharing" id="mntl-sc-block-featuredlink__link_1-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Spanish Translation of How to Invest at Every Age</span></a></div> <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>Investing for retirement is important at any age, but the same strategy should not be used for every stage of your life.</li><li>Those who are younger can tolerate more risk, but they often have less income to invest.</li><li>Those who near retirement may have more money to invest, but less time to recover from any losses.</li><li>Asset allocation by age plays an important role in building a sound retirement investing strategy.</li></ul></div></div></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_8-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://embed.acast.com/5f45da62694fe7449d24bed7/625420dfc088540014910c41" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="The New Age of Financial Literacy with Kyla Scanlon"></iframe></div> <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"> <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="sponsored 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_11-0"></div> <span class="heading-toc" id="toc-asset-allocation"></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"> Asset Allocation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Before considering how to invest during the different stages of your life, it's helpful to understand the concept of asset allocation. When it comes to investing, there are numerous asset classes—or, to put it simply, investment "categories." The three main asset classes are: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071415/what-difference-between-equity-market-and-fixed-income-market.asp">Stocks (equities)</a></li> <li>Bonds (fixed-income securities)</li> <li>Cash and cash equivalents</li> </ul> <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"> Other asset classes include: </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>Commodities</li><li>Real estate</li><li>Futures and other derivatives</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Each asset class has a different level of risk and reward—returns, as they're usually called. As such, each class behaves differently over time, depending on what's happening in the overall economy and other factors. </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, when the economy is booming, investors are confident. They take money out of the bond market and move it into stocks, where the earnings potential is much higher. </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"> Similarly, when the economy cools, investors are less confident. They take money out of stocks—which now seem too risky—and seek the safe haven of the bond market. Generally speaking, stocks and bonds are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negative-correlation.asp">negatively correlated</a> but during the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-crisis.asp">financial crisis</a>, that wasn't the case. Still, for the most part, bonds help level out stock market volatility. </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"> Here's why that's important. If you put all your money into one asset class (i.e., all your eggs in one basket), and that class tanks, you have no hedge to protect your capital. Investing in a variety of asset classes provides <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-theory/08/asset-class.asp">diversification</a> in your portfolio. That diversification keeps you from losing all your money if one asset class goes south. How you arrange the assets in your portfolio is called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/03/032603.asp">asset allocation</a>. Depending on your age and the number of years you have until you retire, the recommended asset allocation looks very different. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-asset-allocation-by-age"></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"> Asset Allocation by Age </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Here's a look at asset allocation through life's various stages. Of course, these are general recommendations that can't take into consideration your specific circumstances or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-profile.asp" rel="noopener noreferrer">risk profile</a>. Some investors are comfortable with a more aggressive investment approach, while others value stability above all else—or have life situations that call for extra caution, such as a child with disabilities. </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"> A trusted financial advisor can help you figure out your risk profile. Alternatively, many online brokers have risk profile "calculators" and questionnaires that can determine if your investing style is conservative or aggressive—or somewhere in between. </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"> At any age, you should first gather at least six to 12 months' worth of living expenses in a readily accessible place, such as a savings account, money market account, or <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" rel="noopener noreferrer">liquid CD</a>. </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-beginning-retirement-planning-your-20s"></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"> Beginning Retirement Planning: Your 20s </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Sample Asset Allocation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> <li>Stocks: 80% to 90%</li><li>Bonds: 10% to 20%</li> </ul> <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"> Even though you may have recently graduated from college and are likely still paying off student loans, use this time to start investing. Whether it’s in a company <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 an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ira.asp">individual retirement account</a> (IRA) you set up yourself, invest what you can as a 20-something, even if you can’t contribute the 10% recommended amount. </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 <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) has established an annual contribution limit for both traditional IRAs and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRAs</a>, which is $6,500 in total per year for 2023 and $7,000 for 2024. For 401(k)s, the maximum amount that you can contribute each year is $22,500 in 2023 and $23,000 in 2024.<span class="ql-inline-citation" data-cite="13"></span><span class="ql-inline-citation" data-cite="12"></span> Some 401(k) plans offer <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matchingcontribution.asp">matching contributions</a> from the employer, which means they'll contribute up to a certain percentage of your salary to your 401(k). </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"> You <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0212/5-advantages-to-investing-in-your-20s.aspx">have the biggest advantage</a> over everyone by investing right now: time. Because of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compound interest</a>, what you invest during this decade has the greatest possible growth. Since you have more time to absorb changes in the market, you can focus on more aggressive growth stocks and avoid slow-growing assets like <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bonds</a>. </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-career-focused-your-30s"></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"> Career-Focused: Your 30s </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> Sample Asset Allocation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li>Stocks: 70% to 80%</li><li>Bonds: 20% to 30%</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> If you put off investing in your 20s due to paying off student loans or the fits and starts of establishing your career, your 30s are when you need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/retirement-savings-tips-25-34-year-olds-7556362">start putting money away</a>. You’re still young enough to reap the rewards of compound interest, but old enough to be investing 10% to 15% of your income. </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"> Even if you’re now paying for a mortgage or starting a family, contributing to your retirement should be a top priority. You still have 30 to 40 active working years left, so this is when you need to maximize that contribution. Make sure to put in enough to get the company match in your 401(k) and consider maxing it out if you can. And max out your IRAs, too, while you're at it. </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"> You can still afford some risk, but it may be time to start adding bonds to the mix to have some safety. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <span class="heading-toc" id="toc-retirement-minded-your-40s"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_58-0"> <span class="mntl-sc-block-heading__text"> Retirement-Minded: Your 40s </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> Sample Asset Allocation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> <li>Stocks: 60% to 70%</li><li>Bonds: 30% to 40%</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> If you’ve procrastinated saving for retirement until your 40s—or if you were in a low-paying career and switched to something more lucrative—now is the time to buckle down and get serious. If you're already on track, use this time to do serious portfolio building. You’re at the midpoint of your career, and you're probably approaching your peak earning potential. </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"> Even if you’re saving for your kids’ college funds or continuing to pay your mortgage, retirement savings should be at the forefront of every financial decision. You have enough time to play catch up if you’re careful, but not enough time to mess around. Meet with a financial advisor if you’re not sure about which funds to choose. You’ll need to save in aggressive assets like stocks to give your funds the best chance to beat <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp" rel="noopener noreferrer">inflation</a>, which is the pace of rising prices in the economy. </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"> However, "aggressive" doesn't mean "careless." Stick with investments that have a track record of producing returns and avoid deals that are "too good to be true." And continue to max out contributions to your 401(k) and IRAs. </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-tip" 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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Order your copy of the print edition of <a data-component="amazon" data-ordinal="1" data-source="affiliate" data-type="externalLink" href="https://www.amazon.com/dp/B0CKKSVGP6" rel="sponsored nofollow">Investopedia's Retirement Guide</a> for more assistance in building the best plan for your retirement.</p></div></div></div> <span class="heading-toc" id="toc-almost-retirement-your-50s-and-60s"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Almost Retirement: Your 50s and 60s </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Sample Asset Allocation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_73-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> <li>Stocks: 50% to 60%</li><li>Bonds: 40% to 50%</li> </ul> <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"> Since you’re getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings. </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"> Switching some of your investments to more stable, low-earning funds like bonds and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moneymarket.asp">money markets</a> can be a good choice if you don’t want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away. </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"> Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older can contribute an additional $7,500 per year to a 401(k)—called a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/catchupcontribution.asp">catch-up contribution</a>—for 2023 and $7,500 for 2024. In other words, those aged 50 and over can add a total of $30,000 to their 401(k) or ($22,500 + $7,500) in 2023 and $30,500 or ($23,000 + $7,500) in 2024. If you have a traditional or Roth IRA and you're aged 50 or older, the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/401-k-vs-ira-contribution-limits-4770068">contribution limit</a> is $7,500 for 2023 and $8,000 for 2024.<span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_81-0"></div> <span class="heading-toc" id="toc-retirement-70s-and-80s"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_82-0"> <span class="mntl-sc-block-heading__text"> Retirement: 70s and 80s </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Sample Asset Allocation: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <li>Stocks: 30% to 50%</li><li>Bonds: 50% to 70%</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> You're likely retired by now—or will be very soon—so it's time to shift your focus from growth to income. Still, that doesn't mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> At this stage, you'll probably collect Social Security retirement benefits, a company pension (if you have one), and in the year you turn 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later), you'll probably start taking <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/requiredminimumdistribution.asp">required minimum distributions</a> (RMD) from your retirement accounts.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Make sure you take those RMDs on time—there's a 25% penalty on any amount that you should have withdrawn but didn't. If you have a Roth IRA, you don't have to take RMDs, so you can leave the account to grow for your heirs if you don't need the money.<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_92-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> Should you still be working, by the way, you won't owe RMDs on the 401(k) you have at the company where you're employed. And you can still contribute to an IRA (even if it's a traditional one, thanks to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743">SECURE Act</a> that was passed in late 2019) if you have eligible earned income that doesn't exceed the IRS income thresholds.<span class="ql-inline-citation" data-cite="18"></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_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"> A Chinese proverb says: “The best time to plant a tree was 20 years ago. The second-best time is now.”<em> </em> </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"> That attitude is at the heart of investing. No matter how old you are, the best time to start investing was a while ago. But it's never too late to do something. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Just make sure the decisions you make are the right ones for your age—your investment approach should age with you. It's also a good idea to meet with a qualified financial professional who can tell you where you stand and where you need to go. </p></div>	Most retirement experts and financial planners recommend you save at least 10% of your annual income for retirement. But how you save and invest in the decades before you leave your nine-to-five job impacts how you’ll spend your post-work years. It’s important to know that the asset allocation strategy you use in your 20s and 30s won’t work when you’re close to (or in) retirement. Here’s how to invest at every age to reach your retirement goals. [Spanish Translation of How to Invest at Every Age](https://drive.google.com/file/d/18MV_k-JQgDX4vcd-i8IJ3j_AqSn2TU-4/view?usp=sharing) ### Key Takeaways * Investing for retirement is important at any age, but the same strategy should not be used for every stage of your life. * Those who are younger can tolerate more risk, but they often have less income to invest. * Those who near retirement may have more money to invest, but less time to recover from any losses. * Asset allocation by age plays an important role in building a sound retirement investing strategy. 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) ## Asset Allocation Before considering how to invest during the different stages of your life, it's helpful to understand the concept of asset allocation. When it comes to investing, there are numerous asset classes—or, to put it simply, investment "categories." The three main asset classes are: * [Stocks (equities)](https://www.investopedia.com/ask/answers/071415/what-difference-between-equity-market-and-fixed-income-market.asp) * Bonds (fixed-income securities) * Cash and cash equivalents Other asset classes include: * Commodities * Real estate * Futures and other derivatives Each asset class has a different level of risk and reward—returns, as they're usually called. As such, each class behaves differently over time, depending on what's happening in the overall economy and other factors. For example, when the economy is booming, investors are confident. They take money out of the bond market and move it into stocks, where the earnings potential is much higher. Similarly, when the economy cools, investors are less confident. They take money out of stocks—which now seem too risky—and seek the safe haven of the bond market. Generally speaking, stocks and bonds are [negatively correlated](https://www.investopedia.com/terms/n/negative-correlation.asp) but during the [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp), that wasn't the case. Still, for the most part, bonds help level out stock market volatility. Here's why that's important. If you put all your money into one asset class (i.e., all your eggs in one basket), and that class tanks, you have no hedge to protect your capital. Investing in a variety of asset classes provides [diversification](https://www.investopedia.com/articles/financial-theory/08/asset-class.asp) in your portfolio. That diversification keeps you from losing all your money if one asset class goes south. How you arrange the assets in your portfolio is called [asset allocation](https://www.investopedia.com/articles/03/032603.asp). Depending on your age and the number of years you have until you retire, the recommended asset allocation looks very different. ## Asset Allocation by Age Here's a look at asset allocation through life's various stages. Of course, these are general recommendations that can't take into consideration your specific circumstances or [risk profile](https://www.investopedia.com/terms/r/risk-profile.asp). Some investors are comfortable with a more aggressive investment approach, while others value stability above all else—or have life situations that call for extra caution, such as a child with disabilities. A trusted financial advisor can help you figure out your risk profile. Alternatively, many online brokers have risk profile "calculators" and questionnaires that can determine if your investing style is conservative or aggressive—or somewhere in between. At any age, you should first gather at least six to 12 months' worth of living expenses in a readily accessible place, such as a savings account, money market account, or [liquid CD](https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp). ## Beginning Retirement Planning: Your 20s Sample Asset Allocation: * Stocks: 80% to 90% * Bonds: 10% to 20% Even though you may have recently graduated from college and are likely still paying off student loans, use this time to start investing. Whether it’s in a company [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) or an [individual retirement account](https://www.investopedia.com/terms/i/ira.asp) (IRA) you set up yourself, invest what you can as a 20-something, even if you can’t contribute the 10% recommended amount. The [Internal Revenue Service](https://www.investopedia.com/terms/i/irs.asp) (IRS) has established an annual contribution limit for both traditional IRAs and [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp), which is $6,500 in total per year for 2023 and $7,000 for 2024. For 401(k)s, the maximum amount that you can contribute each year is $22,500 in 2023 and $23,000 in 2024. Some 401(k) plans offer [matching contributions](https://www.investopedia.com/terms/m/matchingcontribution.asp) from the employer, which means they'll contribute up to a certain percentage of your salary to your 401(k). You [have the biggest advantage](https://www.investopedia.com/financial-edge/0212/5-advantages-to-investing-in-your-20s.aspx) over everyone by investing right now: time. Because of [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp), what you invest during this decade has the greatest possible growth. Since you have more time to absorb changes in the market, you can focus on more aggressive growth stocks and avoid slow-growing assets like [bonds](https://www.investopedia.com/terms/b/bond.asp). ## Career-Focused: Your 30s Sample Asset Allocation: * Stocks: 70% to 80% * Bonds: 20% to 30% If you put off investing in your 20s due to paying off student loans or the fits and starts of establishing your career, your 30s are when you need to [start putting money away](https://www.investopedia.com/retirement-savings-tips-25-34-year-olds-7556362). You’re still young enough to reap the rewards of compound interest, but old enough to be investing 10% to 15% of your income. Even if you’re now paying for a mortgage or starting a family, contributing to your retirement should be a top priority. You still have 30 to 40 active working years left, so this is when you need to maximize that contribution. Make sure to put in enough to get the company match in your 401(k) and consider maxing it out if you can. And max out your IRAs, too, while you're at it. You can still afford some risk, but it may be time to start adding bonds to the mix to have some safety. ## Retirement-Minded: Your 40s Sample Asset Allocation: * Stocks: 60% to 70% * Bonds: 30% to 40% If you’ve procrastinated saving for retirement until your 40s—or if you were in a low-paying career and switched to something more lucrative—now is the time to buckle down and get serious. If you're already on track, use this time to do serious portfolio building. You’re at the midpoint of your career, and you're probably approaching your peak earning potential. Even if you’re saving for your kids’ college funds or continuing to pay your mortgage, retirement savings should be at the forefront of every financial decision. You have enough time to play catch up if you’re careful, but not enough time to mess around. Meet with a financial advisor if you’re not sure about which funds to choose. You’ll need to save in aggressive assets like stocks to give your funds the best chance to beat [inflation](https://www.investopedia.com/terms/i/inflation.asp), which is the pace of rising prices in the economy. However, "aggressive" doesn't mean "careless." Stick with investments that have a track record of producing returns and avoid deals that are "too good to be true." And continue to max out contributions to your 401(k) and IRAs. ### Order your copy of the print edition of [Investopedia's Retirement Guide](https://www.amazon.com/dp/B0CKKSVGP6) for more assistance in building the best plan for your retirement. ## Almost Retirement: Your 50s and 60s Sample Asset Allocation: * Stocks: 50% to 60% * Bonds: 40% to 50% Since you’re getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings. Switching some of your investments to more stable, low-earning funds like bonds and [money markets](https://www.investopedia.com/terms/m/moneymarket.asp) can be a good choice if you don’t want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away. Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older can contribute an additional $7,500 per year to a 401(k)—called a [catch-up contribution](https://www.investopedia.com/terms/c/catchupcontribution.asp)—for 2023 and $7,500 for 2024. In other words, those aged 50 and over can add a total of $30,000 to their 401(k) or ($22,500 + $7,500) in 2023 and $30,500 or ($23,000 + $7,500) in 2024. If you have a traditional or Roth IRA and you're aged 50 or older, the [contribution limit](https://www.investopedia.com/401-k-vs-ira-contribution-limits-4770068) is $7,500 for 2023 and $8,000 for 2024. ## Retirement: 70s and 80s Sample Asset Allocation: * Stocks: 30% to 50% * Bonds: 50% to 70% You're likely retired by now—or will be very soon—so it's time to shift your focus from growth to income. Still, that doesn't mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings. At this stage, you'll probably collect Social Security retirement benefits, a company pension (if you have one), and in the year you turn 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later), you'll probably start taking [required minimum distributions](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) (RMD) from your retirement accounts. Make sure you take those RMDs on time—there's a 25% penalty on any amount that you should have withdrawn but didn't. If you have a Roth IRA, you don't have to take RMDs, so you can leave the account to grow for your heirs if you don't need the money. Should you still be working, by the way, you won't owe RMDs on the 401(k) you have at the company where you're employed. And you can still contribute to an IRA (even if it's a traditional one, thanks to the [SECURE Act](https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743) that was passed in late 2019) if you have eligible earned income that doesn't exceed the IRS income thresholds. ## The Bottom Line A Chinese proverb says: “The best time to plant a tree was 20 years ago. The second-best time is now.” That attitude is at the heart of investing. No matter how old you are, the best time to start investing was a while ago. But it's never too late to do something. Just make sure the decisions you make are the right ones for your age—your investment approach should age with you. It's also a good idea to meet with a qualified financial professional who can tell you where you stand and where you need to go.	Most retirement experts and financial planners recommend you save at least 10% of your annual income for retirement. But how you save and invest in the decades before you leave your nine-to-five job impacts how you’ll spend your post-work years. It’s important to know that the asset allocation strategy you use in your 20s and 30s won’t work when you’re close to (or in) retirement. Here’s how to invest at every age to reach your retirement goals. Spanish Translation of How to Invest at Every Age Key Takeaways Investing for retirement is important at any age, but the same strategy should not be used for every stage of your life.Those who are younger can tolerate more risk, but they often have less income to invest.Those who near retirement may have more money to invest, but less time to recover from any losses.Asset allocation by age plays an important role in building a sound retirement investing strategy. Subscribe Now: Apple Podcasts / Spotify / Google Podcasts / PlayerFM Asset Allocation Before considering how to invest during the different stages of your life, it's helpful to understand the concept of asset allocation. When it comes to investing, there are numerous asset classes—or, to put it simply, investment "categories." The three main asset classes are: Stocks (equities) Bonds (fixed-income securities) Cash and cash equivalents Other asset classes include: CommoditiesReal estateFutures and other derivatives Each asset class has a different level of risk and reward—returns, as they're usually called. As such, each class behaves differently over time, depending on what's happening in the overall economy and other factors. For example, when the economy is booming, investors are confident. They take money out of the bond market and move it into stocks, where the earnings potential is much higher. Similarly, when the economy cools, investors are less confident. They take money out of stocks—which now seem too risky—and seek the safe haven of the bond market. Generally speaking, stocks and bonds are negatively correlated but during the financial crisis, that wasn't the case. Still, for the most part, bonds help level out stock market volatility. Here's why that's important. If you put all your money into one asset class (i.e., all your eggs in one basket), and that class tanks, you have no hedge to protect your capital. Investing in a variety of asset classes provides diversification in your portfolio. That diversification keeps you from losing all your money if one asset class goes south. How you arrange the assets in your portfolio is called asset allocation. Depending on your age and the number of years you have until you retire, the recommended asset allocation looks very different. Asset Allocation by Age Here's a look at asset allocation through life's various stages. Of course, these are general recommendations that can't take into consideration your specific circumstances or risk profile. Some investors are comfortable with a more aggressive investment approach, while others value stability above all else—or have life situations that call for extra caution, such as a child with disabilities. A trusted financial advisor can help you figure out your risk profile. Alternatively, many online brokers have risk profile "calculators" and questionnaires that can determine if your investing style is conservative or aggressive—or somewhere in between. At any age, you should first gather at least six to 12 months' worth of living expenses in a readily accessible place, such as a savings account, money market account, or liquid CD. Beginning Retirement Planning: Your 20s Sample Asset Allocation: Stocks: 80% to 90%Bonds: 10% to 20% Even though you may have recently graduated from college and are likely still paying off student loans, use this time to start investing. Whether it’s in a company 401(k) or an individual retirement account (IRA) you set up yourself, invest what you can as a 20-something, even if you can’t contribute the 10% recommended amount. The Internal Revenue Service (IRS) has established an annual contribution limit for both traditional IRAs and Roth IRAs, which is $6,500 in total per year for 2023 and $7,000 for 2024. For 401(k)s, the maximum amount that you can contribute each year is $22,500 in 2023 and $23,000 in 2024. Some 401(k) plans offer matching contributions from the employer, which means they'll contribute up to a certain percentage of your salary to your 401(k). You have the biggest advantage over everyone by investing right now: time. Because of compound interest, what you invest during this decade has the greatest possible growth. Since you have more time to absorb changes in the market, you can focus on more aggressive growth stocks and avoid slow-growing assets like bonds. Career-Focused: Your 30s Sample Asset Allocation: Stocks: 70% to 80%Bonds: 20% to 30% If you put off investing in your 20s due to paying off student loans or the fits and starts of establishing your career, your 30s are when you need to start putting money away. You’re still young enough to reap the rewards of compound interest, but old enough to be investing 10% to 15% of your income. Even if you’re now paying for a mortgage or starting a family, contributing to your retirement should be a top priority. You still have 30 to 40 active working years left, so this is when you need to maximize that contribution. Make sure to put in enough to get the company match in your 401(k) and consider maxing it out if you can. And max out your IRAs, too, while you're at it. You can still afford some risk, but it may be time to start adding bonds to the mix to have some safety. Retirement-Minded: Your 40s Sample Asset Allocation: Stocks: 60% to 70%Bonds: 30% to 40% If you’ve procrastinated saving for retirement until your 40s—or if you were in a low-paying career and switched to something more lucrative—now is the time to buckle down and get serious. If you're already on track, use this time to do serious portfolio building. You’re at the midpoint of your career, and you're probably approaching your peak earning potential. Even if you’re saving for your kids’ college funds or continuing to pay your mortgage, retirement savings should be at the forefront of every financial decision. You have enough time to play catch up if you’re careful, but not enough time to mess around. Meet with a financial advisor if you’re not sure about which funds to choose. You’ll need to save in aggressive assets like stocks to give your funds the best chance to beat inflation, which is the pace of rising prices in the economy. However, "aggressive" doesn't mean "careless." Stick with investments that have a track record of producing returns and avoid deals that are "too good to be true." And continue to max out contributions to your 401(k) and IRAs. Order your copy of the print edition of Investopedia's Retirement Guide for more assistance in building the best plan for your retirement. Almost Retirement: Your 50s and 60s Sample Asset Allocation: Stocks: 50% to 60%Bonds: 40% to 50% Since you’re getting closer to retirement age, now is not the time to lose focus. If you spent your younger years putting money in the latest hot stocks, you need to be more conservative the closer you get to actually needing your retirement savings. Switching some of your investments to more stable, low-earning funds like bonds and money markets can be a good choice if you don’t want to risk having all your money on the table. Now is also the time to take note of what you have and start thinking about when might be a good time for you to actually retire. Getting professional advice can be a good step to feeling secure in choosing the right time to walk away. Another approach is to play catch-up by socking more money away. The IRS allows people approaching retirement to put more of their income into investment accounts. Workers who are 50 and older can contribute an additional $7,500 per year to a 401(k)—called a catch-up contribution—for 2023 and $7,500 for 2024. In other words, those aged 50 and over can add a total of $30,000 to their 401(k) or ($22,500 + $7,500) in 2023 and $30,500 or ($23,000 + $7,500) in 2024. If you have a traditional or Roth IRA and you're aged 50 or older, the contribution limit is $7,500 for 2023 and $8,000 for 2024. Retirement: 70s and 80s Sample Asset Allocation: Stocks: 30% to 50%Bonds: 50% to 70% You're likely retired by now—or will be very soon—so it's time to shift your focus from growth to income. Still, that doesn't mean you want to cash out all your stocks. Focus on stocks that provide dividend income and add to your bond holdings. At this stage, you'll probably collect Social Security retirement benefits, a company pension (if you have one), and in the year you turn 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later), you'll probably start taking required minimum distributions (RMD) from your retirement accounts. Make sure you take those RMDs on time—there's a 25% penalty on any amount that you should have withdrawn but didn't. If you have a Roth IRA, you don't have to take RMDs, so you can leave the account to grow for your heirs if you don't need the money. Should you still be working, by the way, you won't owe RMDs on the 401(k) you have at the company where you're employed. And you can still contribute to an IRA (even if it's a traditional one, thanks to the SECURE Act that was passed in late 2019) if you have eligible earned income that doesn't exceed the IRS income thresholds. The Bottom Line A Chinese proverb says: “The best time to plant a tree was 20 years ago. The second-best time is now.” That attitude is at the heart of investing. No matter how old you are, the best time to start investing was a while ago. But it's never too late to do something. Just make sure the decisions you make are the right ones for your age—your investment approach should age with you. It's also a good idea to meet with a qualified financial professional who can tell you where you stand and where you need to go.	[ [ "Spanish Translation of How to Invest at Every Age", "https://drive.google.com/file/d/18MV_k-JQgDX4vcd-i8IJ3j_AqSn2TU-4/view?usp=sharing" ], [ "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" ], [ "Stocks (equities)", "https://www.investopedia.com/ask/answers/071415/what-difference-between-equity-market-and-fixed-income-market.asp" ], [ "negatively correlated", "https://www.investopedia.com/terms/n/negative-correlation.asp" ], [ "financial crisis", "https://www.investopedia.com/terms/f/financial-crisis.asp" ], [ "diversification", "https://www.investopedia.com/articles/financial-theory/08/asset-class.asp" ], [ "asset allocation", "https://www.investopedia.com/articles/03/032603.asp" ], [ "risk profile", "https://www.investopedia.com/terms/r/risk-profile.asp" ], [ "liquid CD", "https://www.investopedia.com/terms/l/liquid-certificate-of-deposit.asp" ], [ "401(k)", "https://www.investopedia.com/terms/1/401kplan.asp" ], [ "individual retirement account", "https://www.investopedia.com/terms/i/ira.asp" ], [ "Internal Revenue Service", "https://www.investopedia.com/terms/i/irs.asp" ], [ "Roth IRAs", "https://www.investopedia.com/terms/r/rothira.asp" ], [ "matching contributions", "https://www.investopedia.com/terms/m/matchingcontribution.asp" ], [ "have the biggest advantage", "https://www.investopedia.com/financial-edge/0212/5-advantages-to-investing-in-your-20s.aspx" ], [ "compound interest", "https://www.investopedia.com/terms/c/compoundinterest.asp" ], [ "bonds", "https://www.investopedia.com/terms/b/bond.asp" ], [ "start putting money away", "https://www.investopedia.com/retirement-savings-tips-25-34-year-olds-7556362" ], [ "inflation", "https://www.investopedia.com/terms/i/inflation.asp" ], [ "Investopedia's Retirement Guide", "https://www.amazon.com/dp/B0CKKSVGP6" ], [ "money markets", "https://www.investopedia.com/terms/m/moneymarket.asp" ], [ "catch-up contribution", "https://www.investopedia.com/terms/c/catchupcontribution.asp" ], [ "contribution limit", "https://www.investopedia.com/401-k-vs-ira-contribution-limits-4770068" ], [ "required minimum distributions", "https://www.investopedia.com/terms/r/requiredminimumdistribution.asp" ], [ "SECURE Act", "https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743" ] ]
https://www.investopedia.com/terms/r/repudiation.asp	Repudiation: Meaning, Examples and FAQs in Fixed Income	<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-repudiation"></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 Repudiation? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Repudiation involves disputing the validity of a contract and refusing to honor its terms. In investing, repudiation is most relevant in <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> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">securities</a>, particularly <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sovereign-debt.asp">sovereign debt</a>. Fixed income instruments are fundamentally contracts where the borrower lends a certain amount of principal in return for payments of interest and principal on a preset schedule. </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>Repudiation occurs when one party refuses to honor a contract with another party.</li><li>Often the party doing the repudiation cannot perform its obligations outlined in the contract due to financial difficulties.</li><li>A breach of contract may be settled in the courts.</li><li>The innocent party in a repudiation situation may cancel the contract or let it stand with the hope of the issue being resolved.</li><li>If you repudiate a contract, it does not automatically terminate it. </li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-repudiation"></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 Repudiation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Repudiation occurs if the borrower refuses to honor this contract and stops making the agreed-upon payments. With fixed income instruments, it is always possible that the borrower may default, dispute the validity of the contract, or otherwise refuse to pay. If the borrower repudiates the contract, the corresponding investors may lose their entire investment unless they can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/recourse.asp">recourse</a> against the borrower. In the case of sovereign debt, however, there is often not any method of recourse against the borrowing nation. </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 context of repudiation, it may be that the repudiating party is unwilling or unable to perform its obligations under a contract. Repudiation is seen to be quite a serious matter, and the court requires a ‘clear indication’ that a party is unready or unwilling to perform the contract. When repudiation occurs before the actual breach of a contract, it can be referred to as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/anticpatory-breach.asp">anticipatory breach</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 simplest method of repudiation is when a party comes right out and admits that they are unwilling or unable to perform their obligations under the contract. A party’s conduct can also amount to an act of repudiation. Whether a party repudiates or not is an objective test undertaken by the court making it a complex situation in the legal world. Each matter is considered individually. Put simply, determining repudiation requires a detailed review of the actual terms of the contract and the obligations of each party, and then the conduct and statements of the parties. </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-warning" 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>If you wrongfully form the view that the other party has repudiated the contract and terminate the contract based on this, and you are not entitled to do so, you could be held to have actually repudiated the contract yourself! It’s then critical that you analyze the circumstances carefully.</p></div></div></div> <span class="heading-toc" id="toc-types-of-repudiation"></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"> Types of Repudiation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There are essentially three main types of repudiation that a party can make when pulling out of an agreement or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/voidable-contract.asp">contract</a> are transferring the deed to the property that is the subject of the deal (such as a home or building), a verbal repudiation when one party unconditionally refuses to stand by the contract, or when one party takes an action that makes it unable for the other party to perform or follow up on the contract or agreement. All three types are ways to breach a contract that is recognizable in the eyes of the law.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <span class="heading-toc" id="toc-responding-to-repudiation"></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"> Responding to Repudiation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The party on the receiving end of repudiation (i.e., the party not pulling out of the contract) should be careful and ensure they respond appropriately. If one party believes another party has repudiated the contract, the innocent party may: </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>Continue with the contract</li><li>Accept the repudiation and elect to terminate the contract</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Repudiation itself does not<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termination-event.asp"> terminate </a>a contract. It simply allows the innocent party to determine how they want to proceed. Such a party should either accept the repudiation or continue the performance of the contract without actually meaning to. In many cases, termination is the only way forward to responding to repudiation since continuing the contract may mean losing money or property. </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_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p><br/>Repudiation is a complex area of law and each case is taken on its own merits by the courts and involves a deep dive review of the situation and the contract.</p></div></div></div> <span class="heading-toc" id="toc-repudiation-vs-rescind"></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"> Repudiation vs. Rescind </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Repudiation occurs when one party decided to terminate a contract made with another party by letting them know they cannot (for whatever reason) honor the contract agreement. When a contract is rescinded, it means the contract is terminated by a court of law usually due to an error in the contract itself or because the other party has behaved badly or conducted unlawful business on behalf of the other party. In short, repudiation occurs by a party, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rescission.asp#:~:text=Rescission%20is%20when%20a%20contract,before%20the%20contract%20was%20signed.">rescission </a>happens in a court of law. </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-example-of-repudiation"></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"> Example of Repudiation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Say a buyer finds a house they love and makes an offer on it. The seller contacts their sales agent arranges to meet the buyer and their agent, and all parties agree on the price offered for the home. A contract is drawn up with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0810/7-must-have-real-estate-contract-conditions.aspx">contingencies for a home</a> inspection. After the inspection occurs, the seller decides they do not want to sell their home after all. The seller lets the buyer's agent know that they want out of the contract. This is an act of repudiation in the real estate industry. The contract is then breached and the seller will most likely have to return any earnest money given to them by the buyer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-is-non-repudiation"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Non-Repudiation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Nonrepudiation is often used in communications and technology fields and means that no one party can deny it sent or received messages, nor deny the authorship or authenticity of a document or signature.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-what-is-repudiation-of-a-credit-default-swap"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Repudiation of a Credit Default Swap?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The repudiation of a credit default swap is when one party disputes the validity of a contract between a creditor and borrower.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_37-0"><span class="heading-toc" id="toc-how-do-you-accept-repudiation"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Accept Repudiation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you believe your party on a contract has repudiated the contract, you can terminate the contract as an acceptance of the repudiation, or you may simply continue with the contract.</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-you-prove-repudiation"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Prove Repudiation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An unconditional reusable is the reputation of a contract. If one party refuses to perform what a contract promises, it is a breach of contract. So, if you are in a contract and the second party does not follow the outline of the contract, you could take them to court for a breach of contract.</p><p>The courts recognize three forms of repudiation: an unconditional refusal to follow the contract agreement, taking an action that makes it impossible for the contract to stand or the second party to perform, or the transference of property that is the subject of a contract, for example, in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102913/contingency-clauses-home-purchase-contracts.asp">sale of a home</a> promised to another buyer.</p></div> </div></div>	## What Is Repudiation? Repudiation involves disputing the validity of a contract and refusing to honor its terms. In investing, repudiation is most relevant in [fixed income](https://www.investopedia.com/terms/f/fixedincome.asp) [securities](https://www.investopedia.com/terms/s/security.asp), particularly [sovereign debt](https://www.investopedia.com/terms/s/sovereign-debt.asp). Fixed income instruments are fundamentally contracts where the borrower lends a certain amount of principal in return for payments of interest and principal on a preset schedule. ### Key Takeaways * Repudiation occurs when one party refuses to honor a contract with another party. * Often the party doing the repudiation cannot perform its obligations outlined in the contract due to financial difficulties. * A breach of contract may be settled in the courts. * The innocent party in a repudiation situation may cancel the contract or let it stand with the hope of the issue being resolved. * If you repudiate a contract, it does not automatically terminate it. ## Understanding Repudiation Repudiation occurs if the borrower refuses to honor this contract and stops making the agreed-upon payments. With fixed income instruments, it is always possible that the borrower may default, dispute the validity of the contract, or otherwise refuse to pay. If the borrower repudiates the contract, the corresponding investors may lose their entire investment unless they can [recourse](https://www.investopedia.com/terms/r/recourse.asp) against the borrower. In the case of sovereign debt, however, there is often not any method of recourse against the borrowing nation. In the context of repudiation, it may be that the repudiating party is unwilling or unable to perform its obligations under a contract. Repudiation is seen to be quite a serious matter, and the court requires a ‘clear indication’ that a party is unready or unwilling to perform the contract. When repudiation occurs before the actual breach of a contract, it can be referred to as an [anticipatory breach](https://www.investopedia.com/terms/a/anticpatory-breach.asp). The simplest method of repudiation is when a party comes right out and admits that they are unwilling or unable to perform their obligations under the contract. A party’s conduct can also amount to an act of repudiation. Whether a party repudiates or not is an objective test undertaken by the court making it a complex situation in the legal world. Each matter is considered individually. Put simply, determining repudiation requires a detailed review of the actual terms of the contract and the obligations of each party, and then the conduct and statements of the parties. ### If you wrongfully form the view that the other party has repudiated the contract and terminate the contract based on this, and you are not entitled to do so, you could be held to have actually repudiated the contract yourself! It’s then critical that you analyze the circumstances carefully. ## Types of Repudiation There are essentially three main types of repudiation that a party can make when pulling out of an agreement or [contract](https://www.investopedia.com/terms/v/voidable-contract.asp) are transferring the deed to the property that is the subject of the deal (such as a home or building), a verbal repudiation when one party unconditionally refuses to stand by the contract, or when one party takes an action that makes it unable for the other party to perform or follow up on the contract or agreement. All three types are ways to breach a contract that is recognizable in the eyes of the law. ## Responding to Repudiation The party on the receiving end of repudiation (i.e., the party not pulling out of the contract) should be careful and ensure they respond appropriately. If one party believes another party has repudiated the contract, the innocent party may: * Continue with the contract * Accept the repudiation and elect to terminate the contract Repudiation itself does not [terminate](https://www.investopedia.com/terms/t/termination-event.asp) a contract. It simply allows the innocent party to determine how they want to proceed. Such a party should either accept the repudiation or continue the performance of the contract without actually meaning to. In many cases, termination is the only way forward to responding to repudiation since continuing the contract may mean losing money or property. ### Repudiation is a complex area of law and each case is taken on its own merits by the courts and involves a deep dive review of the situation and the contract. ## Repudiation vs. Rescind Repudiation occurs when one party decided to terminate a contract made with another party by letting them know they cannot (for whatever reason) honor the contract agreement. When a contract is rescinded, it means the contract is terminated by a court of law usually due to an error in the contract itself or because the other party has behaved badly or conducted unlawful business on behalf of the other party. In short, repudiation occurs by a party, a [rescission](https://www.investopedia.com/terms/r/rescission.asp#:~:text=Rescission%20is%20when%20a%20contract,before%20the%20contract%20was%20signed.) happens in a court of law. ## Example of Repudiation Say a buyer finds a house they love and makes an offer on it. The seller contacts their sales agent arranges to meet the buyer and their agent, and all parties agree on the price offered for the home. A contract is drawn up with [contingencies for a home](https://www.investopedia.com/financial-edge/0810/7-must-have-real-estate-contract-conditions.aspx) inspection. After the inspection occurs, the seller decides they do not want to sell their home after all. The seller lets the buyer's agent know that they want out of the contract. This is an act of repudiation in the real estate industry. The contract is then breached and the seller will most likely have to return any earnest money given to them by the buyer. ## What Is Non-Repudiation? Nonrepudiation is often used in communications and technology fields and means that no one party can deny it sent or received messages, nor deny the authorship or authenticity of a document or signature. ## What Is Repudiation of a Credit Default Swap? The repudiation of a credit default swap is when one party disputes the validity of a contract between a creditor and borrower. ## How Do You Accept Repudiation? If you believe your party on a contract has repudiated the contract, you can terminate the contract as an acceptance of the repudiation, or you may simply continue with the contract. ## How Do You Prove Repudiation? An unconditional reusable is the reputation of a contract. If one party refuses to perform what a contract promises, it is a breach of contract. So, if you are in a contract and the second party does not follow the outline of the contract, you could take them to court for a breach of contract. The courts recognize three forms of repudiation: an unconditional refusal to follow the contract agreement, taking an action that makes it impossible for the contract to stand or the second party to perform, or the transference of property that is the subject of a contract, for example, in the [sale of a home](https://www.investopedia.com/articles/personal-finance/102913/contingency-clauses-home-purchase-contracts.asp) promised to another buyer.	What Is Repudiation? Repudiation involves disputing the validity of a contract and refusing to honor its terms. In investing, repudiation is most relevant in fixed income securities, particularly sovereign debt. Fixed income instruments are fundamentally contracts where the borrower lends a certain amount of principal in return for payments of interest and principal on a preset schedule. Key Takeaways Repudiation occurs when one party refuses to honor a contract with another party.Often the party doing the repudiation cannot perform its obligations outlined in the contract due to financial difficulties.A breach of contract may be settled in the courts.The innocent party in a repudiation situation may cancel the contract or let it stand with the hope of the issue being resolved.If you repudiate a contract, it does not automatically terminate it. Understanding Repudiation Repudiation occurs if the borrower refuses to honor this contract and stops making the agreed-upon payments. With fixed income instruments, it is always possible that the borrower may default, dispute the validity of the contract, or otherwise refuse to pay. If the borrower repudiates the contract, the corresponding investors may lose their entire investment unless they can recourse against the borrower. In the case of sovereign debt, however, there is often not any method of recourse against the borrowing nation. In the context of repudiation, it may be that the repudiating party is unwilling or unable to perform its obligations under a contract. Repudiation is seen to be quite a serious matter, and the court requires a ‘clear indication’ that a party is unready or unwilling to perform the contract. When repudiation occurs before the actual breach of a contract, it can be referred to as an anticipatory breach. The simplest method of repudiation is when a party comes right out and admits that they are unwilling or unable to perform their obligations under the contract. A party’s conduct can also amount to an act of repudiation. Whether a party repudiates or not is an objective test undertaken by the court making it a complex situation in the legal world. Each matter is considered individually. Put simply, determining repudiation requires a detailed review of the actual terms of the contract and the obligations of each party, and then the conduct and statements of the parties. If you wrongfully form the view that the other party has repudiated the contract and terminate the contract based on this, and you are not entitled to do so, you could be held to have actually repudiated the contract yourself! It’s then critical that you analyze the circumstances carefully. Types of Repudiation There are essentially three main types of repudiation that a party can make when pulling out of an agreement or contract are transferring the deed to the property that is the subject of the deal (such as a home or building), a verbal repudiation when one party unconditionally refuses to stand by the contract, or when one party takes an action that makes it unable for the other party to perform or follow up on the contract or agreement. All three types are ways to breach a contract that is recognizable in the eyes of the law. Responding to Repudiation The party on the receiving end of repudiation (i.e., the party not pulling out of the contract) should be careful and ensure they respond appropriately. If one party believes another party has repudiated the contract, the innocent party may: Continue with the contractAccept the repudiation and elect to terminate the contract Repudiation itself does not terminate a contract. It simply allows the innocent party to determine how they want to proceed. Such a party should either accept the repudiation or continue the performance of the contract without actually meaning to. In many cases, termination is the only way forward to responding to repudiation since continuing the contract may mean losing money or property. Repudiation is a complex area of law and each case is taken on its own merits by the courts and involves a deep dive review of the situation and the contract. Repudiation vs. Rescind Repudiation occurs when one party decided to terminate a contract made with another party by letting them know they cannot (for whatever reason) honor the contract agreement. When a contract is rescinded, it means the contract is terminated by a court of law usually due to an error in the contract itself or because the other party has behaved badly or conducted unlawful business on behalf of the other party. In short, repudiation occurs by a party, a rescission happens in a court of law. Example of Repudiation Say a buyer finds a house they love and makes an offer on it. The seller contacts their sales agent arranges to meet the buyer and their agent, and all parties agree on the price offered for the home. A contract is drawn up with contingencies for a home inspection. After the inspection occurs, the seller decides they do not want to sell their home after all. The seller lets the buyer's agent know that they want out of the contract. This is an act of repudiation in the real estate industry. The contract is then breached and the seller will most likely have to return any earnest money given to them by the buyer. What Is Non-Repudiation? Nonrepudiation is often used in communications and technology fields and means that no one party can deny it sent or received messages, nor deny the authorship or authenticity of a document or signature. What Is Repudiation of a Credit Default Swap? The repudiation of a credit default swap is when one party disputes the validity of a contract between a creditor and borrower. How Do You Accept Repudiation? If you believe your party on a contract has repudiated the contract, you can terminate the contract as an acceptance of the repudiation, or you may simply continue with the contract. How Do You Prove Repudiation? An unconditional reusable is the reputation of a contract. If one party refuses to perform what a contract promises, it is a breach of contract. So, if you are in a contract and the second party does not follow the outline of the contract, you could take them to court for a breach of contract.The courts recognize three forms of repudiation: an unconditional refusal to follow the contract agreement, taking an action that makes it impossible for the contract to stand or the second party to perform, or the transference of property that is the subject of a contract, for example, in the sale of a home promised to another buyer.	[ [ "fixed income", "https://www.investopedia.com/terms/f/fixedincome.asp" ], [ "securities", "https://www.investopedia.com/terms/s/security.asp" ], [ "sovereign debt", "https://www.investopedia.com/terms/s/sovereign-debt.asp" ], [ "recourse", "https://www.investopedia.com/terms/r/recourse.asp" ], [ "anticipatory breach", "https://www.investopedia.com/terms/a/anticpatory-breach.asp" ], [ "contract", "https://www.investopedia.com/terms/v/voidable-contract.asp" ], [ "terminate", "https://www.investopedia.com/terms/t/termination-event.asp" ], [ "rescission", "https://www.investopedia.com/terms/r/rescission.asp#:~:text=Rescission%20is%20when%20a%20contract,before%20the%20contract%20was%20signed." ], [ "contingencies for a home", "https://www.investopedia.com/financial-edge/0810/7-must-have-real-estate-contract-conditions.aspx" ], [ "sale of a home", "https://www.investopedia.com/articles/personal-finance/102913/contingency-clauses-home-purchase-contracts.asp" ] ]
https://www.investopedia.com/terms/a/additional-personal-allowance.asp	Additional Personal Allowance: 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-additional-personal-allowance"></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 Additional Personal Allowance? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The term Additional Personal Allowance refers to an extra <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deduction.asp">tax deduction</a> set forth by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hm-revenue-and-customs-hmrc.asp">HM Revenue and Customs (HMRC)</a> on income tax returns in the United Kingdom. This deduction applied to certain taxpayers who were not eligible to receive the Married Couple's Allowance and who financially supported a child under the age of 16. The value of the Additional Personal Allowance was equal to that of the married couple's allowance. The Additional Personal Allowance was eliminated in 2000.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_4-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_5-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Additional Personal Allowance was an extra deduction allowed by HM Revenue and Customs on income tax returns filed in the United Kingdom.</li><li>This allowance provided tax relief to those who qualified—single, separated, or widowed taxpayers who didn't use the married couple allowance.</li><li>Those who qualified were required to be financially supporting a child under 16.</li><li>The additional personal allowance was eliminated in 2000.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-the-additional-personal-allowance-worked"></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 Additional Personal Allowance Worked </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Income taxes are filed with and collected by HMRC in the United Kingdom. This agency is the British equivalent of 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>. British <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxpayer.asp">taxpayers</a> are charged income tax on different types of income, including wages from employment, self-employed profits, state benefits, pension earnings, rental and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp">trust</a> income, and any benefits earned from an employer. Taxes are exempt on a variety of income sources including: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <li>The first £1,000 of self-employment earnings</li> <li>The first £1,000 earned from a rental property</li> <li>Winnings from the National Lottery</li> <li>Certain <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/07/dividend_implications.asp">dividends</a><span class="ql-inline-citation" data-cite="5"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> A personal allowance reduces an individual's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxliability.asp">tax liability</a>. Certain taxpayers were able to claim the Additional Personal Allowance to reduce their tax bill even further. This allowance was in effect until April 2000. Single individuals, along with those who were <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/separation-and-divorce-4689711">separated</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualifying-widow.asp">widowed</a> were able to use it as long as they didn't claim the allowance for married couples.<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-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Just like the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standarddeduction.asp">standard deduction</a> in the United States, the Additional Personal Allowance in the U.K. was the portion of income that isn't subject to taxation. Anything over the personal allowance—that is, whatever is left over after the personal allowance is deducted—is taxed at the current tax rate.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Anyone claiming the Additional Personal Allowance was required to be financially supporting a child under 16. Parents could also claim the benefit for children over the age of 16 that were full-time students or who were part of a two-year apprentice program.<span class="ql-inline-citation" data-cite="6"></span> The allowance also applied to men with an incapacitated wife and a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dependent.asp">qualifying child</a> under the age of 16 living in the household, provided the wife was incapacitated throughout the year.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The HMRC set the Additional Personal Allowance at £1,970 for the 1999-2000 tax year. It was restricted to 10%, which means that any taxpayer who claimed the allowance received a tax credit of £197 toward their final tax bill.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> According to British <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-laws-and-regulations-4689688">tax law</a>, a qualifying child is a child of the claimant or a child that is supported and cared for by the claimant. Only one allowance was paid, regardless of the number of children cared for by the person claiming the additional allowance.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <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_21-0"> <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_22-0"> Since the Additional Personal Allowance was eliminated, every taxpayer is subject to the same personal allowance, regardless of marital status and gender, and whether or not they have children.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The standard personal allowance in the U.K. for the 2023–2024 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxyear.asp">tax year</a> is £12,570.<span class="ql-inline-citation" data-cite="3"></span> There is no income tax payable on any income earned under this amount. As such, taxpayers can use this amount to lower their overall tax bill. The amount of income tax paid in each tax year depends on how much earnings are above the personal allowance and how much of a person's income falls within the various tax bands.<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-tip" 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_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You may want to consult a tax professional if you're unsure about what credits you can claim or want to know more about how you can lower your tax liability.</p></div></div></div> <span class="heading-toc" id="toc-additional-personal-allowance-vs-child-tax-credit"></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"> Additional Personal Allowance vs. Child Tax Credit </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The HMRC eliminated the Additional Personal Allowance along with the married couples' allowance in April 2000 and replaced them with a new one. The Children's Tax Credit applied to taxpayers who cared for one or more children under 16 regardless of their marital status. It promised to benefit those with lower <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">incomes</a> as it was to be tapered. This credit went into effect in April 2001.<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"> There were several key differences between the additional personal allowance and the new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit.asp">credit</a>. The rate remained at 10% but the allowance was set at £5,200 for the 2001-2002 tax year, giving claiming taxpayers relief of £520. The credit was increased the following tax year in line with inflation and also included a £10 per week credit for families with an additional child for the first year of their life.<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_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> This new credit didn't last long as opponents stated that it wasn't taking family income into account. It was replaced by 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>, which went into effect for the 2003-2004 tax year. This new credit is based on family income and can only be claimed by individuals who take the Working Tax Credit.<span class="ql-inline-citation" data-cite="9"></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_34-0"></div> <span class="heading-toc" id="toc-example-of-the-additional-personal-allowance"></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"> Example of the Additional Personal Allowance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Here's a hypothetical example to show how the Additional Personal Allowance worked. Let's say a widow named Olivia had a 12-year-old child living with her in 1998. Under the British tax system, Olivia was able to claim an allowance beyond the standard personal allowance even though she was no longer married following the passing of her husband two years prior. This additional allowance helped Olivia pay less in income taxes for the year. If she had two children (the other aged 10), she would only be able to claim one Additional Personal Allowance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_38-0"><span class="heading-toc" id="toc-what-was-the-purpose-of-the-additional-personal-allowance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Was the Purpose of the Additional Personal Allowance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The Additional Personal Allowance was established by HM Revenue and Customs (Britain's tax authority) as a way for certain taxpayers to lower their tax liability. It gave individuals who couldn't claim the Married Couples' Allowance but cared for a qualifying child under the age of 16 a tax credit. This allowance was discontinued in 2000.<span class="ql-inline-citation" data-cite="4"></span> Qualifying taxpayers can now claim the Child Tax Credit as of the 2003-2004 tax year.</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-i-still-claim-the-additional-personal-allowance-on-my-uk-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can I Still Claim the Additional Personal Allowance on my U.K. Taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can no longer claim the Additional Personal Allowance on your U.K. taxes. This tax credit was eliminated in April 2000. But you may be able to claim the child tax credit if you qualify. In order to claim the Child Tax Credit, you must already get the Working Tax Credit. If you don't qualify, you can apply for the Universal Credit.<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_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-replaced-the-additional-personal-allowance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Replaced the Additional Personal Allowance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Eliminated in 2000, the Additional Personal Allowance was replaced by the Childrens' Tax Credit, which went into effect in April 2001. But this was short-lived as critics said it didn't take total family income into account.<span class="ql-inline-citation" data-cite="10"></span> This credit was replaced by the new Child Tax Credit as of the 2003-2004 tax year.<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_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"> Tax credits allow individual taxpayers to lower their annual tax bills as long as they qualify for them. In the U.K., the Additional Personal Allowance applied to individuals who couldn't claim the Married Couple's Allowance but cared for a child under the age of 16. Although no longer available, British taxpayers can claim the Child Tax Credit if they meet certain eligibility requirements. If you're unsure about what credits apply to you, consult a tax professional. </p></div>	## What Is Additional Personal Allowance? The term Additional Personal Allowance refers to an extra [tax deduction](https://www.investopedia.com/terms/t/tax-deduction.asp) set forth by [HM Revenue and Customs (HMRC)](https://www.investopedia.com/terms/h/hm-revenue-and-customs-hmrc.asp) on income tax returns in the United Kingdom. This deduction applied to certain taxpayers who were not eligible to receive the Married Couple's Allowance and who financially supported a child under the age of 16. The value of the Additional Personal Allowance was equal to that of the married couple's allowance. The Additional Personal Allowance was eliminated in 2000. ### Key Takeaways * The Additional Personal Allowance was an extra deduction allowed by HM Revenue and Customs on income tax returns filed in the United Kingdom. * This allowance provided tax relief to those who qualified—single, separated, or widowed taxpayers who didn't use the married couple allowance. * Those who qualified were required to be financially supporting a child under 16. * The additional personal allowance was eliminated in 2000. ## How the Additional Personal Allowance Worked Income taxes are filed with and collected by HMRC in the United Kingdom. This agency is the British equivalent of the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp). British [taxpayers](https://www.investopedia.com/terms/t/taxpayer.asp) are charged income tax on different types of income, including wages from employment, self-employed profits, state benefits, pension earnings, rental and [trust](https://www.investopedia.com/terms/t/trust.asp) income, and any benefits earned from an employer. Taxes are exempt on a variety of income sources including: * The first £1,000 of self-employment earnings * The first £1,000 earned from a rental property * Winnings from the National Lottery * Certain [dividends](https://www.investopedia.com/articles/stocks/07/dividend_implications.asp) A personal allowance reduces an individual's [tax liability](https://www.investopedia.com/terms/t/taxliability.asp). Certain taxpayers were able to claim the Additional Personal Allowance to reduce their tax bill even further. This allowance was in effect until April 2000. Single individuals, along with those who were [separated](https://www.investopedia.com/separation-and-divorce-4689711) or [widowed](https://www.investopedia.com/terms/q/qualifying-widow.asp) were able to use it as long as they didn't claim the allowance for married couples. ### Just like the [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp) in the United States, the Additional Personal Allowance in the U.K. was the portion of income that isn't subject to taxation. Anything over the personal allowance—that is, whatever is left over after the personal allowance is deducted—is taxed at the current tax rate. Anyone claiming the Additional Personal Allowance was required to be financially supporting a child under 16. Parents could also claim the benefit for children over the age of 16 that were full-time students or who were part of a two-year apprentice program. The allowance also applied to men with an incapacitated wife and a [qualifying child](https://www.investopedia.com/terms/d/dependent.asp) under the age of 16 living in the household, provided the wife was incapacitated throughout the year. The HMRC set the Additional Personal Allowance at £1,970 for the 1999-2000 tax year. It was restricted to 10%, which means that any taxpayer who claimed the allowance received a tax credit of £197 toward their final tax bill. According to British [tax law](https://www.investopedia.com/tax-laws-and-regulations-4689688), a qualifying child is a child of the claimant or a child that is supported and cared for by the claimant. Only one allowance was paid, regardless of the number of children cared for by the person claiming the additional allowance. ## Special Considerations Since the Additional Personal Allowance was eliminated, every taxpayer is subject to the same personal allowance, regardless of marital status and gender, and whether or not they have children. The standard personal allowance in the U.K. for the 2023–2024 [tax year](https://www.investopedia.com/terms/t/taxyear.asp) is £12,570. There is no income tax payable on any income earned under this amount. As such, taxpayers can use this amount to lower their overall tax bill. The amount of income tax paid in each tax year depends on how much earnings are above the personal allowance and how much of a person's income falls within the various tax bands. ### You may want to consult a tax professional if you're unsure about what credits you can claim or want to know more about how you can lower your tax liability. ## Additional Personal Allowance vs. Child Tax Credit The HMRC eliminated the Additional Personal Allowance along with the married couples' allowance in April 2000 and replaced them with a new one. The Children's Tax Credit applied to taxpayers who cared for one or more children under 16 regardless of their marital status. It promised to benefit those with lower [incomes](https://www.investopedia.com/terms/i/income.asp) as it was to be tapered. This credit went into effect in April 2001. There were several key differences between the additional personal allowance and the new [credit](https://www.investopedia.com/terms/c/credit.asp). The rate remained at 10% but the allowance was set at £5,200 for the 2001-2002 tax year, giving claiming taxpayers relief of £520. The credit was increased the following tax year in line with inflation and also included a £10 per week credit for families with an additional child for the first year of their life. This new credit didn't last long as opponents stated that it wasn't taking family income into account. It was replaced by the [Child Tax Credit](https://www.investopedia.com/terms/c/childtaxcredit.asp), which went into effect for the 2003-2004 tax year. This new credit is based on family income and can only be claimed by individuals who take the Working Tax Credit. ## Example of the Additional Personal Allowance Here's a hypothetical example to show how the Additional Personal Allowance worked. Let's say a widow named Olivia had a 12-year-old child living with her in 1998. Under the British tax system, Olivia was able to claim an allowance beyond the standard personal allowance even though she was no longer married following the passing of her husband two years prior. This additional allowance helped Olivia pay less in income taxes for the year. If she had two children (the other aged 10), she would only be able to claim one Additional Personal Allowance. ## What Was the Purpose of the Additional Personal Allowance? The Additional Personal Allowance was established by HM Revenue and Customs (Britain's tax authority) as a way for certain taxpayers to lower their tax liability. It gave individuals who couldn't claim the Married Couples' Allowance but cared for a qualifying child under the age of 16 a tax credit. This allowance was discontinued in 2000. Qualifying taxpayers can now claim the Child Tax Credit as of the 2003-2004 tax year. ## Can I Still Claim the Additional Personal Allowance on my U.K. Taxes? You can no longer claim the Additional Personal Allowance on your U.K. taxes. This tax credit was eliminated in April 2000. But you may be able to claim the child tax credit if you qualify. In order to claim the Child Tax Credit, you must already get the Working Tax Credit. If you don't qualify, you can apply for the Universal Credit. ## What Replaced the Additional Personal Allowance? Eliminated in 2000, the Additional Personal Allowance was replaced by the Childrens' Tax Credit, which went into effect in April 2001. But this was short-lived as critics said it didn't take total family income into account. This credit was replaced by the new Child Tax Credit as of the 2003-2004 tax year. ## The Bottom Line Tax credits allow individual taxpayers to lower their annual tax bills as long as they qualify for them. In the U.K., the Additional Personal Allowance applied to individuals who couldn't claim the Married Couple's Allowance but cared for a child under the age of 16. Although no longer available, British taxpayers can claim the Child Tax Credit if they meet certain eligibility requirements. If you're unsure about what credits apply to you, consult a tax professional.	What Is Additional Personal Allowance? The term Additional Personal Allowance refers to an extra tax deduction set forth by HM Revenue and Customs (HMRC) on income tax returns in the United Kingdom. This deduction applied to certain taxpayers who were not eligible to receive the Married Couple's Allowance and who financially supported a child under the age of 16. The value of the Additional Personal Allowance was equal to that of the married couple's allowance. The Additional Personal Allowance was eliminated in 2000. Key Takeaways The Additional Personal Allowance was an extra deduction allowed by HM Revenue and Customs on income tax returns filed in the United Kingdom.This allowance provided tax relief to those who qualified—single, separated, or widowed taxpayers who didn't use the married couple allowance.Those who qualified were required to be financially supporting a child under 16.The additional personal allowance was eliminated in 2000. How the Additional Personal Allowance Worked Income taxes are filed with and collected by HMRC in the United Kingdom. This agency is the British equivalent of the Internal Revenue Service (IRS). British taxpayers are charged income tax on different types of income, including wages from employment, self-employed profits, state benefits, pension earnings, rental and trust income, and any benefits earned from an employer. Taxes are exempt on a variety of income sources including: The first £1,000 of self-employment earnings The first £1,000 earned from a rental property Winnings from the National Lottery Certain dividends A personal allowance reduces an individual's tax liability. Certain taxpayers were able to claim the Additional Personal Allowance to reduce their tax bill even further. This allowance was in effect until April 2000. Single individuals, along with those who were separated or widowed were able to use it as long as they didn't claim the allowance for married couples. Just like the standard deduction in the United States, the Additional Personal Allowance in the U.K. was the portion of income that isn't subject to taxation. Anything over the personal allowance—that is, whatever is left over after the personal allowance is deducted—is taxed at the current tax rate. Anyone claiming the Additional Personal Allowance was required to be financially supporting a child under 16. Parents could also claim the benefit for children over the age of 16 that were full-time students or who were part of a two-year apprentice program. The allowance also applied to men with an incapacitated wife and a qualifying child under the age of 16 living in the household, provided the wife was incapacitated throughout the year. The HMRC set the Additional Personal Allowance at £1,970 for the 1999-2000 tax year. It was restricted to 10%, which means that any taxpayer who claimed the allowance received a tax credit of £197 toward their final tax bill. According to British tax law, a qualifying child is a child of the claimant or a child that is supported and cared for by the claimant. Only one allowance was paid, regardless of the number of children cared for by the person claiming the additional allowance. Special Considerations Since the Additional Personal Allowance was eliminated, every taxpayer is subject to the same personal allowance, regardless of marital status and gender, and whether or not they have children. The standard personal allowance in the U.K. for the 2023–2024 tax year is £12,570. There is no income tax payable on any income earned under this amount. As such, taxpayers can use this amount to lower their overall tax bill. The amount of income tax paid in each tax year depends on how much earnings are above the personal allowance and how much of a person's income falls within the various tax bands. You may want to consult a tax professional if you're unsure about what credits you can claim or want to know more about how you can lower your tax liability. Additional Personal Allowance vs. Child Tax Credit The HMRC eliminated the Additional Personal Allowance along with the married couples' allowance in April 2000 and replaced them with a new one. The Children's Tax Credit applied to taxpayers who cared for one or more children under 16 regardless of their marital status. It promised to benefit those with lower incomes as it was to be tapered. This credit went into effect in April 2001. There were several key differences between the additional personal allowance and the new credit. The rate remained at 10% but the allowance was set at £5,200 for the 2001-2002 tax year, giving claiming taxpayers relief of £520. The credit was increased the following tax year in line with inflation and also included a £10 per week credit for families with an additional child for the first year of their life. This new credit didn't last long as opponents stated that it wasn't taking family income into account. It was replaced by the Child Tax Credit, which went into effect for the 2003-2004 tax year. This new credit is based on family income and can only be claimed by individuals who take the Working Tax Credit. Example of the Additional Personal Allowance Here's a hypothetical example to show how the Additional Personal Allowance worked. Let's say a widow named Olivia had a 12-year-old child living with her in 1998. Under the British tax system, Olivia was able to claim an allowance beyond the standard personal allowance even though she was no longer married following the passing of her husband two years prior. This additional allowance helped Olivia pay less in income taxes for the year. If she had two children (the other aged 10), she would only be able to claim one Additional Personal Allowance. What Was the Purpose of the Additional Personal Allowance? The Additional Personal Allowance was established by HM Revenue and Customs (Britain's tax authority) as a way for certain taxpayers to lower their tax liability. It gave individuals who couldn't claim the Married Couples' Allowance but cared for a qualifying child under the age of 16 a tax credit. This allowance was discontinued in 2000. Qualifying taxpayers can now claim the Child Tax Credit as of the 2003-2004 tax year. Can I Still Claim the Additional Personal Allowance on my U.K. Taxes? You can no longer claim the Additional Personal Allowance on your U.K. taxes. This tax credit was eliminated in April 2000. But you may be able to claim the child tax credit if you qualify. In order to claim the Child Tax Credit, you must already get the Working Tax Credit. If you don't qualify, you can apply for the Universal Credit. What Replaced the Additional Personal Allowance? Eliminated in 2000, the Additional Personal Allowance was replaced by the Childrens' Tax Credit, which went into effect in April 2001. But this was short-lived as critics said it didn't take total family income into account. This credit was replaced by the new Child Tax Credit as of the 2003-2004 tax year. The Bottom Line Tax credits allow individual taxpayers to lower their annual tax bills as long as they qualify for them. In the U.K., the Additional Personal Allowance applied to individuals who couldn't claim the Married Couple's Allowance but cared for a child under the age of 16. Although no longer available, British taxpayers can claim the Child Tax Credit if they meet certain eligibility requirements. If you're unsure about what credits apply to you, consult a tax professional.	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https://www.investopedia.com/terms/b/britcoin.asp	Britcoin: The Digital Pound	<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-britcoin"></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 Britcoin? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The digital pound is an initiative for a new type of money issued by the Bank of England used in-store or online to make purchases. Nicknamed "Britcoin" or "digital sterling," the digital pound would be issued by the Bank of England and backed by the government and would not be a privately issued <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cryptocurrency-4427699">cryptocurrency</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>Central banks have been researching central bank digital currency (CBDC) as an alternative to cryptocurrencies.</li><li>The digital pound, or "Britcoin," is an initiative for a new type of money issued by the Bank of England.</li><li>The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011 that was defunct by 2019.</li></ul></div></div></div> <span class="heading-toc" id="toc-britcoin-and-cbdc"></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"> Britcoin and CBDC </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/centralbank.asp">Central banks</a> have been researching <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">central bank digital currency</a> (CBDC) as an alternative to cryptocurrencies. The Bank of England seeks to establish the digital pound to improve payment options. The digital pound would enable private companies to innovate, make payments more efficient, and provide consumers with more choices.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> As consumers move away from cash and toward digital payments, new forms of money emerge, and some pose risks to financial stability. The digital pound would be an electronic version of the banknotes issued by the Bank of England. </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 CBDC would be sovereign money, without fees, in digital form. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp">credit or debit card</a> is bank money and is one step removed from the issuing authority. Bank money is often the place where fees are levied. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>When using Britcoin, the Bank of England and the government would not collect personal data and see how consumers spend money. However, users access the digital pound through a virtual wallet that contains personal data.<span class="ql-inline-citation" data-cite="3"></span> </p></div></div></div> <span class="heading-toc" id="toc-cryptocurrency-in-the-uk"></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"> Cryptocurrency in the U.K. </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The rise of cryptocurrencies grew following the 2008 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-crisis.asp">financial crisis</a>. Many investors sought alternatives to traditional <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiatmoney.asp">fiat </a>currency, money issued by a nation's government. <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bitcoin.asp">Bitcoin</a> was one of the first decentralized cryptocurrencies. Transactions are generally verified and recorded through a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>, a publicly-accessible ledger that records cryptocurrency transactions.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011. Like other cryptocurrencies, Britcoins allowed traders to execute <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transactions</a> safely and privately without using a bank account. The cryptocurrency traded on the now-defunct Britcoin Exchange and provided individuals with an alternative to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gbp.asp">British pound</a> (GBP). Britcoin was delisted from most exchanges in 2019.<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> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_20-0"><span class="heading-toc" id="toc-what-makes-the-britcoin-or-digital-pound-different-from-cryptocurrency"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Makes the Britcoin or Digital Pound Different From Cryptocurrency?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The digital pound would not be a crypto asset which can be very volatile and not hold steady value. The digital pound would be issued and backed by the Bank of England, and a £10 digital pound would be the same as a £10 banknote.</p></div> </div> <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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_22-0"><span class="heading-toc" id="toc-can-users-save-digital-pounds-or-britcoin-to-earn-interest"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Users Save Digital Pounds or Britcoin to Earn Interest?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Individuals would not earn any interest on saved digital pounds, just like users wouldn't earn any interest on physical cash. A digital pound is for day-to-day spending and not for savings.<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_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_24-0"><span class="heading-toc" id="toc-what-countries-have-implemented-a-cbdc"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Countries Have Implemented a CBDC?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Indonesia has a digital rupiah prototype, Ghana has an e-cedi pilot program, and Sweden has been working with Accenture on an e-krona. Eleven countries, including Jamaica and The Bahamas, have implemented central bank digital currencies.<span class="ql-inline-citation" data-cite="5"></span></p><p><br/></p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A central bank digital currency (CBDC) is an alternative to cryptocurrencies. The digital pound, or "Britcoin," is an initiative for a new type of money issued and backed by the Bank of England. The digital pound would be denominated in sterling, and its value would be stable, just like banknotes. £10 in digital pounds would equal a £10 banknote. </p></div>	## What Is Britcoin? The digital pound is an initiative for a new type of money issued by the Bank of England used in-store or online to make purchases. Nicknamed "Britcoin" or "digital sterling," the digital pound would be issued by the Bank of England and backed by the government and would not be a privately issued [cryptocurrency](https://www.investopedia.com/cryptocurrency-4427699). ### Key Takeaways * Central banks have been researching central bank digital currency (CBDC) as an alternative to cryptocurrencies. * The digital pound, or "Britcoin," is an initiative for a new type of money issued by the Bank of England. * The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011 that was defunct by 2019. ## Britcoin and CBDC [Central banks](https://www.investopedia.com/terms/c/centralbank.asp) have been researching [central bank digital currency](https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp) (CBDC) as an alternative to cryptocurrencies. The Bank of England seeks to establish the digital pound to improve payment options. The digital pound would enable private companies to innovate, make payments more efficient, and provide consumers with more choices. As consumers move away from cash and toward digital payments, new forms of money emerge, and some pose risks to financial stability. The digital pound would be an electronic version of the banknotes issued by the Bank of England. A CBDC would be sovereign money, without fees, in digital form. A [credit or debit card](https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp) is bank money and is one step removed from the issuing authority. Bank money is often the place where fees are levied. ### When using Britcoin, the Bank of England and the government would not collect personal data and see how consumers spend money. However, users access the digital pound through a virtual wallet that contains personal data. ## Cryptocurrency in the U.K. The rise of cryptocurrencies grew following the 2008 [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp). Many investors sought alternatives to traditional [fiat](https://www.investopedia.com/terms/f/fiatmoney.asp) currency, money issued by a nation's government. [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) was one of the first decentralized cryptocurrencies. Transactions are generally verified and recorded through a [blockchain](https://www.investopedia.com/terms/b/blockchain.asp), a publicly-accessible ledger that records cryptocurrency transactions. The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011. Like other cryptocurrencies, Britcoins allowed traders to execute [transactions](https://www.investopedia.com/terms/t/transaction.asp) safely and privately without using a bank account. The cryptocurrency traded on the now-defunct Britcoin Exchange and provided individuals with an alternative to the [British pound](https://www.investopedia.com/terms/g/gbp.asp) (GBP). Britcoin was delisted from most exchanges in 2019. ## What Makes the Britcoin or Digital Pound Different From Cryptocurrency? The digital pound would not be a crypto asset which can be very volatile and not hold steady value. The digital pound would be issued and backed by the Bank of England, and a £10 digital pound would be the same as a £10 banknote. ## Can Users Save Digital Pounds or Britcoin to Earn Interest? Individuals would not earn any interest on saved digital pounds, just like users wouldn't earn any interest on physical cash. A digital pound is for day-to-day spending and not for savings. ## What Countries Have Implemented a CBDC? Indonesia has a digital rupiah prototype, Ghana has an e-cedi pilot program, and Sweden has been working with Accenture on an e-krona. Eleven countries, including Jamaica and The Bahamas, have implemented central bank digital currencies. ## The Bottom Line A central bank digital currency (CBDC) is an alternative to cryptocurrencies. The digital pound, or "Britcoin," is an initiative for a new type of money issued and backed by the Bank of England. The digital pound would be denominated in sterling, and its value would be stable, just like banknotes. £10 in digital pounds would equal a £10 banknote.	What Is Britcoin? The digital pound is an initiative for a new type of money issued by the Bank of England used in-store or online to make purchases. Nicknamed "Britcoin" or "digital sterling," the digital pound would be issued by the Bank of England and backed by the government and would not be a privately issued cryptocurrency. Key Takeaways Central banks have been researching central bank digital currency (CBDC) as an alternative to cryptocurrencies.The digital pound, or "Britcoin," is an initiative for a new type of money issued by the Bank of England.The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011 that was defunct by 2019. Britcoin and CBDC Central banks have been researching central bank digital currency (CBDC) as an alternative to cryptocurrencies. The Bank of England seeks to establish the digital pound to improve payment options. The digital pound would enable private companies to innovate, make payments more efficient, and provide consumers with more choices. As consumers move away from cash and toward digital payments, new forms of money emerge, and some pose risks to financial stability. The digital pound would be an electronic version of the banknotes issued by the Bank of England. A CBDC would be sovereign money, without fees, in digital form. A credit or debit card is bank money and is one step removed from the issuing authority. Bank money is often the place where fees are levied. When using Britcoin, the Bank of England and the government would not collect personal data and see how consumers spend money. However, users access the digital pound through a virtual wallet that contains personal data. Cryptocurrency in the U.K. The rise of cryptocurrencies grew following the 2008 financial crisis. Many investors sought alternatives to traditional fiat currency, money issued by a nation's government. Bitcoin was one of the first decentralized cryptocurrencies. Transactions are generally verified and recorded through a blockchain, a publicly-accessible ledger that records cryptocurrency transactions. The term "Britcoin" once referred to a cryptocurrency launched and based in the United Kingdom in 2011. Like other cryptocurrencies, Britcoins allowed traders to execute transactions safely and privately without using a bank account. The cryptocurrency traded on the now-defunct Britcoin Exchange and provided individuals with an alternative to the British pound (GBP). Britcoin was delisted from most exchanges in 2019. What Makes the Britcoin or Digital Pound Different From Cryptocurrency? The digital pound would not be a crypto asset which can be very volatile and not hold steady value. The digital pound would be issued and backed by the Bank of England, and a £10 digital pound would be the same as a £10 banknote. Can Users Save Digital Pounds or Britcoin to Earn Interest? Individuals would not earn any interest on saved digital pounds, just like users wouldn't earn any interest on physical cash. A digital pound is for day-to-day spending and not for savings. What Countries Have Implemented a CBDC? Indonesia has a digital rupiah prototype, Ghana has an e-cedi pilot program, and Sweden has been working with Accenture on an e-krona. Eleven countries, including Jamaica and The Bahamas, have implemented central bank digital currencies. The Bottom Line A central bank digital currency (CBDC) is an alternative to cryptocurrencies. The digital pound, or "Britcoin," is an initiative for a new type of money issued and backed by the Bank of England. The digital pound would be denominated in sterling, and its value would be stable, just like banknotes. £10 in digital pounds would equal a £10 banknote.	[ [ "cryptocurrency", "https://www.investopedia.com/cryptocurrency-4427699" ], [ "Central banks", "https://www.investopedia.com/terms/c/centralbank.asp" ], [ "central bank digital currency", "https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp" ], [ "credit or debit card", "https://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp" ], [ "financial crisis", "https://www.investopedia.com/terms/f/financial-crisis.asp" ], [ "fiat", "https://www.investopedia.com/terms/f/fiatmoney.asp" ], [ "Bitcoin", "https://www.investopedia.com/terms/b/bitcoin.asp" ], [ "blockchain", "https://www.investopedia.com/terms/b/blockchain.asp" ], [ "transactions", "https://www.investopedia.com/terms/t/transaction.asp" ], [ "British pound", "https://www.investopedia.com/terms/g/gbp.asp" ] ]
https://www.investopedia.com/terms/c/cashandcarry.asp	Cash-and-Carry Trade: Definition, Strategies, 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-a-cash-and-carry-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 a Cash-and-Carry Trade? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between an asset and its corresponding derivative. The key to profiting from this strategy is the eventual correction of that mispricing. </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 cash-and-carry trade should not be confused with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currencycarrytrade.asp">carry trade</a> in the context of forex trading, which looks for interest rate differentials between countries. </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 cash-and-carry trade is an arbitrage strategy that profits off the mispricing between the underlying asset and its corresponding derivative.</li><li>A cash-and-carry trade is usually executed by entering a long position in an asset while simultaneously selling the associated derivative.</li><li>Specifically, this is done by going short the market via a futures or options contract.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-cash-and-carry-trades"></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 Cash-and-Carry Trades </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> A cash-and-carry trade takes advantage of market pricing discrepancies. It usually entails taking a <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> in a security or commodity while simultaneously selling the associated derivative, specifically by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/short.asp">shorting</a> a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures</a> or <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/optionscontract.asp">options</a> contract.<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_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The security or commodity being purchased is held until the contract <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deliverydate.asp">delivery date</a> and is used to cover the short position’s obligation. By selling a futures contract, the investor has taken a short position. The investor knows how much will be made on the delivery date and the cost of the security because of the cash-and-carry trade’s long position component.<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"> For example, in the case of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond.asp">bond</a>, the investor receives the coupon payments from the bond they've bought, plus any <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investmentincome.asp">investment income</a> earned by investing the coupons, as well as the predetermined future price at the future delivery date.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-steps-in-a-cash-and-carry-trade"></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"> Steps in a Cash-and-Carry Trade </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> There are three main steps in a cash-and-carry trade: </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>An investor identifies two securities that are currently mispriced with respect to each other, such as the spot crude price and crude futures price. This presents an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arbitrage.asp">arbitrage</a> opportunity.</li> <li>The investor must first purchase spot crude and sell a crude futures contract.</li> <li>Then, the investor must hold (or "carry") spot crude until the crude futures contract expires, at which time the investor delivers the spot crude.</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"> Regardless of what the delivery price is, a profit is only assured if the purchase price of spot crude <em>plus</em> the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/costofcarry.asp">cost of carry</a> is less than the price at which the crude futures contract was initially sold. </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"> Cash-and-Carry Trades in the Credit Derivatives Market </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> This strategy is commonly known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/basis-trading.asp">basis trading</a>, Often, carry trades are executed to take advantage of the implied interest rates generated from the positions because they may end up being more favorable than borrowing or lending through traditional channels. </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"> This strategy also has an application in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditderivative.asp">credit derivatives</a> market, where basis (the difference between a commodity's immediate cash price and its futures price) represents the difference in spread between <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 bonds for the same debt issuer (and with similar—if not exactly equal—maturities).<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_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Here, the strategy is called a negative basis trade. (In the credit derivatives market, basis can be positive or negative; <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/08/negative-basis-trades.asp">a negative basis</a> means that the CDS spread is smaller than the bond spread.) </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 trade is usually done with bonds that are trading at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/parvalue.asp">par</a> or at a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discount.asp">discount</a>, and a single-name CDS (as opposed to an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">index</a> CDS) of a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tenor.asp">tenor</a> equal to the maturity of the bond. </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"> Cash-and-Carry Trades in the Options Market </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> In the options market, an example of a carry trade is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/boxspread.asp">box spread</a>. </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"> Box spreads are used for borrowing or lending at implied rates that are more favorable than a trader going to their prime broker, clearing firm, or bank. Because the price of a box at its expiration will always be the distance between the strikes involved (e.g., a 100-pt box might utilize the 25 and 125 strikes and would be worth $100 at expiration), the price paid for today can be thought of as that of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/z/zero-couponbond.asp">zero-coupon bond</a>. </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 lower the initial cost of the box, the higher its implied interest rate. </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"> This concept is known as a synthetic loan. Thus, the difference in the price of the box spread from the difference between the strike prices is the carry. </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"> For instance, if a trader executes a carry trade using a box spread in the S&P 500 using the 1,000 and 2,000 strikes, the spread will be worth $1,000 at expiration (i.e., the distance between strikes). If the spread costs $1,050 in the market, that $50 represents the implied interest rate associated with the cost of carry. </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-example-of-a-cash-and-carry-trade"></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"> Example of a Cash-and-Carry Trade </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Assume an asset currently trades at $100 while the one-month futures contract is priced at $104. In addition, monthly <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/carrying-costs.asp">carrying costs</a>—such as storage, insurance, and financing—for this asset is equal to $2. In this case, the trader would buy the asset (open a long position) at $100, and simultaneously sell the one-month futures contract (initiate a short position) at $104. </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 cost to buy and hold the asset is $102, but the investor has already locked in a sale at $104. The trader would then carry the asset until the expiration date of the futures contract and deliver it against the contract, thereby ensuring an arbitrage profit of $2.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-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_2-0">Note</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>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.</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-arbitrage"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is Arbitrage?</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/what-is-arbitrage/#:~:text=Arbitrage%20occurs%20when%20a%20security,lets%20traders%20lock%20in%20profits.">Arbitrage is</a> simultaneously buying and selling the same asset in different markets or in derivative forms to profit from the brief differences in their prices.</p><p>Arbitrage is used in the currency and commodities markets as well as in international stock markets.</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-is-a-cash-and-carry-trade-the-same-as-an-arbitrage-trade"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Cash-and-Carry Trade the Same As an Arbitrage Trade?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A cash-and-carry trade is one type of arbitrage trade. In this case, the trader exploits the difference in pricing between an asset and a derivative that is based on that asset. The trader simultaneously buys one and sells the other, profiting from the brief difference in price.</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-is-cash-and-carry-legal-in-the-us"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Cash-and-Carry Legal in the U.S.?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The cash-and-carry trade is legal in the U.S., as is arbitrage trading in general. In fact, the practice is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/032615/why-arbitrage-trading-legal.asp#:~:text=Arbitrage%20trading%20is%20not%20only,providing%20liquidity%20in%20different%20markets.">positively encouraged</a> as a means of increasing market efficiency and providing liquidity in the markets.</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"> The cash-and-carry trade is one variety of arbitrage, the practice of buying and selling the same asset in two markets in order to profit from the brief discrepancies in their prices. </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"> The practice of arbitrage is perhaps best known in the currency markets, where miniscule differences in posted prices encourage such a strategy. </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"> Cash-and-carry, though, relies on a different set of assets: one the "real" asset and a second a derivative based on that asset's price. </p></div>	## What Is a Cash-and-Carry Trade? A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between an asset and its corresponding derivative. The key to profiting from this strategy is the eventual correction of that mispricing. A cash-and-carry trade should not be confused with a [carry trade](https://www.investopedia.com/terms/c/currencycarrytrade.asp) in the context of forex trading, which looks for interest rate differentials between countries. ### Key Takeaways * A cash-and-carry trade is an arbitrage strategy that profits off the mispricing between the underlying asset and its corresponding derivative. * A cash-and-carry trade is usually executed by entering a long position in an asset while simultaneously selling the associated derivative. * Specifically, this is done by going short the market via a futures or options contract. ## Understanding Cash-and-Carry Trades A cash-and-carry trade takes advantage of market pricing discrepancies. It usually entails taking a [long position](https://www.investopedia.com/terms/l/long.asp) in a security or commodity while simultaneously selling the associated derivative, specifically by [shorting](https://www.investopedia.com/terms/s/short.asp) a [futures](https://www.investopedia.com/terms/f/futurescontract.asp) or [options](https://www.investopedia.com/terms/o/optionscontract.asp) contract. The security or commodity being purchased is held until the contract [delivery date](https://www.investopedia.com/terms/d/deliverydate.asp) and is used to cover the short position’s obligation. By selling a futures contract, the investor has taken a short position. The investor knows how much will be made on the delivery date and the cost of the security because of the cash-and-carry trade’s long position component. For example, in the case of a [bond](https://www.investopedia.com/terms/b/bond.asp), the investor receives the coupon payments from the bond they've bought, plus any [investment income](https://www.investopedia.com/terms/i/investmentincome.asp) earned by investing the coupons, as well as the predetermined future price at the future delivery date. ## Steps in a Cash-and-Carry Trade There are three main steps in a cash-and-carry trade: * An investor identifies two securities that are currently mispriced with respect to each other, such as the spot crude price and crude futures price. This presents an [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) opportunity. * The investor must first purchase spot crude and sell a crude futures contract. * Then, the investor must hold (or "carry") spot crude until the crude futures contract expires, at which time the investor delivers the spot crude. Regardless of what the delivery price is, a profit is only assured if the purchase price of spot crude plus the [cost of carry](https://www.investopedia.com/terms/c/costofcarry.asp) is less than the price at which the crude futures contract was initially sold. ### Cash-and-Carry Trades in the Credit Derivatives Market This strategy is commonly known as [basis trading](https://www.investopedia.com/terms/b/basis-trading.asp), Often, carry trades are executed to take advantage of the implied interest rates generated from the positions because they may end up being more favorable than borrowing or lending through traditional channels. This strategy also has an application in the [credit derivatives](https://www.investopedia.com/terms/c/creditderivative.asp) market, where basis (the difference between a commodity's immediate cash price and its futures price) represents the difference in spread between [credit default swaps](https://www.investopedia.com/terms/c/creditdefaultswap.asp) (CDS) and bonds for the same debt issuer (and with similar—if not exactly equal—maturities). Here, the strategy is called a negative basis trade. (In the credit derivatives market, basis can be positive or negative; [a negative basis](https://www.investopedia.com/articles/trading/08/negative-basis-trades.asp) means that the CDS spread is smaller than the bond spread.) The trade is usually done with bonds that are trading at [par](https://www.investopedia.com/terms/p/parvalue.asp) or at a [discount](https://www.investopedia.com/terms/d/discount.asp), and a single-name CDS (as opposed to an [index](https://www.investopedia.com/terms/i/index.asp) CDS) of a [tenor](https://www.investopedia.com/terms/t/tenor.asp) equal to the maturity of the bond. ### Cash-and-Carry Trades in the Options Market In the options market, an example of a carry trade is a [box spread](https://www.investopedia.com/terms/b/boxspread.asp). Box spreads are used for borrowing or lending at implied rates that are more favorable than a trader going to their prime broker, clearing firm, or bank. Because the price of a box at its expiration will always be the distance between the strikes involved (e.g., a 100-pt box might utilize the 25 and 125 strikes and would be worth $100 at expiration), the price paid for today can be thought of as that of a [zero-coupon bond](https://www.investopedia.com/terms/z/zero-couponbond.asp). The lower the initial cost of the box, the higher its implied interest rate. This concept is known as a synthetic loan. Thus, the difference in the price of the box spread from the difference between the strike prices is the carry. For instance, if a trader executes a carry trade using a box spread in the S&P 500 using the 1,000 and 2,000 strikes, the spread will be worth $1,000 at expiration (i.e., the distance between strikes). If the spread costs $1,050 in the market, that $50 represents the implied interest rate associated with the cost of carry. ## Example of a Cash-and-Carry Trade Assume an asset currently trades at $100 while the one-month futures contract is priced at $104. In addition, monthly [carrying costs](https://www.investopedia.com/terms/c/carrying-costs.asp)—such as storage, insurance, and financing—for this asset is equal to $2. In this case, the trader would buy the asset (open a long position) at $100, and simultaneously sell the one-month futures contract (initiate a short position) at $104. The cost to buy and hold the asset is $102, but the investor has already locked in a sale at $104. The trader would then carry the asset until the expiration date of the futures contract and deliver it against the contract, thereby ensuring an arbitrage profit of $2. ### Note Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. ## What Is Arbitrage? [Arbitrage is](https://www.investopedia.com/ask/answers/what-is-arbitrage/#:~:text=Arbitrage%20occurs%20when%20a%20security,lets%20traders%20lock%20in%20profits.) simultaneously buying and selling the same asset in different markets or in derivative forms to profit from the brief differences in their prices. Arbitrage is used in the currency and commodities markets as well as in international stock markets. ## Is a Cash-and-Carry Trade the Same As an Arbitrage Trade? A cash-and-carry trade is one type of arbitrage trade. In this case, the trader exploits the difference in pricing between an asset and a derivative that is based on that asset. The trader simultaneously buys one and sells the other, profiting from the brief difference in price. ## Is Cash-and-Carry Legal in the U.S.? The cash-and-carry trade is legal in the U.S., as is arbitrage trading in general. In fact, the practice is [positively encouraged](https://www.investopedia.com/articles/investing/032615/why-arbitrage-trading-legal.asp#:~:text=Arbitrage%20trading%20is%20not%20only,providing%20liquidity%20in%20different%20markets.) as a means of increasing market efficiency and providing liquidity in the markets. ## The Bottom Line The cash-and-carry trade is one variety of arbitrage, the practice of buying and selling the same asset in two markets in order to profit from the brief discrepancies in their prices. The practice of arbitrage is perhaps best known in the currency markets, where miniscule differences in posted prices encourage such a strategy. Cash-and-carry, though, relies on a different set of assets: one the "real" asset and a second a derivative based on that asset's price.	What Is a Cash-and-Carry Trade? A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between an asset and its corresponding derivative. The key to profiting from this strategy is the eventual correction of that mispricing. A cash-and-carry trade should not be confused with a carry trade in the context of forex trading, which looks for interest rate differentials between countries. Key Takeaways A cash-and-carry trade is an arbitrage strategy that profits off the mispricing between the underlying asset and its corresponding derivative.A cash-and-carry trade is usually executed by entering a long position in an asset while simultaneously selling the associated derivative.Specifically, this is done by going short the market via a futures or options contract. Understanding Cash-and-Carry Trades A cash-and-carry trade takes advantage of market pricing discrepancies. It usually entails taking a long position in a security or commodity while simultaneously selling the associated derivative, specifically by shorting a futures or options contract. The security or commodity being purchased is held until the contract delivery date and is used to cover the short position’s obligation. By selling a futures contract, the investor has taken a short position. The investor knows how much will be made on the delivery date and the cost of the security because of the cash-and-carry trade’s long position component. For example, in the case of a bond, the investor receives the coupon payments from the bond they've bought, plus any investment income earned by investing the coupons, as well as the predetermined future price at the future delivery date. Steps in a Cash-and-Carry Trade There are three main steps in a cash-and-carry trade: An investor identifies two securities that are currently mispriced with respect to each other, such as the spot crude price and crude futures price. This presents an arbitrage opportunity. The investor must first purchase spot crude and sell a crude futures contract. Then, the investor must hold (or "carry") spot crude until the crude futures contract expires, at which time the investor delivers the spot crude. Regardless of what the delivery price is, a profit is only assured if the purchase price of spot crude plus the cost of carry is less than the price at which the crude futures contract was initially sold. Cash-and-Carry Trades in the Credit Derivatives Market This strategy is commonly known as basis trading, Often, carry trades are executed to take advantage of the implied interest rates generated from the positions because they may end up being more favorable than borrowing or lending through traditional channels. This strategy also has an application in the credit derivatives market, where basis (the difference between a commodity's immediate cash price and its futures price) represents the difference in spread between credit default swaps (CDS) and bonds for the same debt issuer (and with similar—if not exactly equal—maturities). Here, the strategy is called a negative basis trade. (In the credit derivatives market, basis can be positive or negative; a negative basis means that the CDS spread is smaller than the bond spread.) The trade is usually done with bonds that are trading at par or at a discount, and a single-name CDS (as opposed to an index CDS) of a tenor equal to the maturity of the bond. Cash-and-Carry Trades in the Options Market In the options market, an example of a carry trade is a box spread. Box spreads are used for borrowing or lending at implied rates that are more favorable than a trader going to their prime broker, clearing firm, or bank. Because the price of a box at its expiration will always be the distance between the strikes involved (e.g., a 100-pt box might utilize the 25 and 125 strikes and would be worth $100 at expiration), the price paid for today can be thought of as that of a zero-coupon bond. The lower the initial cost of the box, the higher its implied interest rate. This concept is known as a synthetic loan. Thus, the difference in the price of the box spread from the difference between the strike prices is the carry. For instance, if a trader executes a carry trade using a box spread in the S&P 500 using the 1,000 and 2,000 strikes, the spread will be worth $1,000 at expiration (i.e., the distance between strikes). If the spread costs $1,050 in the market, that $50 represents the implied interest rate associated with the cost of carry. Example of a Cash-and-Carry Trade Assume an asset currently trades at $100 while the one-month futures contract is priced at $104. In addition, monthly carrying costs—such as storage, insurance, and financing—for this asset is equal to $2. In this case, the trader would buy the asset (open a long position) at $100, and simultaneously sell the one-month futures contract (initiate a short position) at $104. The cost to buy and hold the asset is $102, but the investor has already locked in a sale at $104. The trader would then carry the asset until the expiration date of the futures contract and deliver it against the contract, thereby ensuring an arbitrage profit of $2. Note Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. What Is Arbitrage? Arbitrage is simultaneously buying and selling the same asset in different markets or in derivative forms to profit from the brief differences in their prices.Arbitrage is used in the currency and commodities markets as well as in international stock markets. Is a Cash-and-Carry Trade the Same As an Arbitrage Trade? A cash-and-carry trade is one type of arbitrage trade. In this case, the trader exploits the difference in pricing between an asset and a derivative that is based on that asset. The trader simultaneously buys one and sells the other, profiting from the brief difference in price. Is Cash-and-Carry Legal in the U.S.? The cash-and-carry trade is legal in the U.S., as is arbitrage trading in general. In fact, the practice is positively encouraged as a means of increasing market efficiency and providing liquidity in the markets. The Bottom Line The cash-and-carry trade is one variety of arbitrage, the practice of buying and selling the same asset in two markets in order to profit from the brief discrepancies in their prices. The practice of arbitrage is perhaps best known in the currency markets, where miniscule differences in posted prices encourage such a strategy. Cash-and-carry, though, relies on a different set of assets: one the "real" asset and a second a derivative based on that asset's price.	[ [ "carry trade", "https://www.investopedia.com/terms/c/currencycarrytrade.asp" ], [ "long position", "https://www.investopedia.com/terms/l/long.asp" ], [ "shorting", "https://www.investopedia.com/terms/s/short.asp" ], [ "futures", "https://www.investopedia.com/terms/f/futurescontract.asp" ], [ "options", "https://www.investopedia.com/terms/o/optionscontract.asp" ], [ "delivery date", "https://www.investopedia.com/terms/d/deliverydate.asp" ], [ "bond", "https://www.investopedia.com/terms/b/bond.asp" ], [ "investment income", "https://www.investopedia.com/terms/i/investmentincome.asp" ], [ "arbitrage", "https://www.investopedia.com/terms/a/arbitrage.asp" ], [ "cost of carry", "https://www.investopedia.com/terms/c/costofcarry.asp" ], [ "basis trading", "https://www.investopedia.com/terms/b/basis-trading.asp" ], [ "credit derivatives", "https://www.investopedia.com/terms/c/creditderivative.asp" ], [ "credit default swaps", "https://www.investopedia.com/terms/c/creditdefaultswap.asp" ], [ "a negative basis", "https://www.investopedia.com/articles/trading/08/negative-basis-trades.asp" ], [ "par", "https://www.investopedia.com/terms/p/parvalue.asp" ], [ "discount", "https://www.investopedia.com/terms/d/discount.asp" ], [ "index", "https://www.investopedia.com/terms/i/index.asp" ], [ "tenor", "https://www.investopedia.com/terms/t/tenor.asp" ], [ "box spread", "https://www.investopedia.com/terms/b/boxspread.asp" ], [ "zero-coupon bond", "https://www.investopedia.com/terms/z/zero-couponbond.asp" ], [ "carrying costs", "https://www.investopedia.com/terms/c/carrying-costs.asp" ], [ "Arbitrage is", "https://www.investopedia.com/ask/answers/what-is-arbitrage/#:~:text=Arbitrage%20occurs%20when%20a%20security,lets%20traders%20lock%20in%20profits." ], [ "positively encouraged", "https://www.investopedia.com/articles/investing/032615/why-arbitrage-trading-legal.asp#:~:text=Arbitrage%20trading%20is%20not%20only,providing%20liquidity%20in%20different%20markets." ] ]
https://www.investopedia.com/avoid-these-5-savings-mistakes-8649677	Avoid These 5 Savings Mistakes	<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>These mistakes can sabotage how much your savings earns: keeping too much money in your checking account, not knowing your savings account interest rate or fees, not shopping for competitive rates, overlooking CDs as a useful savings vehicle, or letting a maturing CD roll over automatically.</li> <li>Solutions are not difficult, and they range from opening a savings account that pays a competitive rate to socking longer-term savings in a CD and not letting those funds roll over automatically when the CD matures.</li> <li>Our daily ranking of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-high-yield-savings-accounts-4770633">best high-yield savings accounts</a> highlights rates up to 5.55%, with almost 20 options paying 5.15% or better.</li> <li>CDs offer a guaranteed rate for months or years—with today's top CDs <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">paying 4.80% to 5.65%</a>.</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-5-mistakes-americans-make-with-their-savings"></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"> 5 Mistakes Americans Make With Their Savings </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Putting away money for a big expense or emergencies is a smart financial move. Letting your money earn interest is even smarter—helping you boost your balance and reach goals more quickly. </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"> Unfortunately, many Americans make mistakes that hamper their savings efforts, leaving possible interest earnings on the table. The good news is that all of these are easy to solve, using our tips below and our daily research on the best nationwide rates on savings accounts and CDs.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <span class="heading-toc" id="toc-mistake-1-over-funding-your-checking-account"></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"> Mistake #1: Over-Funding Your Checking Account </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Your checking account may be the easiest place to hold money, as it's likely where your paycheck is deposited. But it's also usually the least lucrative place to keep surplus cash. That's because the vast majority of checking accounts pay no interest at all. And even those called "interest-bearing checking" often pay very low rates compared to competitive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp">high-yield savings accounts</a>. </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-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Solution: Move Money to Savings</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Only keep as much money in your checking account as you need to cover your bills and withdrawals, plus a modest cushion. Then shuttle the extra into a separate savings account. Even if you're living paycheck to paycheck, try to make small, regular transfers into a savings account so you can slowly build up an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a>.</p> <p>If you don't already have a savings account, it's time to open one. A savings account at the same bank where you hold your checking account is certainly convenient and allows for instant transfers to checking. But you'll want to have at least one savings account, maybe at another bank, that pays a competitive interest rate—rather than have money languish in your checking account earning nothing.</p></div></div></div> <span class="heading-toc" id="toc-mistake-2-not-knowing-what-youre-earningor-losing"></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"> Mistake #2: Not Knowing What You're Earning—or Losing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Ask someone what their savings account interest rate is and many people don't know. And when you don't know what you're earning, you have no idea if you're doing well or getting a raw deal. </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/rBNok/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Not all SA rates are created equal"></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"> Besides losing out on earnings with an underperforming account, your balance can also suffer from fees. Perhaps your savings account charges a monthly service charge whenever your account falls below a certain minimum. Or maybe you're being charged because you haven't opted into electronic statements. Even if an account is paying a competitive interest rate, that won't do you any good if you're losing the earnings to fees.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" 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">Solution: Review Your Rate and Any Fees</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Log into your bank account to look at what <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> your current savings account is paying. You may be able to find this in online banking, but if not, it should be on a paper or electronic statement. If all else fails, call the bank or credit union and ask what you're earning.</p> <p>Additionally, review the withdrawals from your savings account for the last two or three months. Are you seeing any bank fees? If so, talk to a customer service rep to find out what the fees were for and how you can avoid them in the future. You can also ask if the most recent fee can be waived as a one-time courtesy.</p></div></div></div> <span class="heading-toc" id="toc-mistake-3-not-doing-your-homework-on-rates"></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"> Mistake #3: Not Doing Your Homework on Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> As you saw above, savings rates on different accounts range from almost nothing to many times the national average. But many savers don't spend any time checking what current accounts are paying—and therefore have no idea if the 2% return their bank offers is a great deal or a lousy one. </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"> You don't have to earn the very tip-top rate on your savings. But it's worth shopping around to make sure your rate is at least somewhat competitive. </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/mOBSQ/2/" frameborder="0" id="mntl-sc-block-iframe__uri_2-0" title="Earnings on $10K in savings at different rates"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_33-0"><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_34-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0">Solution: Always Shop Around</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Fortunately, we make it easy to shop rates by checking 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>, which always gives you at least 15 of today's highest APYs. Currently, the top nationwide offer is 5.55% APY, but our list includes almost 20 choices that earn 5.15% or better.</p> <p>If you've never held savings at a separate institution before, don't worry. All of the banks and credit unions in our rankings carry the same $250,000 in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fdic-insured-account.asp">Federal Deposit Insurance Corp. (FDIC)</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/ncua.asp">National Credit Union Administration (NCUA)</a> insurance. And moving money between banks can be done with an electronic transfer that takes one to three days.</p></div></div></div> <span class="heading-toc" id="toc-mistake-4-not-considering-a-cd"></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"> Mistake #4: Not Considering a CD </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Continuing to stash cash in your savings account is a great idea. But if you know you won't need some of your funds for a while, you have another interest-boosting option at your disposal: <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>. Unfortunately, many savers overlook this useful bank account option, perhaps thinking it's too complicated or that it's not useful for smaller balances. </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 actuality, CDs are pretty straightforward. You agree to keep a lump sum in the account for a specified term (usually ranging from 3 months to 5 years). In exchange, the bank or credit union promises you a known interest rate for that full duration. This differs from savings accounts, where the rate can be lowered at any time. Often, you can also earn a higher rate on CDs than savings accounts are paying, </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-whatyouneedtoknow" 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">Solution: Move Some Savings to a High-Paying CD</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_5-0"><p>As with savings accounts, our daily rate research makes it very easy to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-cd-rates-4770214">shop for the best CD rates</a>. Today's top nationwide rate is 5.65% on a 3-month CD, but the top rates across terms range from 4.80% for a 5-year CD to 5.55% on a 6-month CD. Just be sure to choose a duration you can stick to because if you need to cash out before <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-cd-maturities-work-5268105">maturity</a>, you'll be hit with an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cd-early-withdrawal-penalty-5225111">early withdrawal penalty</a>.</p> <p>Many CDs in our rankings can be opened with as little as $500 or $1,000, so they aren't just for the wealthy. And they can keep your savings growing because the threat of a penalty can help you resist the temptation to spend the funds.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_42-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/btvD9/1/" frameborder="0" id="mntl-sc-block-iframe__uri_3-0" title="Top CD rates by term"></iframe></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-mistake-5-letting-a-cd-auto-renew"></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"> Mistake #5: Letting a CD Auto-Renew </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> When a CD matures, banks and credit unions generally roll your funds into a brand-new CD of a similar duration. This is certainly easy, but it is almost always a losing financial proposition for you. That's because the new CD you'll receive is very likely to have a lower rate than you can earn by shopping around—potentially a lot lower. Secondly, you may not want your money locked up for a new term of several months or years. </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-whatyouneedtoknow" 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_6-0">Solution: Move Maturing CD Funds to Savings</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_6-0"><p>Whenever you open a CD, mark a reminder on your calendar for about a month before it matures. If at that point your CD institution hasn't told you how to provide instructions on what to do with your maturing funds, contact the bank or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditunion.asp">credit union</a> yourself.</p> <p>By acting before the CD's maturity date, you can request that the funds be transferred to another account at that institution or another institution. You can also ask that the money be sent to you as a check or rolled into another CD. If you're not sure what you want to do with the funds, you can transfer them into a savings account and decide on a more permanent plan later.</p></div></div></div> <div class="comp mntl-sc-block mntl-sc-block-featuredlink mntl-block related-link" data-tracking-container="true" id="mntl-sc-block_50-0"><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_52-0"><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_54-0"><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_55-0"></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_56-0"> <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_57-0"> 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_58-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> 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 * These mistakes can sabotage how much your savings earns: keeping too much money in your checking account, not knowing your savings account interest rate or fees, not shopping for competitive rates, overlooking CDs as a useful savings vehicle, or letting a maturing CD roll over automatically. * Solutions are not difficult, and they range from opening a savings account that pays a competitive rate to socking longer-term savings in a CD and not letting those funds roll over automatically when the CD matures. * Our daily ranking of the [best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) highlights rates up to 5.55%, with almost 20 options paying 5.15% or better. * CDs offer a guaranteed rate for months or years—with today's top CDs [paying 4.80% to 5.65%](https://www.investopedia.com/best-cd-rates-4770214). The full article continues below these offers from our partners. ## 5 Mistakes Americans Make With Their Savings Putting away money for a big expense or emergencies is a smart financial move. Letting your money earn interest is even smarter—helping you boost your balance and reach goals more quickly. Unfortunately, many Americans make mistakes that hamper their savings efforts, leaving possible interest earnings on the table. The good news is that all of these are easy to solve, using our tips below and our daily research on the best nationwide rates on savings accounts and CDs. ## Mistake #1: Over-Funding Your Checking Account Your checking account may be the easiest place to hold money, as it's likely where your paycheck is deposited. But it's also usually the least lucrative place to keep surplus cash. That's because the vast majority of checking accounts pay no interest at all. And even those called "interest-bearing checking" often pay very low rates compared to competitive [high-yield savings accounts](https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp). ### Solution: Move Money to Savings Only keep as much money in your checking account as you need to cover your bills and withdrawals, plus a modest cushion. Then shuttle the extra into a separate savings account. Even if you're living paycheck to paycheck, try to make small, regular transfers into a savings account so you can slowly build up an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp). If you don't already have a savings account, it's time to open one. A savings account at the same bank where you hold your checking account is certainly convenient and allows for instant transfers to checking. But you'll want to have at least one savings account, maybe at another bank, that pays a competitive interest rate—rather than have money languish in your checking account earning nothing. ## Mistake #2: Not Knowing What You're Earning—or Losing Ask someone what their savings account interest rate is and many people don't know. And when you don't know what you're earning, you have no idea if you're doing well or getting a raw deal. Besides losing out on earnings with an underperforming account, your balance can also suffer from fees. Perhaps your savings account charges a monthly service charge whenever your account falls below a certain minimum. Or maybe you're being charged because you haven't opted into electronic statements. Even if an account is paying a competitive interest rate, that won't do you any good if you're losing the earnings to fees. ### Solution: Review Your Rate and Any Fees Log into your bank account to look at what [annual percentage yield (APY)](https://www.investopedia.com/terms/a/apy.asp) your current savings account is paying. You may be able to find this in online banking, but if not, it should be on a paper or electronic statement. If all else fails, call the bank or credit union and ask what you're earning. Additionally, review the withdrawals from your savings account for the last two or three months. Are you seeing any bank fees? If so, talk to a customer service rep to find out what the fees were for and how you can avoid them in the future. You can also ask if the most recent fee can be waived as a one-time courtesy. ## Mistake #3: Not Doing Your Homework on Rates As you saw above, savings rates on different accounts range from almost nothing to many times the national average. But many savers don't spend any time checking what current accounts are paying—and therefore have no idea if the 2% return their bank offers is a great deal or a lousy one. You don't have to earn the very tip-top rate on your savings. But it's worth shopping around to make sure your rate is at least somewhat competitive. ### Solution: Always Shop Around Fortunately, we make it easy to shop rates by checking our daily ranking of [the best high-yield savings accounts](https://www.investopedia.com/best-high-yield-savings-accounts-4770633), which always gives you at least 15 of today's highest APYs. Currently, the top nationwide offer is 5.55% APY, but our list includes almost 20 choices that earn 5.15% or better. If you've never held savings at a separate institution before, don't worry. All of the banks and credit unions in our rankings carry the same $250,000 in [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/terms/f/fdic-insured-account.asp) or [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp) insurance. And moving money between banks can be done with an electronic transfer that takes one to three days. ## Mistake #4: Not Considering a CD Continuing to stash cash in your savings account is a great idea. But if you know you won't need some of your funds for a while, you have another interest-boosting option at your disposal: [certificates of deposit (CDs)](https://www.investopedia.com/terms/c/certificateofdeposit.asp). Unfortunately, many savers overlook this useful bank account option, perhaps thinking it's too complicated or that it's not useful for smaller balances. In actuality, CDs are pretty straightforward. You agree to keep a lump sum in the account for a specified term (usually ranging from 3 months to 5 years). In exchange, the bank or credit union promises you a known interest rate for that full duration. This differs from savings accounts, where the rate can be lowered at any time. Often, you can also earn a higher rate on CDs than savings accounts are paying, ### Solution: Move Some Savings to a High-Paying CD As with savings accounts, our daily rate research makes it very easy to [shop for the best CD rates](https://www.investopedia.com/best-cd-rates-4770214). Today's top nationwide rate is 5.65% on a 3-month CD, but the top rates across terms range from 4.80% for a 5-year CD to 5.55% on a 6-month CD. Just be sure to choose a duration you can stick to because if you need to cash out before [maturity](https://www.investopedia.com/how-cd-maturities-work-5268105), you'll be hit with an [early withdrawal penalty](https://www.investopedia.com/cd-early-withdrawal-penalty-5225111). Many CDs in our rankings can be opened with as little as $500 or $1,000, so they aren't just for the wealthy. And they can keep your savings growing because the threat of a penalty can help you resist the temptation to spend the funds. ## Mistake #5: Letting a CD Auto-Renew When a CD matures, banks and credit unions generally roll your funds into a brand-new CD of a similar duration. This is certainly easy, but it is almost always a losing financial proposition for you. That's because the new CD you'll receive is very likely to have a lower rate than you can earn by shopping around—potentially a lot lower. Secondly, you may not want your money locked up for a new term of several months or years. ### Solution: Move Maturing CD Funds to Savings Whenever you open a CD, mark a reminder on your calendar for about a month before it matures. If at that point your CD institution hasn't told you how to provide instructions on what to do with your maturing funds, contact the bank or [credit union](https://www.investopedia.com/terms/c/creditunion.asp) yourself. By acting before the CD's maturity date, you can request that the funds be transferred to another account at that institution or another institution. You can also ask that the money be sent to you as a check or rolled into another CD. If you're not sure what you want to do with the funds, you can transfer them into a savings account and decide on a more permanent plan later. [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 These mistakes can sabotage how much your savings earns: keeping too much money in your checking account, not knowing your savings account interest rate or fees, not shopping for competitive rates, overlooking CDs as a useful savings vehicle, or letting a maturing CD roll over automatically. Solutions are not difficult, and they range from opening a savings account that pays a competitive rate to socking longer-term savings in a CD and not letting those funds roll over automatically when the CD matures. Our daily ranking of the best high-yield savings accounts highlights rates up to 5.55%, with almost 20 options paying 5.15% or better. CDs offer a guaranteed rate for months or years—with today's top CDs paying 4.80% to 5.65%. The full article continues below these offers from our partners. 5 Mistakes Americans Make With Their Savings Putting away money for a big expense or emergencies is a smart financial move. Letting your money earn interest is even smarter—helping you boost your balance and reach goals more quickly. Unfortunately, many Americans make mistakes that hamper their savings efforts, leaving possible interest earnings on the table. The good news is that all of these are easy to solve, using our tips below and our daily research on the best nationwide rates on savings accounts and CDs. Mistake #1: Over-Funding Your Checking Account Your checking account may be the easiest place to hold money, as it's likely where your paycheck is deposited. But it's also usually the least lucrative place to keep surplus cash. That's because the vast majority of checking accounts pay no interest at all. And even those called "interest-bearing checking" often pay very low rates compared to competitive high-yield savings accounts. Solution: Move Money to Savings Only keep as much money in your checking account as you need to cover your bills and withdrawals, plus a modest cushion. Then shuttle the extra into a separate savings account. Even if you're living paycheck to paycheck, try to make small, regular transfers into a savings account so you can slowly build up an emergency fund. If you don't already have a savings account, it's time to open one. A savings account at the same bank where you hold your checking account is certainly convenient and allows for instant transfers to checking. But you'll want to have at least one savings account, maybe at another bank, that pays a competitive interest rate—rather than have money languish in your checking account earning nothing. Mistake #2: Not Knowing What You're Earning—or Losing Ask someone what their savings account interest rate is and many people don't know. And when you don't know what you're earning, you have no idea if you're doing well or getting a raw deal. Besides losing out on earnings with an underperforming account, your balance can also suffer from fees. Perhaps your savings account charges a monthly service charge whenever your account falls below a certain minimum. Or maybe you're being charged because you haven't opted into electronic statements. Even if an account is paying a competitive interest rate, that won't do you any good if you're losing the earnings to fees. Solution: Review Your Rate and Any Fees Log into your bank account to look at what annual percentage yield (APY) your current savings account is paying. You may be able to find this in online banking, but if not, it should be on a paper or electronic statement. If all else fails, call the bank or credit union and ask what you're earning. Additionally, review the withdrawals from your savings account for the last two or three months. Are you seeing any bank fees? If so, talk to a customer service rep to find out what the fees were for and how you can avoid them in the future. You can also ask if the most recent fee can be waived as a one-time courtesy. Mistake #3: Not Doing Your Homework on Rates As you saw above, savings rates on different accounts range from almost nothing to many times the national average. But many savers don't spend any time checking what current accounts are paying—and therefore have no idea if the 2% return their bank offers is a great deal or a lousy one. You don't have to earn the very tip-top rate on your savings. But it's worth shopping around to make sure your rate is at least somewhat competitive. Solution: Always Shop Around Fortunately, we make it easy to shop rates by checking our daily ranking of the best high-yield savings accounts, which always gives you at least 15 of today's highest APYs. Currently, the top nationwide offer is 5.55% APY, but our list includes almost 20 choices that earn 5.15% or better. If you've never held savings at a separate institution before, don't worry. All of the banks and credit unions in our rankings carry the same $250,000 in Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA) insurance. And moving money between banks can be done with an electronic transfer that takes one to three days. Mistake #4: Not Considering a CD Continuing to stash cash in your savings account is a great idea. But if you know you won't need some of your funds for a while, you have another interest-boosting option at your disposal: certificates of deposit (CDs). Unfortunately, many savers overlook this useful bank account option, perhaps thinking it's too complicated or that it's not useful for smaller balances. In actuality, CDs are pretty straightforward. You agree to keep a lump sum in the account for a specified term (usually ranging from 3 months to 5 years). In exchange, the bank or credit union promises you a known interest rate for that full duration. This differs from savings accounts, where the rate can be lowered at any time. Often, you can also earn a higher rate on CDs than savings accounts are paying, Solution: Move Some Savings to a High-Paying CD As with savings accounts, our daily rate research makes it very easy to shop for the best CD rates. Today's top nationwide rate is 5.65% on a 3-month CD, but the top rates across terms range from 4.80% for a 5-year CD to 5.55% on a 6-month CD. Just be sure to choose a duration you can stick to because if you need to cash out before maturity, you'll be hit with an early withdrawal penalty. Many CDs in our rankings can be opened with as little as $500 or $1,000, so they aren't just for the wealthy. And they can keep your savings growing because the threat of a penalty can help you resist the temptation to spend the funds. Mistake #5: Letting a CD Auto-Renew When a CD matures, banks and credit unions generally roll your funds into a brand-new CD of a similar duration. This is certainly easy, but it is almost always a losing financial proposition for you. That's because the new CD you'll receive is very likely to have a lower rate than you can earn by shopping around—potentially a lot lower. Secondly, you may not want your money locked up for a new term of several months or years. Solution: Move Maturing CD Funds to Savings Whenever you open a CD, mark a reminder on your calendar for about a month before it matures. If at that point your CD institution hasn't told you how to provide instructions on what to do with your maturing funds, contact the bank or credit union yourself. By acting before the CD's maturity date, you can request that the funds be transferred to another account at that institution or another institution. You can also ask that the money be sent to you as a check or rolled into another CD. If you're not sure what you want to do with the funds, you can transfer them into a savings account and decide on a more permanent plan later. 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. 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https://www.investopedia.com/articles/personal-finance/010716/do-you-need-life-insurance-after-you-retire.asp	Do You Need Life Insurance in Retirement?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> If you're about to enter retirement or are already there, you may wonder if <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp">life insurance </a>still makes sense. This question is more pressing if you lost employer-provided life insurance and need to decide whether to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-life-insurance-for-seniors-4845439">buy a new life insurance policy</a> for yourself. You could need life insurance in retirement to cover final expenses, pay off your final debts and estate taxes, and leave an inheritance. If you've already got these goals covered though, then you likely no longer need life insurance. </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"> Not surprisingly, there's no one-size-fits-all answer. But we'll help you consider the different variables that impact your situation to determine what's best for you.<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>Life insurance pays out a death benefit to your heirs when you pass away.</li><li>Retirees must balance life insurance benefits against the ongoing costs, especially if they lose their job-based coverage.<br/></li><li>If you retire with debt or still earn some income for your family, keeping life insurance in retirement is a good idea. </li><li>Life insurance in retirement can also make sense to leave an inheritance and pay estate taxes. </li><li>You may not need life insurance in retirement if you're debt-free, have prepaid your final expenses, and don't want to leave a larger inheritance.</li><li>If you own cash-value life insurance, you'll want to consider any tax consequences of canceling the policy.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-life-insurance-fits-in"></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 Life Insurance Fits In </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Prior to retirement, most families use most or all of their household income to support their lifestyle, as well as provide such services for the household as childcare. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If one person works, the same holds true, while the other is usually responsible for childcare and household duties. If either person were to pass away, the household could find itself in a financial emergency at one of the worst possible times. </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"> After you retire and your kids grow up, you may no longer need life insurance for these goals, but there are still other situations where it makes sense. </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>Non-wage earners often provide essential household services, such as childcare, that are expensive to replace.</p></div></div></div> <span class="heading-toc" id="toc-types-of-life-insurance"></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"> Types of Life Insurance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Life insurance is a commonly used tool to protect against potential income and other losses. But like any insurance product, there are multiple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lifeinsurance.asp">types of life insurance</a>. Some common ones to use in retirement include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li><strong>Term life insurance</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termlife.asp">Term life insurance</a> is temporary life insurance that offers coverage for a set period of time — normally 10 to 30 years. If you outlive the term or stop paying <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance-premium.asp">premiums</a>, your coverage ends.</li> <li><strong>Whole life insurance</strong>: As a type of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/permanentlife.asp">permanent life insurance</a>, these policies do not have an expiration date so long as you keep paying the premiums. <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wholelife.asp">Whole life</a> can be useful for lifelong needs and is often used in <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a>. Whole life insurance can also include cash value, which is money you could access while alive.</li> <li><strong>Universal life insurance</strong>: Another type of permanent life insurance, <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/universallife.asp">universal life</a> insurance enables you to adjust the premium payments up and down each year. By contrast, most whole life policies charge the same premium the entire time.</li> <li><strong>Burial insurance</strong>: <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111314/burial-insurance-vs-life-insurance.asp">Burial insurance</a>, also known as final expense or funeral insurance, is a small whole life insurance policy designed to cover your funeral costs. These policies typically only offer coverage between $5,000 to $35,000. Some burial life insurance policies do not require a medical exam.<br/></li> </ul> <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"> Here are some questions that may help you decide whether you need life insurance in retirement. </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_3-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Which insurance companies are the best? Check out our rankings of the top <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-life-insurance-companies-4845858">term, whole life, and no-exam</a> insurers.</p></div></div></div> <span class="heading-toc" id="toc-deciding-if-you-need-life-insurance-in-retirement"></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"> Deciding If You Need Life Insurance in Retirement </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> When deciding whether you should maintain a life insurance policy in retirement, there are a few questions you should ask yourself. Consider these factors when making your decision.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <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"> Do You Still Earn Outside Income? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. If you retire and no longer work to make ends meet, you probably don’t need life insurance in retirement. One exception is if you expect to owe <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 taxes,</a> in which case, life insurance can be a good solution to cover the bill. Otherwise, you may <em>want</em> life insurance to bequest a tax-free sum to your beneficiaries or charity. </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"> When you die, your family can usually inherit and receive payouts from your existing sources of income. Your named <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/beneficiary.asp">beneficiaries </a>will receive your retirement accounts. However, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp">inheriting an IRA</a> can create tax consequences for family members, depending on who inherits it and the type of retirement account it is. And while Social Security pays a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/social-security-survivor-benefits-work">survivor benefit</a>, that survivor benefit varies based on your unique situation and it won't be as much as Social Security paid while you were alive.<span class="ql-inline-citation" data-cite="6"></span> Make sure you know what benefits your family stands to inherit, any tax consequences, and their income needs before making a decision on whether you need life insurance in retirement. <br/> </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"> How Will You Pay for Your Final Expenses? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The average funeral costs between $7,000 and $12,000.<span class="ql-inline-citation" data-cite="8"></span> Your family could also owe for your final medical bills as well as legal costs to process your will and estate. Do you want to cover these costs for your family? You could do so using a small life insurance policy in retirement. On the other hand, if you have enough in savings and prepay your funeral while alive, then you may not need life insurance in retirement.<br> </br></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"> Are You in Debt? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Ideally, you will arrive at retirement age debt-free, but that’s not always the case. In fact, more than 10 million Americans over the age of 65 had a mortgage in 2022.<span class="ql-inline-citation" data-cite="11"></span> A 2023 report stated that 41% of homeowners ages 65 to 79 still carried a mortgage, as did 31% of people ages 80 and older.<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_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Student loan debt is forecast to be a problem for an increasing number of retirees in the future, too. Some 3.5 million people over the age of 60 had more than $135 billion of student loans in 2023.<span class="ql-inline-citation" data-cite="12"></span> Over the past 20 years, student loan debt held by senior citizens has increased 19-fold — either the remnants of their own loans or because of co-signing loans for children or grandchildren.<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_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Continuing life insurance coverage in retirement might be advised if you’re still paying off debt. Take a “better safe than sorry” approach unless those debt payments are such a small part of your net worth that there would be no risk of financial difficulty. </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"> What Does Your Family Situation Look Like? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Whether or not you need life insurance in retirement also depends on whether you have a spouse or children. </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 you have children who are out of the house and providing for their own families, for example, you likely do not need life insurance. On the other hand, if you have children with special needs or kids who are still living in your home, you should consider keeping your current insurance or purchasing coverage if you don't already have a policy. Also, if your spouse would lose a substantial amount of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pensionplan.asp">pension</a> income or other monthly payment upon your death in retirement, life insurance can fill that gap. You should also keep life insurance if you're continuing to work part-time and earning income in retirement. </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"> Would It Help Your Estate? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Some people with considerable assets can use life insurance strategically — for instance, as a way to take care of estate taxes. The proceeds could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans. </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"> As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is complicated. You’ll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably don’t apply. If so, you may not need life insurance for this purpose. But to be sure, it’s a good idea to ask a qualified expert. </p> <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-consider-cash-value-life-insurance"></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"> Consider Cash Value Life Insurance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> If you've accumulated substantial cash value in a permanent life insurance policy but are still paying premiums on it, consider your options carefully. If you want to stop paying premiums but keep some coverage in retirement, reach out to the life insurance company about how this may be structured. For example, you could settle for a reduced amount of paid-up life insurance on which no premiums are due. </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"> If you no longer have a life insurance need and you want the cash value, surrendering your policy is one way to do that. But it can have significant tax consequences. The amount of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashsurrendervalue.asp">cash surrender value</a> you receive minus the policy basis (the amount of premiums you paid) is taxable. Talk to the life insurance company to understand what the taxable amount would be in your situation, then talk to a CPA to understand what you'd owe. </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"> Also, bear in mind that permanent life insurance policies have a surrender period that can last anywhere from a few to 15 years.<span class="ql-inline-citation" data-cite="14"></span> During this time, a penalty is assessed if you surrender the policy. </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-do-i-really-need-life-insurance-after-retirement"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I really need life insurance after retirement?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You could need life insurance in retirement if you want to cover your final expenses and estate taxes, have outstanding debt, still earn income, or want to provide a tax-free inheritance to your loved ones. Otherwise, you probably do not need life insurance after retirement.</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-at-what-age-is-life-insurance-no-longer-needed"></span> <h2 class="mntl-sc-block-questionandanswer__question">At what age is life insurance no longer needed?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses.</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-should-a-65-year-old-buy-life-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should a 65-year-old buy life insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A 65-year-old should buy life insurance if they want a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deathbenefit.asp">death benefit</a> to cover their final expenses, create an inheritance, and pay off their remaining debt. While qualifying for life insurance is more challenging as people get older, it is still possible at age 65. If a 65-year-old doesn't have these financial goals, they should not buy life insurance.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-happens-to-life-insurance-after-you-retire"></span> <h2 class="mntl-sc-block-questionandanswer__question">What happens to life insurance after you retire?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you had life insurance through work, you lose that coverage. Your group plan may let you switch the policy to your own individual plan, though the cost could be higher than what you were paying as an employee.<span class="ql-inline-citation" data-cite="15"></span> If you own life insurance outside of work, retiring will not change the coverage or the cost.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-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 may seem counterproductive to give up having life insurance after so long, but the truth may be that you no longer need it in retirement. If you have no income to replace, very little debt, a self-sufficient family, and no pricey concerns around settling your estate, there’s a good chance you can say goodbye to that policy. As far as estate planning goes, you could well need a different type of policy or major changes to your current one anyway. </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"> This is the perfect question for a financial planner or a fee-only insurance consultant. Be careful about simply asking your insurance agent. Because they are often paid by commission, they might have an interest in keeping you on the policy even if you don’t need it, or having you exchange it for another one. By weighing these questions with a professional, you can decide if you need life insurance in retirement. </p></div>	If you're about to enter retirement or are already there, you may wonder if [life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp) still makes sense. This question is more pressing if you lost employer-provided life insurance and need to decide whether to [buy a new life insurance policy](https://www.investopedia.com/best-life-insurance-for-seniors-4845439) for yourself. You could need life insurance in retirement to cover final expenses, pay off your final debts and estate taxes, and leave an inheritance. If you've already got these goals covered though, then you likely no longer need life insurance. Not surprisingly, there's no one-size-fits-all answer. But we'll help you consider the different variables that impact your situation to determine what's best for you. ### Key Takeaways * Life insurance pays out a death benefit to your heirs when you pass away. * Retirees must balance life insurance benefits against the ongoing costs, especially if they lose their job-based coverage. * If you retire with debt or still earn some income for your family, keeping life insurance in retirement is a good idea. * Life insurance in retirement can also make sense to leave an inheritance and pay estate taxes. * You may not need life insurance in retirement if you're debt-free, have prepaid your final expenses, and don't want to leave a larger inheritance. * If you own cash-value life insurance, you'll want to consider any tax consequences of canceling the policy. ## How Life Insurance Fits In Prior to retirement, most families use most or all of their household income to support their lifestyle, as well as provide such services for the household as childcare. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If one person works, the same holds true, while the other is usually responsible for childcare and household duties. If either person were to pass away, the household could find itself in a financial emergency at one of the worst possible times. After you retire and your kids grow up, you may no longer need life insurance for these goals, but there are still other situations where it makes sense. ### Non-wage earners often provide essential household services, such as childcare, that are expensive to replace. ## Types of Life Insurance Life insurance is a commonly used tool to protect against potential income and other losses. But like any insurance product, there are multiple [types of life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp). Some common ones to use in retirement include: * Term life insurance: [Term life insurance](https://www.investopedia.com/terms/t/termlife.asp) is temporary life insurance that offers coverage for a set period of time — normally 10 to 30 years. If you outlive the term or stop paying [premiums](https://www.investopedia.com/terms/i/insurance-premium.asp), your coverage ends. * Whole life insurance: As a type of [permanent life insurance](https://www.investopedia.com/terms/p/permanentlife.asp), these policies do not have an expiration date so long as you keep paying the premiums. [Whole life](https://www.investopedia.com/terms/w/wholelife.asp) can be useful for lifelong needs and is often used in [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp). Whole life insurance can also include cash value, which is money you could access while alive. * Universal life insurance: Another type of permanent life insurance, [universal life](https://www.investopedia.com/terms/u/universallife.asp) insurance enables you to adjust the premium payments up and down each year. By contrast, most whole life policies charge the same premium the entire time. * Burial insurance: [Burial insurance](https://www.investopedia.com/articles/personal-finance/111314/burial-insurance-vs-life-insurance.asp), also known as final expense or funeral insurance, is a small whole life insurance policy designed to cover your funeral costs. These policies typically only offer coverage between $5,000 to $35,000. Some burial life insurance policies do not require a medical exam. Here are some questions that may help you decide whether you need life insurance in retirement. ### Tip Which insurance companies are the best? Check out our rankings of the top [term, whole life, and no-exam](https://www.investopedia.com/best-life-insurance-companies-4845858) insurers. ## Deciding If You Need Life Insurance in Retirement When deciding whether you should maintain a life insurance policy in retirement, there are a few questions you should ask yourself. Consider these factors when making your decision. ### Do You Still Earn Outside Income? Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. If you retire and no longer work to make ends meet, you probably don’t need life insurance in retirement. One exception is if you expect to owe [estate taxes,](https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp) in which case, life insurance can be a good solution to cover the bill. Otherwise, you may want life insurance to bequest a tax-free sum to your beneficiaries or charity. When you die, your family can usually inherit and receive payouts from your existing sources of income. Your named [beneficiaries](https://www.investopedia.com/terms/b/beneficiary.asp) will receive your retirement accounts. However, [inheriting an IRA](https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp) can create tax consequences for family members, depending on who inherits it and the type of retirement account it is. And while Social Security pays a [survivor benefit](https://www.investopedia.com/personal-finance/social-security-survivor-benefits-work), that survivor benefit varies based on your unique situation and it won't be as much as Social Security paid while you were alive. Make sure you know what benefits your family stands to inherit, any tax consequences, and their income needs before making a decision on whether you need life insurance in retirement. ### How Will You Pay for Your Final Expenses? The average funeral costs between $7,000 and $12,000. Your family could also owe for your final medical bills as well as legal costs to process your will and estate. Do you want to cover these costs for your family? You could do so using a small life insurance policy in retirement. On the other hand, if you have enough in savings and prepay your funeral while alive, then you may not need life insurance in retirement. ### Are You in Debt? Ideally, you will arrive at retirement age debt-free, but that’s not always the case. In fact, more than 10 million Americans over the age of 65 had a mortgage in 2022. A 2023 report stated that 41% of homeowners ages 65 to 79 still carried a mortgage, as did 31% of people ages 80 and older. Student loan debt is forecast to be a problem for an increasing number of retirees in the future, too. Some 3.5 million people over the age of 60 had more than $135 billion of student loans in 2023. Over the past 20 years, student loan debt held by senior citizens has increased 19-fold — either the remnants of their own loans or because of co-signing loans for children or grandchildren. Continuing life insurance coverage in retirement might be advised if you’re still paying off debt. Take a “better safe than sorry” approach unless those debt payments are such a small part of your net worth that there would be no risk of financial difficulty. ### What Does Your Family Situation Look Like? Whether or not you need life insurance in retirement also depends on whether you have a spouse or children. If you have children who are out of the house and providing for their own families, for example, you likely do not need life insurance. On the other hand, if you have children with special needs or kids who are still living in your home, you should consider keeping your current insurance or purchasing coverage if you don't already have a policy. Also, if your spouse would lose a substantial amount of your [pension](https://www.investopedia.com/terms/p/pensionplan.asp) income or other monthly payment upon your death in retirement, life insurance can fill that gap. You should also keep life insurance if you're continuing to work part-time and earning income in retirement. ### Would It Help Your Estate? Some people with considerable assets can use life insurance strategically — for instance, as a way to take care of estate taxes. The proceeds could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans. As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is complicated. You’ll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably don’t apply. If so, you may not need life insurance for this purpose. But to be sure, it’s a good idea to ask a qualified expert. ## Consider Cash Value Life Insurance If you've accumulated substantial cash value in a permanent life insurance policy but are still paying premiums on it, consider your options carefully. If you want to stop paying premiums but keep some coverage in retirement, reach out to the life insurance company about how this may be structured. For example, you could settle for a reduced amount of paid-up life insurance on which no premiums are due. If you no longer have a life insurance need and you want the cash value, surrendering your policy is one way to do that. But it can have significant tax consequences. The amount of [cash surrender value](https://www.investopedia.com/terms/c/cashsurrendervalue.asp) you receive minus the policy basis (the amount of premiums you paid) is taxable. Talk to the life insurance company to understand what the taxable amount would be in your situation, then talk to a CPA to understand what you'd owe. Also, bear in mind that permanent life insurance policies have a surrender period that can last anywhere from a few to 15 years. During this time, a penalty is assessed if you surrender the policy. ## Do I really need life insurance after retirement? You could need life insurance in retirement if you want to cover your final expenses and estate taxes, have outstanding debt, still earn income, or want to provide a tax-free inheritance to your loved ones. Otherwise, you probably do not need life insurance after retirement. ## At what age is life insurance no longer needed? Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses. ## Should a 65-year-old buy life insurance? A 65-year-old should buy life insurance if they want a [death benefit](https://www.investopedia.com/terms/d/deathbenefit.asp) to cover their final expenses, create an inheritance, and pay off their remaining debt. While qualifying for life insurance is more challenging as people get older, it is still possible at age 65. If a 65-year-old doesn't have these financial goals, they should not buy life insurance. ## What happens to life insurance after you retire? If you had life insurance through work, you lose that coverage. Your group plan may let you switch the policy to your own individual plan, though the cost could be higher than what you were paying as an employee. If you own life insurance outside of work, retiring will not change the coverage or the cost. ## The Bottom Line It may seem counterproductive to give up having life insurance after so long, but the truth may be that you no longer need it in retirement. If you have no income to replace, very little debt, a self-sufficient family, and no pricey concerns around settling your estate, there’s a good chance you can say goodbye to that policy. As far as estate planning goes, you could well need a different type of policy or major changes to your current one anyway. This is the perfect question for a financial planner or a fee-only insurance consultant. Be careful about simply asking your insurance agent. Because they are often paid by commission, they might have an interest in keeping you on the policy even if you don’t need it, or having you exchange it for another one. By weighing these questions with a professional, you can decide if you need life insurance in retirement.	If you're about to enter retirement or are already there, you may wonder if life insurance still makes sense. This question is more pressing if you lost employer-provided life insurance and need to decide whether to buy a new life insurance policy for yourself. You could need life insurance in retirement to cover final expenses, pay off your final debts and estate taxes, and leave an inheritance. If you've already got these goals covered though, then you likely no longer need life insurance. Not surprisingly, there's no one-size-fits-all answer. But we'll help you consider the different variables that impact your situation to determine what's best for you. Key Takeaways Life insurance pays out a death benefit to your heirs when you pass away.Retirees must balance life insurance benefits against the ongoing costs, especially if they lose their job-based coverage.If you retire with debt or still earn some income for your family, keeping life insurance in retirement is a good idea. Life insurance in retirement can also make sense to leave an inheritance and pay estate taxes. You may not need life insurance in retirement if you're debt-free, have prepaid your final expenses, and don't want to leave a larger inheritance.If you own cash-value life insurance, you'll want to consider any tax consequences of canceling the policy. How Life Insurance Fits In Prior to retirement, most families use most or all of their household income to support their lifestyle, as well as provide such services for the household as childcare. If two people work, both incomes are generally essential to maintaining the family’s standard of living. If one person works, the same holds true, while the other is usually responsible for childcare and household duties. If either person were to pass away, the household could find itself in a financial emergency at one of the worst possible times. After you retire and your kids grow up, you may no longer need life insurance for these goals, but there are still other situations where it makes sense. Non-wage earners often provide essential household services, such as childcare, that are expensive to replace. Types of Life Insurance Life insurance is a commonly used tool to protect against potential income and other losses. But like any insurance product, there are multiple types of life insurance. Some common ones to use in retirement include: Term life insurance: Term life insurance is temporary life insurance that offers coverage for a set period of time — normally 10 to 30 years. If you outlive the term or stop paying premiums, your coverage ends. Whole life insurance: As a type of permanent life insurance, these policies do not have an expiration date so long as you keep paying the premiums. Whole life can be useful for lifelong needs and is often used in estate planning. Whole life insurance can also include cash value, which is money you could access while alive. Universal life insurance: Another type of permanent life insurance, universal life insurance enables you to adjust the premium payments up and down each year. By contrast, most whole life policies charge the same premium the entire time. Burial insurance: Burial insurance, also known as final expense or funeral insurance, is a small whole life insurance policy designed to cover your funeral costs. These policies typically only offer coverage between $5,000 to $35,000. Some burial life insurance policies do not require a medical exam. Here are some questions that may help you decide whether you need life insurance in retirement. Tip Which insurance companies are the best? Check out our rankings of the top term, whole life, and no-exam insurers. Deciding If You Need Life Insurance in Retirement When deciding whether you should maintain a life insurance policy in retirement, there are a few questions you should ask yourself. Consider these factors when making your decision. Do You Still Earn Outside Income? Given the basic function of life insurance, you may have a pretty good idea of your need for ongoing coverage. If you retire and no longer work to make ends meet, you probably don’t need life insurance in retirement. One exception is if you expect to owe estate taxes, in which case, life insurance can be a good solution to cover the bill. Otherwise, you may want life insurance to bequest a tax-free sum to your beneficiaries or charity. When you die, your family can usually inherit and receive payouts from your existing sources of income. Your named beneficiaries will receive your retirement accounts. However, inheriting an IRA can create tax consequences for family members, depending on who inherits it and the type of retirement account it is. And while Social Security pays a survivor benefit, that survivor benefit varies based on your unique situation and it won't be as much as Social Security paid while you were alive. Make sure you know what benefits your family stands to inherit, any tax consequences, and their income needs before making a decision on whether you need life insurance in retirement. How Will You Pay for Your Final Expenses? The average funeral costs between $7,000 and $12,000. Your family could also owe for your final medical bills as well as legal costs to process your will and estate. Do you want to cover these costs for your family? You could do so using a small life insurance policy in retirement. On the other hand, if you have enough in savings and prepay your funeral while alive, then you may not need life insurance in retirement. Are You in Debt? Ideally, you will arrive at retirement age debt-free, but that’s not always the case. In fact, more than 10 million Americans over the age of 65 had a mortgage in 2022. A 2023 report stated that 41% of homeowners ages 65 to 79 still carried a mortgage, as did 31% of people ages 80 and older. Student loan debt is forecast to be a problem for an increasing number of retirees in the future, too. Some 3.5 million people over the age of 60 had more than $135 billion of student loans in 2023. Over the past 20 years, student loan debt held by senior citizens has increased 19-fold — either the remnants of their own loans or because of co-signing loans for children or grandchildren. Continuing life insurance coverage in retirement might be advised if you’re still paying off debt. Take a “better safe than sorry” approach unless those debt payments are such a small part of your net worth that there would be no risk of financial difficulty. What Does Your Family Situation Look Like? Whether or not you need life insurance in retirement also depends on whether you have a spouse or children. If you have children who are out of the house and providing for their own families, for example, you likely do not need life insurance. On the other hand, if you have children with special needs or kids who are still living in your home, you should consider keeping your current insurance or purchasing coverage if you don't already have a policy. Also, if your spouse would lose a substantial amount of your pension income or other monthly payment upon your death in retirement, life insurance can fill that gap. You should also keep life insurance if you're continuing to work part-time and earning income in retirement. Would It Help Your Estate? Some people with considerable assets can use life insurance strategically — for instance, as a way to take care of estate taxes. The proceeds could pay off business debt, fund any buy-sell agreements related to your business or estate, or even fund retirement plans. As you can imagine, how you use life insurance as a tax-efficient part of your estate plan is complicated. You’ll need the help of an attorney who specializes in estate planning. Keep in mind that unless you have an estate that reaches into the millions of dollars in net worth, estate tax considerations probably don’t apply. If so, you may not need life insurance for this purpose. But to be sure, it’s a good idea to ask a qualified expert. Consider Cash Value Life Insurance If you've accumulated substantial cash value in a permanent life insurance policy but are still paying premiums on it, consider your options carefully. If you want to stop paying premiums but keep some coverage in retirement, reach out to the life insurance company about how this may be structured. For example, you could settle for a reduced amount of paid-up life insurance on which no premiums are due. If you no longer have a life insurance need and you want the cash value, surrendering your policy is one way to do that. But it can have significant tax consequences. The amount of cash surrender value you receive minus the policy basis (the amount of premiums you paid) is taxable. Talk to the life insurance company to understand what the taxable amount would be in your situation, then talk to a CPA to understand what you'd owe. Also, bear in mind that permanent life insurance policies have a surrender period that can last anywhere from a few to 15 years. During this time, a penalty is assessed if you surrender the policy. Do I really need life insurance after retirement? You could need life insurance in retirement if you want to cover your final expenses and estate taxes, have outstanding debt, still earn income, or want to provide a tax-free inheritance to your loved ones. Otherwise, you probably do not need life insurance after retirement. At what age is life insurance no longer needed? Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses. Should a 65-year-old buy life insurance? A 65-year-old should buy life insurance if they want a death benefit to cover their final expenses, create an inheritance, and pay off their remaining debt. While qualifying for life insurance is more challenging as people get older, it is still possible at age 65. If a 65-year-old doesn't have these financial goals, they should not buy life insurance. What happens to life insurance after you retire? If you had life insurance through work, you lose that coverage. Your group plan may let you switch the policy to your own individual plan, though the cost could be higher than what you were paying as an employee. If you own life insurance outside of work, retiring will not change the coverage or the cost. The Bottom Line It may seem counterproductive to give up having life insurance after so long, but the truth may be that you no longer need it in retirement. If you have no income to replace, very little debt, a self-sufficient family, and no pricey concerns around settling your estate, there’s a good chance you can say goodbye to that policy. As far as estate planning goes, you could well need a different type of policy or major changes to your current one anyway. This is the perfect question for a financial planner or a fee-only insurance consultant. Be careful about simply asking your insurance agent. Because they are often paid by commission, they might have an interest in keeping you on the policy even if you don’t need it, or having you exchange it for another one. By weighing these questions with a professional, you can decide if you need life insurance in retirement.	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https://www.investopedia.com/insurers-offer-policyholders-free-help-in-the-fight-against-wildfires-5194497	Insurers Offer Policyholders Free Help in the Fight Against Wildfires	<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"> To help protect homes against wildfires as they threaten more populated areas, insurers are teaming up with specialists and offering free prevention and loss-minimization services for their policyholders. </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>With wildfires raging in the Western U.S., some major insurers are teaming with wildfire prevention and mitigation services to help their policyholders.</li><li>These services are typically free to the homeowner. </li><li>Assistance can include preventative measures before wildfire strikes and after-the-fact help if it does.</li><li>New technology is also helping homeowners identify fire risks and remedy them before the worst happens.</li></ul></div></div></div> <span class="heading-toc" id="toc-spreading-like-wildfire"></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"> Spreading Like Wildfire </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Wildfire damage is an enormous and ever-growing threat in the U.S. More than 17,000 structures—at least half of them residences—burned in wildfires in 2020, primarily in California. That year nearly 59,000 wildfires consumed 10.1 million acres, the second-highest acreage affected in a single year since 1960 and more than twice the average annual acreage that burned in the 1990s.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Currently, some 2 million homes in California alone are considered to be at high risk of wildfire, "a peril that is advancing on areas where we had not seen it," State Farm stated in press release.<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> <span class="heading-toc" id="toc-what-insurers-are-doing-to-help"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> What Insurers Are Doing to Help </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> State Farm is one of a number of major insurers that are stepping up to help. The Bloomington, Ill.-based insurance giant announced in May that it would offer a wildfire response endorsement at no cost to policyholders in affected areas, in partnership with a vendor experienced in risk mitigation. The vendor, Wildfire Defense Systems (WDS) of Bozeman, Mont., saved more than 70 homes in a 2020 pilot program in Colorado and Oregon, State Farm noted. </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"> State Farm's service area for its WDS offering includes California, Arizona, and Washington, as well as Colorado and Oregon. </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"> "Because we feel this expansion of service is such an important benefit, customers cannot opt out of this service," State Farm spokesman Kevin Gamble said in an email, adding that it "is automatically included at no additional cost." However, the new service is not meant to replace existing wildfire preparation efforts, which customers in wildfire-prone areas are advised to continue. </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"> Similarly, Farmers Insurance Group kicked off a pilot program in mid-July 2021 to last through the end of the year, offering WDS's services to potentially affected homeowners in California. The no-cost benefit is available to more than 900,000 Farmers policyholders in the state, according to Jeff Thomas, the company's personal lines underwriting manager. </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"> Farmers Smart Plan Home and Farmers Next Generation customers in California are automatically enrolled in the WDS pilot program, but they can choose to opt-out at any time before the program concludes on Dec. 31 by contacting their agent. </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"> Both Liberty Mutual Group and Chubb have offered WDS services to homeowners for some time. Liberty Mutual and its Safeco Insurance division provide wildfire protection to customers in 15 fire-vulnerable states, utilizing the WDS defense system since 2010, the company said in an email. </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 WDS protection kicks in when the company is notified of a fire, and a team should be onsite within 24 hours, State Farm says. The company's fire-suppression activities can include clearing brush and combustibles away from policyholders' homes; removing flammable debris from the roof and exterior; covering vents to prevent embers from entering; setting up temporary sprinkler systems; removing pine needles from roofs; and active fire and ember extinguishing, according to insurers that contract with the company. </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"> (Indeed, flying embers are responsible for the destruction of most homes during a wildfire, according to California Department of Forestry & Fire Protection. Embers can reach homes a mile away from the fire itself.)<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_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> After a fire, WDS returns to help with clean-up efforts. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-other-help-in-the-fight-against-fires"></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"> Other Help in the Fight Against Fires </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> While WDS is a leader in this field, it is not the only company that insurers are calling on for help. For example, State Farm is also working with Whisker Labs to promote Ting, a plug-in device and app that can alert homeowners to electrical problems that could lead to a home fire and, in turn, spark a wildfire.<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"> The insurer also participated in the development of the Insurance Institute for Business & Home Safety's Wildfire Ready app, which uses "augmented reality" to assist homeowners in identifying and then mitigating wildfire risk, basically by pointing their smartphone at their house. The app reveals the home's vulnerable areas for the ignition or spread of wildfire, according to the company, and suggests do-it-yourself projects and tips for remedying the problem. </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>	To help protect homes against wildfires as they threaten more populated areas, insurers are teaming up with specialists and offering free prevention and loss-minimization services for their policyholders. ### Key Takeaways * With wildfires raging in the Western U.S., some major insurers are teaming with wildfire prevention and mitigation services to help their policyholders. * These services are typically free to the homeowner. * Assistance can include preventative measures before wildfire strikes and after-the-fact help if it does. * New technology is also helping homeowners identify fire risks and remedy them before the worst happens. ## Spreading Like Wildfire Wildfire damage is an enormous and ever-growing threat in the U.S. More than 17,000 structures—at least half of them residences—burned in wildfires in 2020, primarily in California. That year nearly 59,000 wildfires consumed 10.1 million acres, the second-highest acreage affected in a single year since 1960 and more than twice the average annual acreage that burned in the 1990s. Currently, some 2 million homes in California alone are considered to be at high risk of wildfire, "a peril that is advancing on areas where we had not seen it," State Farm stated in press release. ## What Insurers Are Doing to Help State Farm is one of a number of major insurers that are stepping up to help. The Bloomington, Ill.-based insurance giant announced in May that it would offer a wildfire response endorsement at no cost to policyholders in affected areas, in partnership with a vendor experienced in risk mitigation. The vendor, Wildfire Defense Systems (WDS) of Bozeman, Mont., saved more than 70 homes in a 2020 pilot program in Colorado and Oregon, State Farm noted. State Farm's service area for its WDS offering includes California, Arizona, and Washington, as well as Colorado and Oregon. "Because we feel this expansion of service is such an important benefit, customers cannot opt out of this service," State Farm spokesman Kevin Gamble said in an email, adding that it "is automatically included at no additional cost." However, the new service is not meant to replace existing wildfire preparation efforts, which customers in wildfire-prone areas are advised to continue. Similarly, Farmers Insurance Group kicked off a pilot program in mid-July 2021 to last through the end of the year, offering WDS's services to potentially affected homeowners in California. The no-cost benefit is available to more than 900,000 Farmers policyholders in the state, according to Jeff Thomas, the company's personal lines underwriting manager. Farmers Smart Plan Home and Farmers Next Generation customers in California are automatically enrolled in the WDS pilot program, but they can choose to opt-out at any time before the program concludes on Dec. 31 by contacting their agent. Both Liberty Mutual Group and Chubb have offered WDS services to homeowners for some time. Liberty Mutual and its Safeco Insurance division provide wildfire protection to customers in 15 fire-vulnerable states, utilizing the WDS defense system since 2010, the company said in an email. The WDS protection kicks in when the company is notified of a fire, and a team should be onsite within 24 hours, State Farm says. The company's fire-suppression activities can include clearing brush and combustibles away from policyholders' homes; removing flammable debris from the roof and exterior; covering vents to prevent embers from entering; setting up temporary sprinkler systems; removing pine needles from roofs; and active fire and ember extinguishing, according to insurers that contract with the company. (Indeed, flying embers are responsible for the destruction of most homes during a wildfire, according to California Department of Forestry & Fire Protection. Embers can reach homes a mile away from the fire itself.) After a fire, WDS returns to help with clean-up efforts. ## Other Help in the Fight Against Fires While WDS is a leader in this field, it is not the only company that insurers are calling on for help. For example, State Farm is also working with Whisker Labs to promote Ting, a plug-in device and app that can alert homeowners to electrical problems that could lead to a home fire and, in turn, spark a wildfire. The insurer also participated in the development of the Insurance Institute for Business & Home Safety's Wildfire Ready app, which uses "augmented reality" to assist homeowners in identifying and then mitigating wildfire risk, basically by pointing their smartphone at their house. The app reveals the home's vulnerable areas for the ignition or spread of wildfire, according to the company, and suggests do-it-yourself projects and tips for remedying the problem. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	To help protect homes against wildfires as they threaten more populated areas, insurers are teaming up with specialists and offering free prevention and loss-minimization services for their policyholders. Key Takeaways With wildfires raging in the Western U.S., some major insurers are teaming with wildfire prevention and mitigation services to help their policyholders.These services are typically free to the homeowner. Assistance can include preventative measures before wildfire strikes and after-the-fact help if it does.New technology is also helping homeowners identify fire risks and remedy them before the worst happens. Spreading Like Wildfire Wildfire damage is an enormous and ever-growing threat in the U.S. More than 17,000 structures—at least half of them residences—burned in wildfires in 2020, primarily in California. That year nearly 59,000 wildfires consumed 10.1 million acres, the second-highest acreage affected in a single year since 1960 and more than twice the average annual acreage that burned in the 1990s. Currently, some 2 million homes in California alone are considered to be at high risk of wildfire, "a peril that is advancing on areas where we had not seen it," State Farm stated in press release. What Insurers Are Doing to Help State Farm is one of a number of major insurers that are stepping up to help. The Bloomington, Ill.-based insurance giant announced in May that it would offer a wildfire response endorsement at no cost to policyholders in affected areas, in partnership with a vendor experienced in risk mitigation. The vendor, Wildfire Defense Systems (WDS) of Bozeman, Mont., saved more than 70 homes in a 2020 pilot program in Colorado and Oregon, State Farm noted. State Farm's service area for its WDS offering includes California, Arizona, and Washington, as well as Colorado and Oregon. "Because we feel this expansion of service is such an important benefit, customers cannot opt out of this service," State Farm spokesman Kevin Gamble said in an email, adding that it "is automatically included at no additional cost." However, the new service is not meant to replace existing wildfire preparation efforts, which customers in wildfire-prone areas are advised to continue. Similarly, Farmers Insurance Group kicked off a pilot program in mid-July 2021 to last through the end of the year, offering WDS's services to potentially affected homeowners in California. The no-cost benefit is available to more than 900,000 Farmers policyholders in the state, according to Jeff Thomas, the company's personal lines underwriting manager. Farmers Smart Plan Home and Farmers Next Generation customers in California are automatically enrolled in the WDS pilot program, but they can choose to opt-out at any time before the program concludes on Dec. 31 by contacting their agent. Both Liberty Mutual Group and Chubb have offered WDS services to homeowners for some time. Liberty Mutual and its Safeco Insurance division provide wildfire protection to customers in 15 fire-vulnerable states, utilizing the WDS defense system since 2010, the company said in an email. The WDS protection kicks in when the company is notified of a fire, and a team should be onsite within 24 hours, State Farm says. The company's fire-suppression activities can include clearing brush and combustibles away from policyholders' homes; removing flammable debris from the roof and exterior; covering vents to prevent embers from entering; setting up temporary sprinkler systems; removing pine needles from roofs; and active fire and ember extinguishing, according to insurers that contract with the company. (Indeed, flying embers are responsible for the destruction of most homes during a wildfire, according to California Department of Forestry & Fire Protection. Embers can reach homes a mile away from the fire itself.) After a fire, WDS returns to help with clean-up efforts. Other Help in the Fight Against Fires While WDS is a leader in this field, it is not the only company that insurers are calling on for help. For example, State Farm is also working with Whisker Labs to promote Ting, a plug-in device and app that can alert homeowners to electrical problems that could lead to a home fire and, in turn, spark a wildfire. The insurer also participated in the development of the Insurance Institute for Business & Home Safety's Wildfire Ready app, which uses "augmented reality" to assist homeowners in identifying and then mitigating wildfire risk, basically by pointing their smartphone at their house. The app reveals the home's vulnerable areas for the ignition or spread of wildfire, according to the company, and suggests do-it-yourself projects and tips for remedying the problem. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/how-to-make-money-as-a-teen-7550056	How to Make Money as a Teen	<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 addition to traditional jobs like babysitting, fast food service, and summer camp counselor roles, teens today can also tap into the digital economy for creative and gig work. These kinds of jobs are paid per project, not per hour, which might be ideal for tech-savvy teens. </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"> Let’s look in more detail about the variety of jobs that teens might find in today’s market that can match their interests and fit their schedule.<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>Teens can make money with traditional jobs like babysitting, cutting lawns, washing cars, or working part time in restaurants or retail.</li><li>Online opportunities for teens to make money include blogging, programming, and social media management.</li><li>Different federal rules apply to working minors depending on the teen’s age and if the job is agricultural or nonagricultural.</li><li>Teens who are making money can build work ethic, communication skills, time management, and money management skills.</li><li>Earning money can also help teens learn skills like how to open bank accounts, file taxes, and save for retirement.<br/></li></ul></div></div></div> <span class="heading-toc" id="toc-benefits-of-earning-money-as-a-teenager"></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"> Benefits of Earning Money as a Teenager </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Getting a job allows teens to earn spending and saving money, as well as learn valuable financial lessons that can serve them throughout their life. When teens earn money, they can, for example, help pay for their education or contribute to their households. Additionally, teens with special skills or interests can potentially get a head start on a career. Teens can also <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-for-teens-7111843">gain financial independence</a> and start saving for their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/0712/the-biggest-financial-hurdles-young-people-face.aspx">financial future</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Teens who have jobs can start to develop a strong work ethic and positive work habits that can serve them well throughout their life. Making money teaches young people time management, hones their communication and negotiation skills, and empowers them to understand their rights.<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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> As they earn from their efforts, they can learn more about the careers that fit their interests and skills. These learning opportunities can benefit them in the future as they apply to colleges and search for other employment opportunities.<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-how-to-make-money-as-a-teen"></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 to Make Money as a Teen </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Teens can earn money in a number of ways, but the job must meet federal and state laws regarding wages, working conditions, and other factors. </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 U.S. <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</a>’s Wage and Hour Division (WHD) enforces federal child labor laws to protect working minors against exploitation. The minimum age for employment is 14 for nonagricultural jobs, and young people under the age of 18 cannot work in hazardous occupations, according to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fair-labor-standards-act-flsa.asp">Fair Labor Standards Act (FLSA)</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"> Legally, 14- and 15-year-olds are limited to work outside school hours. They cannot work more than three hours on a school day or eight hours on a nonschool day. After age 16, teens can work any schedule.<span class="ql-inline-citation" data-cite="8"></span> There are additional standards for minor-aged employees who are full-time students, apprentices, or living with disabilities.<span class="ql-inline-citation" data-cite="19"></span> States also have additional regulations that can affect a teen’s employment.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_21-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-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>Before allowing a teen to accept a job, be aware of the U.S. Department of Labor’s federal child labor laws, as well as any state laws and income tax responsibilities that apply to working minors.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Here are some common job opportunities for teens who want to make money:<br/> </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"> Babysitting </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Minors can babysit other children, but some states have age restrictions.<span class="ql-inline-citation" data-cite="15"></span> Babysitting is work that requires that the teen is responsible enough to keep another minor safe and that they can engage with children. Consider enrolling in a brief babysitting training program to gain additional preparation and qualification for the role.<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_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"> Car Care </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Pumping gas, dispensing oil, and washing and hand polishing a car are roles that teens can take. They can be physically demanding and have set hours if the teen works for a business. But, independently, teens can also wash cars for money. Older teens may want to formalize their business as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/llc.asp">limited liability company (LLC)</a> to take advantage of tax and employment benefits once they age into adulthood. </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"> Farm Work </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> According to federal law, teens as young as 13 can start doing farm work outside of school hours, and those older than 16 can work any farm job anytime. Teens can work on farms owned or operated by their parents or someone standing in place of a parent. They can also work on farms that employ their parent(s) or that receive parental consent.<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_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-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>Each state has its own additional regulations that might further limit the jobs and hours that a teen can work on a farm.<span class="ql-inline-citation" data-cite="21"></span></p></div></div></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"> Food Service </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Teens can perform kitchen work, including cleaning fruits and vegetables, washing dishes, cooking, and reheating food. Working in this industry can also include restaurant work like hosting, washing dishes, and even management. </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 food service job will teach teens food preparation and time management skills that will benefit them over the long haul. </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"> Internships </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> According to the Fair Labor Standards Act, if interns or students are considered employees of a for-profit employer, then they can receive compensation for their work.<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_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> However, not all internship positions are paid, so the teen should do some research into the role before relying on it as a source of money. Nevertheless, internships are a great way to gain experience in a desired field while making some extra cash. </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"> Knowledge Work </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Intellectual or creative work such as tutoring, singing, playing an instrument, and teaching are options for teens to make money. By applying their interests and skill set, teens pursuing a job through knowledge work allows them to learn the different paid roles available for their hobbies and skills. </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"> Lawn Care and Other Errands </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> Yardwork, deliveries, and loading/unloading equipment can be performed by a teen. Lawn care and maintenance can also be physically demanding. It may include working long hours in hot weather or lifting heavy items for extended periods of time. </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"> But for teens who like getting their hands dirty, especially in nature, this can be a fun work opportunity. Of course, teens who do not have a driver’s license cannot take a job that requires driving a motor vehicle. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> Lifeguard </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> Teens older than 15 can work as a lifeguard at pools and amusement parks. A lifeguard job typically requires you to pass basic safety courses and complete specific training.<span class="ql-inline-citation" data-cite="8"></span> This is a great job that teaches responsibility and safety skills that are valuable at any age. </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"> Paper Route </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Minors under 14 are permitted to deliver newspapers because this type of work is exempt from Fair Labor Standards Act requirements.<span class="ql-inline-citation" data-cite="8"></span> The newspaper industry is declining as more people turn to online news, but teens who have the opportunity to take a newspaper route may find it is a flexible job that can fit into their busy school schedule. </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"> Retail </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Per federal law, minors as young as 14 can work in retail occupations, such as cashiering, stocking, price marking, and selling.<span class="ql-inline-citation" data-cite="18"></span> There is often a wide range of different retail positions available that a teen could take to make money. Retail jobs have a set schedule and tasks that can teach teens what it’s like to work for a business. </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"> Selling Recycled/Upcycled Goods </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> Crafty kids could earn money by hand-making items for resale or repurposing pre-loved items for new customers. This could entail fashion, art, furniture, or more. Sales can be made in person, on consignment to a retail store, or online, teaching valuable entrepreneurial sales skills. </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"> Work in Parents’ Business </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Barring jobs in manufacturing, mining, or any other of the 17 occupations that the U.S. government considers hazardous for teens, minors can work for a business owned by their parents.<span class="ql-inline-citation" data-cite="24"></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_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> This option may not be applicable to all teens, but it can be an easy way to make money without doing much job searching. Plus, it can be a great learning experience for teens looking to follow in their parents’ footsteps. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <span class="heading-toc" id="toc-legal-restrictions-on-age"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Legal Restrictions on Age </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Federal regulations for child labor apply to classifications of “agricultural” and “nonagricultural” work, and to specific ages. For example, for teens under 14, legal work is largely limited to performance, babysitting, delivering papers, agricultural work (older than 13), and working in a company owned by a parent. </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"> Teens who are 14 and 15 can work in nonhazardous jobs outside of school hours. Federal regulations state that they cannot work: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_75-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> <li>More than three hours on a school day, including Friday</li><li>More than 18 hours per week when school is in session</li><li>More than eight hours per day when school is not in session</li><li>More than 18 hours in any school week</li><li>More than 40 hours per week when school is not in session</li><li>Before 7 a.m. or after 7 p.m. (extended to 9 p.m. from June 1 through Labor Day)</li> </ul> <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"> Teens 16 or older can work unlimited hours in any occupation except those declared hazardous by the U.S. secretary of labor.<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_79-0"></div> <span class="heading-toc" id="toc-easy-tips-for-teens-to-make-money"></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"> Easy Tips for Teens to Make Money </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Teens can start small by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetize.asp">monetizing</a> their talents. They can also turn to family and friends who own businesses for their first work experience. </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"> Jennifer Sisson, a Utah mom of five says her kids started getting paid <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/minimum_wage.asp">minimum wage</a> at ages 11 and 12. Her oldest kids started worked in a family friend’s T-shirt business, occasionally helping set up and take down events. Her oldest kids continue to work, and her 12-year-old babysits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> Teenagers can also look for opportunities to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/younginvestors/08/eight-tips.asp">make money</a> in their local community. Because young teens are not allowed to drive as part of their employment, it may be more convenient for the teen to work locally. </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"> Local work can include working at a local retail store or restaurant, babysitting, or tutoring for neighbors, as well as doing yardwork and odd jobs within walking or biking distance. Teens in farming communities may find seasonal opportunities where their parents, friends, or relatives already work. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Finally, teens can sell things they no longer need for fast cash, although they won’t earn regular money as they do with wages. Whether through garage sales, trade-ins, or online sites, teens can try to sell items like used games, toys, or clothes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_91-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_92-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Many states and municipalities offer work programs designed to help young people land a job that can provide real-world experiences and raise awareness of local job opportunities.<span class="ql-inline-citation" data-cite="10"></span></p></div></div></div> <span class="heading-toc" id="toc-making-money-online"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_93-0"> <span class="mntl-sc-block-heading__text"> Making Money Online </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-money-making-apps-5115140">Making money online</a> may be an even easier option for teens than a traditional job, according to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://innovativewealth.com/about-iag/our-team/" rel="nofollow">Jack Wang</a>, wealth advisor at Innovative Advisory Group. Many teens have computer skills and tech stamina that are highly sought after. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> “Teens can certainly use their skills in social media or even just help parents sell stuff online from decluttering,” Wang says. Many of these jobs often offer remote work, so teens can work from home. </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"> Here are some examples for ways that teens can make money online: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-subheading__text"> Blogging or Vlogging </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> Blogging (writing) or vlogging (videoing) are ways for teens to create an online community around something they already love. Writing or sharing videos on their own website can generate income through ads and affiliate links. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_103-0"> <span class="mntl-sc-block-subheading__text"> Design and Dropship </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_104-0"> Whether it is creating their own books, T-shirts, or merchandise, print-on-demand fulfillment has made it easier for teens to design something cool and put it on the web for sale through sites like Amazon, Etsy, Printify, and Printful. This option is great for teaching teens how to run their own business. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_105-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_106-0"> <span class="mntl-sc-block-subheading__text"> Freelance Work </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_107-0"> Teens can be their own bosses with just the click of a button. Sites like Fiverr and Upwork can help connect them with clients around the world willing to pay them per project, not per hour, for work like writing or designing. While this option does provide flexibility in scheduling, prices vary widely for jobs and skills. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_108-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_109-0"> <span class="mntl-sc-block-subheading__text"> Influencing </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_110-0"> Teens can safely create video or social media content connecting brands with online audiences. Platforms like Pinterest, Meta, TikTok, and YouTube offer ways to earn cash whenever a large audience tunes in, clicks, or buys. However, becoming an influencer is not guaranteed to make money and may take time. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></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"> Programming, Coding, and Building Games </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Teens may have coding, programming, or gaming skills that could earn them money. They can build and sell apps, websites, and games. Otherwise, they can test or review sites, apps, and games, and receive compensation in return. This is a job option that can combine skills and hobbies to make profits. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <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"> Sell NFTs, Web3, and Metaverse Products </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> Teens are earning money in the online art market by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-trade-nfts-7378247">creating and selling non-fungible tokens (NFTs)</a>. They have a higher <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a> and are quick to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-teens-need-to-know-about-cryptocurrency-7152233">learn about cryptocurrencies</a>. They can curate everything from events to virtual reality experiences that could put money in their pockets and their digital wallets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_117-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_118-0"> <span class="mntl-sc-block-subheading__text"> Social Media Management </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> Many companies are looking for a tech-savvy person to assist with online marketing through regular posting on social media platforms. Teens can help create captions, take photographs, curate online community groups, and monitor viral trends for the best marketing ideas.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_121-0"> <span class="mntl-sc-block-subheading__text"> Tutoring and Teaching </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_122-0"> Teens may still be learning, but they can also be good educators. Whether it’s teaching lessons on how to cook, play an instrument, or improve in school-based subjects, young experts can use virtual platforms to tutor or teach students anywhere around the world. Teens can take on more students virtually without leaving their homes to make more money than they would teaching only in person. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_123-0"></div> <span class="heading-toc" id="toc-what-to-do-with-the-money-earned"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_124-0"> <span class="mntl-sc-block-heading__text"> What to Do with the Money Earned </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_125-0"> Teens may be tempted to spend their all money immediately, but if they learn <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/talking-to-teens-about-financial-risk-7152992">essential money lessons</a> first, they can practice healthy habits like saving that can serve them in the long term. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_126-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_127-0"> To help teach teens about banking, involve them in decisions about where to bank and which types of deposit accounts they want to use, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-checking-accounts-for-teens-5197119">checking</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-savings-accounts-for-kids-5179494">savings</a>. Ensuring that your teen connects with a reputable bank can help set them up to build a long-term banking relationship. </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"> Sisson says she helped her older kids have checking accounts that she believes are teaching them valuable financial lessons. “I feel like they’re getting a better grasp of how to manage money in a digital world,” she says. “They can track their spending, which holds them more accountable for what they spend.” </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"> Second, teens need to consider <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/teens-and-income-taxes-7152618">income taxes</a>. If their earned income from a job is under the standard deduction limit ($14,600 for a single person in 2024), they are likely not required to file a tax return.<span class="ql-inline-citation" data-cite="11"></span> If their income surpasses that or if the teen is self-employed, then they must file their state and federal taxes.<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_132-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_133-0"><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_134-0"><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>Older teens can try to file their taxes themselves (with adult supervision, of course) and learn more about the U.S. taxation system.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_135-0"> Finally, if the teen has a job working for others or is self-employed, they may want to contribute to their own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth individual retirement account (Roth IRA)</a>, Wang says. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_136-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_137-0"> “Since the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> is always accessible, a Roth IRA can serve as a great college savings vehicle or for any large purchase, such as a house,” he says. Parents or guardians can help teens set aside a certain amount of savings for long-term goals like retirement. Starting early can help investments grow more with the power of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compounding.asp">compounding</a>.<span class="ql-inline-citation" data-cite="23"></span><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_138-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_139-0"><span class="heading-toc" id="toc-is-15-old-enough-to-get-a-job"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is 15 Old Enough to Get a Job?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>According to the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/120914/8-federal-laws-protect-employees.asp">Fair Labor Standards Act (FLSA)</a>, the minimum age for employment is 14 for nonagricultural jobs, so 15-year-olds are old enough to get a job. However, the hours that teens can work outside of school is limited. At 15, teens cannot work more than three hours on a school day and eight hours on a nonschool day. They also cannot work hazardous jobs.<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_140-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_141-0"><span class="heading-toc" id="toc-how-many-hours-should-a-teen-work"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Hours Should a Teen Work?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Legally, 14- and 15-year-olds cannot work more than three hours on a school day or eight hours on a nonschool day. There are also additional hourly limits defined by the U.S. Department of Labor for teens who are 14 and 15, depending on whether school is in session. But after age 16, teens can work any schedule in any occupation except those declared hazardous by the U.S. secretary of labor.<span class="ql-inline-citation" data-cite="18"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_142-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_143-0"><span class="heading-toc" id="toc-why-should-high-schoolers-have-jobs"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Should High Schoolers Have Jobs?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are many benefits to getting a job while in high school. Depending on the job, it can teach valuable time management skills, entrepreneurial skills, and safety skills. But getting a job in high school also prepares teens with the smart spending skills and financial literacy that they’ll need in their adult life. Having a job can also give teens more financial independence.<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_144-0"></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_145-0"> <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_146-0"> Getting a job is an exciting step in a young person’s life. In addition to balancing responsibility with independence, jobs can teach teens valuable life skills, such as saving, budgeting, and time management. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_147-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_148-0"> With so many different jobs out there for teens, whether it’s a traditional job or an online job, young people will find multiple opportunities to make money and learn key financial lessons.<br/> </p></div>	In addition to traditional jobs like babysitting, fast food service, and summer camp counselor roles, teens today can also tap into the digital economy for creative and gig work. These kinds of jobs are paid per project, not per hour, which might be ideal for tech-savvy teens. Let’s look in more detail about the variety of jobs that teens might find in today’s market that can match their interests and fit their schedule. ### Key Takeaways * Teens can make money with traditional jobs like babysitting, cutting lawns, washing cars, or working part time in restaurants or retail. * Online opportunities for teens to make money include blogging, programming, and social media management. * Different federal rules apply to working minors depending on the teen’s age and if the job is agricultural or nonagricultural. * Teens who are making money can build work ethic, communication skills, time management, and money management skills. * Earning money can also help teens learn skills like how to open bank accounts, file taxes, and save for retirement. ## Benefits of Earning Money as a Teenager Getting a job allows teens to earn spending and saving money, as well as learn valuable financial lessons that can serve them throughout their life. When teens earn money, they can, for example, help pay for their education or contribute to their households. Additionally, teens with special skills or interests can potentially get a head start on a career. Teens can also [gain financial independence](https://www.investopedia.com/investing-for-teens-7111843) and start saving for their [financial future](https://www.investopedia.com/financial-edge/0712/the-biggest-financial-hurdles-young-people-face.aspx). Teens who have jobs can start to develop a strong work ethic and positive work habits that can serve them well throughout their life. Making money teaches young people time management, hones their communication and negotiation skills, and empowers them to understand their rights. As they earn from their efforts, they can learn more about the careers that fit their interests and skills. These learning opportunities can benefit them in the future as they apply to colleges and search for other employment opportunities. ## How to Make Money as a Teen Teens can earn money in a number of ways, but the job must meet federal and state laws regarding wages, working conditions, and other factors. The U.S. [Department of Labor](https://www.investopedia.com/terms/d/dol.asp)’s Wage and Hour Division (WHD) enforces federal child labor laws to protect working minors against exploitation. The minimum age for employment is 14 for nonagricultural jobs, and young people under the age of 18 cannot work in hazardous occupations, according to the [Fair Labor Standards Act (FLSA)](https://www.investopedia.com/terms/f/fair-labor-standards-act-flsa.asp). Legally, 14- and 15-year-olds are limited to work outside school hours. They cannot work more than three hours on a school day or eight hours on a nonschool day. After age 16, teens can work any schedule. There are additional standards for minor-aged employees who are full-time students, apprentices, or living with disabilities. States also have additional regulations that can affect a teen’s employment. ### Before allowing a teen to accept a job, be aware of the U.S. Department of Labor’s federal child labor laws, as well as any state laws and income tax responsibilities that apply to working minors. Here are some common job opportunities for teens who want to make money: ### Babysitting Minors can babysit other children, but some states have age restrictions. Babysitting is work that requires that the teen is responsible enough to keep another minor safe and that they can engage with children. Consider enrolling in a brief babysitting training program to gain additional preparation and qualification for the role. ### Car Care Pumping gas, dispensing oil, and washing and hand polishing a car are roles that teens can take. They can be physically demanding and have set hours if the teen works for a business. But, independently, teens can also wash cars for money. Older teens may want to formalize their business as a [limited liability company (LLC)](https://www.investopedia.com/terms/l/llc.asp) to take advantage of tax and employment benefits once they age into adulthood. ### Farm Work According to federal law, teens as young as 13 can start doing farm work outside of school hours, and those older than 16 can work any farm job anytime. Teens can work on farms owned or operated by their parents or someone standing in place of a parent. They can also work on farms that employ their parent(s) or that receive parental consent. ### Each state has its own additional regulations that might further limit the jobs and hours that a teen can work on a farm. ### Food Service Teens can perform kitchen work, including cleaning fruits and vegetables, washing dishes, cooking, and reheating food. Working in this industry can also include restaurant work like hosting, washing dishes, and even management. A food service job will teach teens food preparation and time management skills that will benefit them over the long haul. ### Internships According to the Fair Labor Standards Act, if interns or students are considered employees of a for-profit employer, then they can receive compensation for their work. However, not all internship positions are paid, so the teen should do some research into the role before relying on it as a source of money. Nevertheless, internships are a great way to gain experience in a desired field while making some extra cash. ### Knowledge Work Intellectual or creative work such as tutoring, singing, playing an instrument, and teaching are options for teens to make money. By applying their interests and skill set, teens pursuing a job through knowledge work allows them to learn the different paid roles available for their hobbies and skills. ### Lawn Care and Other Errands Yardwork, deliveries, and loading/unloading equipment can be performed by a teen. Lawn care and maintenance can also be physically demanding. It may include working long hours in hot weather or lifting heavy items for extended periods of time. But for teens who like getting their hands dirty, especially in nature, this can be a fun work opportunity. Of course, teens who do not have a driver’s license cannot take a job that requires driving a motor vehicle. ### Lifeguard Teens older than 15 can work as a lifeguard at pools and amusement parks. A lifeguard job typically requires you to pass basic safety courses and complete specific training. This is a great job that teaches responsibility and safety skills that are valuable at any age. ### Paper Route Minors under 14 are permitted to deliver newspapers because this type of work is exempt from Fair Labor Standards Act requirements. The newspaper industry is declining as more people turn to online news, but teens who have the opportunity to take a newspaper route may find it is a flexible job that can fit into their busy school schedule. ### Retail Per federal law, minors as young as 14 can work in retail occupations, such as cashiering, stocking, price marking, and selling. There is often a wide range of different retail positions available that a teen could take to make money. Retail jobs have a set schedule and tasks that can teach teens what it’s like to work for a business. ### Selling Recycled/Upcycled Goods Crafty kids could earn money by hand-making items for resale or repurposing pre-loved items for new customers. This could entail fashion, art, furniture, or more. Sales can be made in person, on consignment to a retail store, or online, teaching valuable entrepreneurial sales skills. ### Work in Parents’ Business Barring jobs in manufacturing, mining, or any other of the 17 occupations that the U.S. government considers hazardous for teens, minors can work for a business owned by their parents. This option may not be applicable to all teens, but it can be an easy way to make money without doing much job searching. Plus, it can be a great learning experience for teens looking to follow in their parents’ footsteps. ## Legal Restrictions on Age Federal regulations for child labor apply to classifications of “agricultural” and “nonagricultural” work, and to specific ages. For example, for teens under 14, legal work is largely limited to performance, babysitting, delivering papers, agricultural work (older than 13), and working in a company owned by a parent. Teens who are 14 and 15 can work in nonhazardous jobs outside of school hours. Federal regulations state that they cannot work: * More than three hours on a school day, including Friday * More than 18 hours per week when school is in session * More than eight hours per day when school is not in session * More than 18 hours in any school week * More than 40 hours per week when school is not in session * Before 7 a.m. or after 7 p.m. (extended to 9 p.m. from June 1 through Labor Day) Teens 16 or older can work unlimited hours in any occupation except those declared hazardous by the U.S. secretary of labor. ## Easy Tips for Teens to Make Money Teens can start small by [monetizing](https://www.investopedia.com/terms/m/monetize.asp) their talents. They can also turn to family and friends who own businesses for their first work experience. Jennifer Sisson, a Utah mom of five says her kids started getting paid [minimum wage](https://www.investopedia.com/terms/m/minimum_wage.asp) at ages 11 and 12. Her oldest kids started worked in a family friend’s T-shirt business, occasionally helping set up and take down events. Her oldest kids continue to work, and her 12-year-old babysits. Teenagers can also look for opportunities to [make money](https://www.investopedia.com/articles/younginvestors/08/eight-tips.asp) in their local community. Because young teens are not allowed to drive as part of their employment, it may be more convenient for the teen to work locally. Local work can include working at a local retail store or restaurant, babysitting, or tutoring for neighbors, as well as doing yardwork and odd jobs within walking or biking distance. Teens in farming communities may find seasonal opportunities where their parents, friends, or relatives already work. Finally, teens can sell things they no longer need for fast cash, although they won’t earn regular money as they do with wages. Whether through garage sales, trade-ins, or online sites, teens can try to sell items like used games, toys, or clothes. ### Many states and municipalities offer work programs designed to help young people land a job that can provide real-world experiences and raise awareness of local job opportunities. ## Making Money Online [Making money online](https://www.investopedia.com/best-money-making-apps-5115140) may be an even easier option for teens than a traditional job, according to [Jack Wang](https://innovativewealth.com/about-iag/our-team/), wealth advisor at Innovative Advisory Group. Many teens have computer skills and tech stamina that are highly sought after. “Teens can certainly use their skills in social media or even just help parents sell stuff online from decluttering,” Wang says. Many of these jobs often offer remote work, so teens can work from home. Here are some examples for ways that teens can make money online: ### Blogging or Vlogging Blogging (writing) or vlogging (videoing) are ways for teens to create an online community around something they already love. Writing or sharing videos on their own website can generate income through ads and affiliate links. ### Design and Dropship Whether it is creating their own books, T-shirts, or merchandise, print-on-demand fulfillment has made it easier for teens to design something cool and put it on the web for sale through sites like Amazon, Etsy, Printify, and Printful. This option is great for teaching teens how to run their own business. ### Freelance Work Teens can be their own bosses with just the click of a button. Sites like Fiverr and Upwork can help connect them with clients around the world willing to pay them per project, not per hour, for work like writing or designing. While this option does provide flexibility in scheduling, prices vary widely for jobs and skills. ### Influencing Teens can safely create video or social media content connecting brands with online audiences. Platforms like Pinterest, Meta, TikTok, and YouTube offer ways to earn cash whenever a large audience tunes in, clicks, or buys. However, becoming an influencer is not guaranteed to make money and may take time. ### Programming, Coding, and Building Games Teens may have coding, programming, or gaming skills that could earn them money. They can build and sell apps, websites, and games. Otherwise, they can test or review sites, apps, and games, and receive compensation in return. This is a job option that can combine skills and hobbies to make profits. ### Sell NFTs, Web3, and Metaverse Products Teens are earning money in the online art market by [creating and selling non-fungible tokens (NFTs)](https://www.investopedia.com/how-to-trade-nfts-7378247). They have a higher [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and are quick to [learn about cryptocurrencies](https://www.investopedia.com/what-teens-need-to-know-about-cryptocurrency-7152233). They can curate everything from events to virtual reality experiences that could put money in their pockets and their digital wallets. ### Social Media Management Many companies are looking for a tech-savvy person to assist with online marketing through regular posting on social media platforms. Teens can help create captions, take photographs, curate online community groups, and monitor viral trends for the best marketing ideas. ### Tutoring and Teaching Teens may still be learning, but they can also be good educators. Whether it’s teaching lessons on how to cook, play an instrument, or improve in school-based subjects, young experts can use virtual platforms to tutor or teach students anywhere around the world. Teens can take on more students virtually without leaving their homes to make more money than they would teaching only in person. ## What to Do with the Money Earned Teens may be tempted to spend their all money immediately, but if they learn [essential money lessons](https://www.investopedia.com/talking-to-teens-about-financial-risk-7152992) first, they can practice healthy habits like saving that can serve them in the long term. To help teach teens about banking, involve them in decisions about where to bank and which types of deposit accounts they want to use, such as [checking](https://www.investopedia.com/best-checking-accounts-for-teens-5197119) or [savings](https://www.investopedia.com/best-savings-accounts-for-kids-5179494). Ensuring that your teen connects with a reputable bank can help set them up to build a long-term banking relationship. Sisson says she helped her older kids have checking accounts that she believes are teaching them valuable financial lessons. “I feel like they’re getting a better grasp of how to manage money in a digital world,” she says. “They can track their spending, which holds them more accountable for what they spend.” Second, teens need to consider [income taxes](https://www.investopedia.com/teens-and-income-taxes-7152618). If their earned income from a job is under the standard deduction limit ($14,600 for a single person in 2024), they are likely not required to file a tax return. If their income surpasses that or if the teen is self-employed, then they must file their state and federal taxes. ### Older teens can try to file their taxes themselves (with adult supervision, of course) and learn more about the U.S. taxation system. Finally, if the teen has a job working for others or is self-employed, they may want to contribute to their own [Roth individual retirement account (Roth IRA)](https://www.investopedia.com/terms/r/rothira.asp), Wang says. “Since the [principal](https://www.investopedia.com/terms/p/principal.asp) is always accessible, a Roth IRA can serve as a great college savings vehicle or for any large purchase, such as a house,” he says. Parents or guardians can help teens set aside a certain amount of savings for long-term goals like retirement. Starting early can help investments grow more with the power of [compounding](https://www.investopedia.com/terms/c/compounding.asp). ## Is 15 Old Enough to Get a Job? According to the [Fair Labor Standards Act (FLSA)](https://www.investopedia.com/articles/personal-finance/120914/8-federal-laws-protect-employees.asp), the minimum age for employment is 14 for nonagricultural jobs, so 15-year-olds are old enough to get a job. However, the hours that teens can work outside of school is limited. At 15, teens cannot work more than three hours on a school day and eight hours on a nonschool day. They also cannot work hazardous jobs. ## How Many Hours Should a Teen Work? Legally, 14- and 15-year-olds cannot work more than three hours on a school day or eight hours on a nonschool day. There are also additional hourly limits defined by the U.S. Department of Labor for teens who are 14 and 15, depending on whether school is in session. But after age 16, teens can work any schedule in any occupation except those declared hazardous by the U.S. secretary of labor. ## Why Should High Schoolers Have Jobs? There are many benefits to getting a job while in high school. Depending on the job, it can teach valuable time management skills, entrepreneurial skills, and safety skills. But getting a job in high school also prepares teens with the smart spending skills and financial literacy that they’ll need in their adult life. Having a job can also give teens more financial independence. ## The Bottom Line Getting a job is an exciting step in a young person’s life. In addition to balancing responsibility with independence, jobs can teach teens valuable life skills, such as saving, budgeting, and time management. With so many different jobs out there for teens, whether it’s a traditional job or an online job, young people will find multiple opportunities to make money and learn key financial lessons.	In addition to traditional jobs like babysitting, fast food service, and summer camp counselor roles, teens today can also tap into the digital economy for creative and gig work. These kinds of jobs are paid per project, not per hour, which might be ideal for tech-savvy teens. Let’s look in more detail about the variety of jobs that teens might find in today’s market that can match their interests and fit their schedule. Key Takeaways Teens can make money with traditional jobs like babysitting, cutting lawns, washing cars, or working part time in restaurants or retail.Online opportunities for teens to make money include blogging, programming, and social media management.Different federal rules apply to working minors depending on the teen’s age and if the job is agricultural or nonagricultural.Teens who are making money can build work ethic, communication skills, time management, and money management skills.Earning money can also help teens learn skills like how to open bank accounts, file taxes, and save for retirement. Benefits of Earning Money as a Teenager Getting a job allows teens to earn spending and saving money, as well as learn valuable financial lessons that can serve them throughout their life. When teens earn money, they can, for example, help pay for their education or contribute to their households. Additionally, teens with special skills or interests can potentially get a head start on a career. Teens can also gain financial independence and start saving for their financial future. Teens who have jobs can start to develop a strong work ethic and positive work habits that can serve them well throughout their life. Making money teaches young people time management, hones their communication and negotiation skills, and empowers them to understand their rights. As they earn from their efforts, they can learn more about the careers that fit their interests and skills. These learning opportunities can benefit them in the future as they apply to colleges and search for other employment opportunities. How to Make Money as a Teen Teens can earn money in a number of ways, but the job must meet federal and state laws regarding wages, working conditions, and other factors. The U.S. Department of Labor’s Wage and Hour Division (WHD) enforces federal child labor laws to protect working minors against exploitation. The minimum age for employment is 14 for nonagricultural jobs, and young people under the age of 18 cannot work in hazardous occupations, according to the Fair Labor Standards Act (FLSA). Legally, 14- and 15-year-olds are limited to work outside school hours. They cannot work more than three hours on a school day or eight hours on a nonschool day. After age 16, teens can work any schedule. There are additional standards for minor-aged employees who are full-time students, apprentices, or living with disabilities. States also have additional regulations that can affect a teen’s employment. Before allowing a teen to accept a job, be aware of the U.S. Department of Labor’s federal child labor laws, as well as any state laws and income tax responsibilities that apply to working minors. Here are some common job opportunities for teens who want to make money: Babysitting Minors can babysit other children, but some states have age restrictions. Babysitting is work that requires that the teen is responsible enough to keep another minor safe and that they can engage with children. Consider enrolling in a brief babysitting training program to gain additional preparation and qualification for the role. Car Care Pumping gas, dispensing oil, and washing and hand polishing a car are roles that teens can take. They can be physically demanding and have set hours if the teen works for a business. But, independently, teens can also wash cars for money. Older teens may want to formalize their business as a limited liability company (LLC) to take advantage of tax and employment benefits once they age into adulthood. Farm Work According to federal law, teens as young as 13 can start doing farm work outside of school hours, and those older than 16 can work any farm job anytime. Teens can work on farms owned or operated by their parents or someone standing in place of a parent. They can also work on farms that employ their parent(s) or that receive parental consent. Each state has its own additional regulations that might further limit the jobs and hours that a teen can work on a farm. Food Service Teens can perform kitchen work, including cleaning fruits and vegetables, washing dishes, cooking, and reheating food. Working in this industry can also include restaurant work like hosting, washing dishes, and even management. A food service job will teach teens food preparation and time management skills that will benefit them over the long haul. Internships According to the Fair Labor Standards Act, if interns or students are considered employees of a for-profit employer, then they can receive compensation for their work. However, not all internship positions are paid, so the teen should do some research into the role before relying on it as a source of money. Nevertheless, internships are a great way to gain experience in a desired field while making some extra cash. Knowledge Work Intellectual or creative work such as tutoring, singing, playing an instrument, and teaching are options for teens to make money. By applying their interests and skill set, teens pursuing a job through knowledge work allows them to learn the different paid roles available for their hobbies and skills. Lawn Care and Other Errands Yardwork, deliveries, and loading/unloading equipment can be performed by a teen. Lawn care and maintenance can also be physically demanding. It may include working long hours in hot weather or lifting heavy items for extended periods of time. But for teens who like getting their hands dirty, especially in nature, this can be a fun work opportunity. Of course, teens who do not have a driver’s license cannot take a job that requires driving a motor vehicle. Lifeguard Teens older than 15 can work as a lifeguard at pools and amusement parks. A lifeguard job typically requires you to pass basic safety courses and complete specific training. This is a great job that teaches responsibility and safety skills that are valuable at any age. Paper Route Minors under 14 are permitted to deliver newspapers because this type of work is exempt from Fair Labor Standards Act requirements. The newspaper industry is declining as more people turn to online news, but teens who have the opportunity to take a newspaper route may find it is a flexible job that can fit into their busy school schedule. Retail Per federal law, minors as young as 14 can work in retail occupations, such as cashiering, stocking, price marking, and selling. There is often a wide range of different retail positions available that a teen could take to make money. Retail jobs have a set schedule and tasks that can teach teens what it’s like to work for a business. Selling Recycled/Upcycled Goods Crafty kids could earn money by hand-making items for resale or repurposing pre-loved items for new customers. This could entail fashion, art, furniture, or more. Sales can be made in person, on consignment to a retail store, or online, teaching valuable entrepreneurial sales skills. Work in Parents’ Business Barring jobs in manufacturing, mining, or any other of the 17 occupations that the U.S. government considers hazardous for teens, minors can work for a business owned by their parents. This option may not be applicable to all teens, but it can be an easy way to make money without doing much job searching. Plus, it can be a great learning experience for teens looking to follow in their parents’ footsteps. Legal Restrictions on Age Federal regulations for child labor apply to classifications of “agricultural” and “nonagricultural” work, and to specific ages. For example, for teens under 14, legal work is largely limited to performance, babysitting, delivering papers, agricultural work (older than 13), and working in a company owned by a parent. Teens who are 14 and 15 can work in nonhazardous jobs outside of school hours. Federal regulations state that they cannot work: More than three hours on a school day, including FridayMore than 18 hours per week when school is in sessionMore than eight hours per day when school is not in sessionMore than 18 hours in any school weekMore than 40 hours per week when school is not in sessionBefore 7 a.m. or after 7 p.m. (extended to 9 p.m. from June 1 through Labor Day) Teens 16 or older can work unlimited hours in any occupation except those declared hazardous by the U.S. secretary of labor. Easy Tips for Teens to Make Money Teens can start small by monetizing their talents. They can also turn to family and friends who own businesses for their first work experience. Jennifer Sisson, a Utah mom of five says her kids started getting paid minimum wage at ages 11 and 12. Her oldest kids started worked in a family friend’s T-shirt business, occasionally helping set up and take down events. Her oldest kids continue to work, and her 12-year-old babysits. Teenagers can also look for opportunities to make money in their local community. Because young teens are not allowed to drive as part of their employment, it may be more convenient for the teen to work locally. Local work can include working at a local retail store or restaurant, babysitting, or tutoring for neighbors, as well as doing yardwork and odd jobs within walking or biking distance. Teens in farming communities may find seasonal opportunities where their parents, friends, or relatives already work. Finally, teens can sell things they no longer need for fast cash, although they won’t earn regular money as they do with wages. Whether through garage sales, trade-ins, or online sites, teens can try to sell items like used games, toys, or clothes. Many states and municipalities offer work programs designed to help young people land a job that can provide real-world experiences and raise awareness of local job opportunities. Making Money Online Making money online may be an even easier option for teens than a traditional job, according to Jack Wang, wealth advisor at Innovative Advisory Group. Many teens have computer skills and tech stamina that are highly sought after. “Teens can certainly use their skills in social media or even just help parents sell stuff online from decluttering,” Wang says. Many of these jobs often offer remote work, so teens can work from home. Here are some examples for ways that teens can make money online: Blogging or Vlogging Blogging (writing) or vlogging (videoing) are ways for teens to create an online community around something they already love. Writing or sharing videos on their own website can generate income through ads and affiliate links. Design and Dropship Whether it is creating their own books, T-shirts, or merchandise, print-on-demand fulfillment has made it easier for teens to design something cool and put it on the web for sale through sites like Amazon, Etsy, Printify, and Printful. This option is great for teaching teens how to run their own business. Freelance Work Teens can be their own bosses with just the click of a button. Sites like Fiverr and Upwork can help connect them with clients around the world willing to pay them per project, not per hour, for work like writing or designing. While this option does provide flexibility in scheduling, prices vary widely for jobs and skills. Influencing Teens can safely create video or social media content connecting brands with online audiences. Platforms like Pinterest, Meta, TikTok, and YouTube offer ways to earn cash whenever a large audience tunes in, clicks, or buys. However, becoming an influencer is not guaranteed to make money and may take time. Programming, Coding, and Building Games Teens may have coding, programming, or gaming skills that could earn them money. They can build and sell apps, websites, and games. Otherwise, they can test or review sites, apps, and games, and receive compensation in return. This is a job option that can combine skills and hobbies to make profits. Sell NFTs, Web3, and Metaverse Products Teens are earning money in the online art market by creating and selling non-fungible tokens (NFTs). They have a higher risk tolerance and are quick to learn about cryptocurrencies. They can curate everything from events to virtual reality experiences that could put money in their pockets and their digital wallets. Social Media Management Many companies are looking for a tech-savvy person to assist with online marketing through regular posting on social media platforms. Teens can help create captions, take photographs, curate online community groups, and monitor viral trends for the best marketing ideas. Tutoring and Teaching Teens may still be learning, but they can also be good educators. Whether it’s teaching lessons on how to cook, play an instrument, or improve in school-based subjects, young experts can use virtual platforms to tutor or teach students anywhere around the world. Teens can take on more students virtually without leaving their homes to make more money than they would teaching only in person. What to Do with the Money Earned Teens may be tempted to spend their all money immediately, but if they learn essential money lessons first, they can practice healthy habits like saving that can serve them in the long term. To help teach teens about banking, involve them in decisions about where to bank and which types of deposit accounts they want to use, such as checking or savings. Ensuring that your teen connects with a reputable bank can help set them up to build a long-term banking relationship. Sisson says she helped her older kids have checking accounts that she believes are teaching them valuable financial lessons. “I feel like they’re getting a better grasp of how to manage money in a digital world,” she says. “They can track their spending, which holds them more accountable for what they spend.” Second, teens need to consider income taxes. If their earned income from a job is under the standard deduction limit ($14,600 for a single person in 2024), they are likely not required to file a tax return. If their income surpasses that or if the teen is self-employed, then they must file their state and federal taxes. Older teens can try to file their taxes themselves (with adult supervision, of course) and learn more about the U.S. taxation system. Finally, if the teen has a job working for others or is self-employed, they may want to contribute to their own Roth individual retirement account (Roth IRA), Wang says. “Since the principal is always accessible, a Roth IRA can serve as a great college savings vehicle or for any large purchase, such as a house,” he says. Parents or guardians can help teens set aside a certain amount of savings for long-term goals like retirement. Starting early can help investments grow more with the power of compounding. Is 15 Old Enough to Get a Job? According to the Fair Labor Standards Act (FLSA), the minimum age for employment is 14 for nonagricultural jobs, so 15-year-olds are old enough to get a job. However, the hours that teens can work outside of school is limited. At 15, teens cannot work more than three hours on a school day and eight hours on a nonschool day. They also cannot work hazardous jobs. How Many Hours Should a Teen Work? Legally, 14- and 15-year-olds cannot work more than three hours on a school day or eight hours on a nonschool day. There are also additional hourly limits defined by the U.S. Department of Labor for teens who are 14 and 15, depending on whether school is in session. But after age 16, teens can work any schedule in any occupation except those declared hazardous by the U.S. secretary of labor. Why Should High Schoolers Have Jobs? There are many benefits to getting a job while in high school. Depending on the job, it can teach valuable time management skills, entrepreneurial skills, and safety skills. But getting a job in high school also prepares teens with the smart spending skills and financial literacy that they’ll need in their adult life. Having a job can also give teens more financial independence. The Bottom Line Getting a job is an exciting step in a young person’s life. In addition to balancing responsibility with independence, jobs can teach teens valuable life skills, such as saving, budgeting, and time management. With so many different jobs out there for teens, whether it’s a traditional job or an online job, young people will find multiple opportunities to make money and learn key financial lessons.	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https://www.investopedia.com/terms/c/circle-financial-services-company.asp	Circle (Financial Services 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"><span class="heading-toc" id="toc-what-is-circle"></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 Circle? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Circle is a Boston-based financial services company that uses blockchain technology for its peer-to-peer payments and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a>-related products. It was started in 2013 by Jeremy Allaire, who previously founded Brightcove, a video platform company, and Sean Neville.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Circle started as a consumer peer-to-peer cryptocurrency payments and exchange platform, sponsoring the popular cryptocurrency exchange <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/what-poloniex/">Poloniex</a> after the exchange experienced hardship in 2017, which was later spun out in October 2019.<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_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> In 2016 the company stopped offering its cryptocurrency wallet services.<span class="ql-inline-citation" data-cite="10"></span> In June 2019, it was announced that Circle Pay mobile and related web apps would be discontinued.<span class="ql-inline-citation" data-cite="2"></span> In 2020, the company's focus shifted to its stablecoin as "programmable dollars" for business use.<span class="ql-inline-citation" data-cite="6"></span> In 2021, Circle was acquired by Concord Acquisition Corp., a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/spac.asp">special purpose acquisition company</a> (SPAC), in a deal valued at $4.5 billion.<span class="ql-inline-citation" data-cite="22"></span> The deal will take the company public in late 2021 under the ticker symbol 'CRCL'. </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>Circle is a blockchain-focused financial services and payments company launched in 2013.</li><li>Originally a consumer-facing P2P payment and cryptocurrency wallet & exchange app, the company has since refocused on commercial blockchain and crypto applications.</li><li>Circle launched a stablecoin in 2018 known as USD Coin, backed by $1 or asset with equal, fair value.<span class="ql-inline-citation" data-cite="13"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-how-circle-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> How Circle Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Circle's website states that its mission is to change the global economy. The company's first product was an app called Circle Pay. The app was a bitcoin trading exchange. In September 2015, Circle Pay was granted a BitLicense, New York state's license for operating bitcoin exchanges.<span class="ql-inline-citation" data-cite="19"></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_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> In May of 2021, the company announced it had raised $440 million in financing from institutional and strategic investors. In 2018, Circle had raised $110 million in venture capital to create a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stablecoin.asp">stablecoin</a> on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ethereum.asp">Ethereum</a> coin backed by U.S. dollars, known as USD Coin (USDC).<span class="ql-inline-citation" data-cite="20"></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_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The U.K.'s Financial Conduct Authority (FCA) granted Circle an electronic money license.<span class="ql-inline-citation" data-cite="11"></span> In December 2016, Circle Pay's focus shifted to peer-to-peer payments or "global social payments."<span class="ql-inline-citation" data-cite="10"></span> Circle also launched an open-source software project in 2017 to promote payment technology.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <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"> The Circle App </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Circle’s main product was an app called Circle Pay that enabled instant and free money transfers between individuals. The service was similar to Paypal’s Venmo in that it could be used for daily transactions, such as splitting meal costs or making rent payments. </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 Circle Pay app was popular with Millennials in Europe. According to the company, 90% of its European customers in 2017 were below 35 years of age, and 60% were younger than 25 years old. In June 2017, Circle Pay announced the integration of a free money transfer service between the United States and Europe.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> While announcing the launch, Circle founder Allaire said the company was working towards realizing its vision of no distinction between international and domestic money transfers.<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_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_24-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The circle app is no longer supported.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <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"> Open-Source Blockchain Toolkit </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Circle's open source project is called Centre and is named after the Cent Routing Exchange protocol it uses. Transfers within the app take place using Centre tokens (CENT), an Ethereum token. The project enables transfers between consumer digital wallets that support different currencies. It is also intended to help financial services companies to comply with existing regulations, such as <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</a> (KYC) and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/aml.asp">Anti-Money Laundering</a> (AML), by enabling disclosure. </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 project supports transfers in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://support.usdc.circle.com/hc/en-us/articles/360015179832-Who-is-Circle-USDC-for-">many countries</a> around the world. For example, a user in the U.K. can convert British pounds to Korean won and transfer them to a digital wallet user in Korea using the app. Centre currently runs on Ethereum's blockchain but is designed to run on other <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchains</a> as well.<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_30-0"></div> <span class="heading-toc" id="toc-how-does-circle-make-money"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_31-0"> <span class="mntl-sc-block-heading__text"> How Does Circle Make Money? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Circle's products are freely available in app stores, and the company does not charge fees for transactions or transfers. It makes money through the trading of bitcoin and other cryptocurrencies in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">over-the-counter</a> (OTC) markets and at digital exchanges. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> In an August 2017 tweet, Allaire said Circle was the second biggest crypto asset trader in the world.<span class="ql-inline-citation" data-cite="12"></span> The company trades in bitcoin and ether and is a market maker on all major exchanges. It also provides OTC liquidity services to institutions. In the future, it may launch products that generate revenue. </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"> "We will have future, higher-level products that we fully intend to be revenue-generating, but this first basic product needs to be free," co-founder Sean Neville stated in a 2014 blog post.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Circle also earns revenue from the reserve balances that it holds for its customers. The company invests their clients' balances and pays them interest from those investments but takes a portion of the rate as revenue via an interest rate spread.<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_39-0"></div> <span class="heading-toc" id="toc-circles-business-strategy"></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"> Circle’s Business Strategy </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> Circle processed $1 billion in transactions per month as of 2017, according to a statement from Allaire.<span class="ql-inline-citation" data-cite="12"></span> It entered China, a massive market for payment apps, starting in 2016. The company’s focus in China is to “connect Chinese consumers to the rest of the world” by enabling the flow of payments going out or into China.<span class="ql-inline-citation" data-cite="18"></span> For example, it could more easily facilitate money transfer operations for Chinese students studying abroad. </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"> Circle’s technology of using blockchain-based tokens is similar to that of Ripple, which is another company focused on reducing the cost of international money transfers. However, both apps target different markets. Ripple is working with banking institutions to implement its technology.<span class="ql-inline-citation" data-cite="17"></span> </p></div>	## What Is Circle? Circle is a Boston-based financial services company that uses blockchain technology for its peer-to-peer payments and [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp)-related products. It was started in 2013 by Jeremy Allaire, who previously founded Brightcove, a video platform company, and Sean Neville. Circle started as a consumer peer-to-peer cryptocurrency payments and exchange platform, sponsoring the popular cryptocurrency exchange [Poloniex](https://www.investopedia.com/tech/what-poloniex/) after the exchange experienced hardship in 2017, which was later spun out in October 2019. In 2016 the company stopped offering its cryptocurrency wallet services. In June 2019, it was announced that Circle Pay mobile and related web apps would be discontinued. In 2020, the company's focus shifted to its stablecoin as "programmable dollars" for business use. In 2021, Circle was acquired by Concord Acquisition Corp., a [special purpose acquisition company](https://www.investopedia.com/terms/s/spac.asp) (SPAC), in a deal valued at $4.5 billion. The deal will take the company public in late 2021 under the ticker symbol 'CRCL'. ### Key Takeaways * Circle is a blockchain-focused financial services and payments company launched in 2013. * Originally a consumer-facing P2P payment and cryptocurrency wallet & exchange app, the company has since refocused on commercial blockchain and crypto applications. * Circle launched a stablecoin in 2018 known as USD Coin, backed by $1 or asset with equal, fair value. ## How Circle Works Circle's website states that its mission is to change the global economy. The company's first product was an app called Circle Pay. The app was a bitcoin trading exchange. In September 2015, Circle Pay was granted a BitLicense, New York state's license for operating bitcoin exchanges. In May of 2021, the company announced it had raised $440 million in financing from institutional and strategic investors. In 2018, Circle had raised $110 million in venture capital to create a [stablecoin](https://www.investopedia.com/terms/s/stablecoin.asp) on [Ethereum](https://www.investopedia.com/terms/e/ethereum.asp) coin backed by U.S. dollars, known as USD Coin (USDC). The U.K.'s Financial Conduct Authority (FCA) granted Circle an electronic money license. In December 2016, Circle Pay's focus shifted to peer-to-peer payments or "global social payments." Circle also launched an open-source software project in 2017 to promote payment technology. ### The Circle App Circle’s main product was an app called Circle Pay that enabled instant and free money transfers between individuals. The service was similar to Paypal’s Venmo in that it could be used for daily transactions, such as splitting meal costs or making rent payments. The Circle Pay app was popular with Millennials in Europe. According to the company, 90% of its European customers in 2017 were below 35 years of age, and 60% were younger than 25 years old. In June 2017, Circle Pay announced the integration of a free money transfer service between the United States and Europe. While announcing the launch, Circle founder Allaire said the company was working towards realizing its vision of no distinction between international and domestic money transfers. ### The circle app is no longer supported. ### Open-Source Blockchain Toolkit Circle's open source project is called Centre and is named after the Cent Routing Exchange protocol it uses. Transfers within the app take place using Centre tokens (CENT), an Ethereum token. The project enables transfers between consumer digital wallets that support different currencies. It is also intended to help financial services companies to comply with existing regulations, such as [Know Your Customer](https://www.investopedia.com/terms/k/knowyourclient.asp) (KYC) and [Anti-Money Laundering](https://www.investopedia.com/terms/a/aml.asp) (AML), by enabling disclosure. The project supports transfers in [many countries](https://support.usdc.circle.com/hc/en-us/articles/360015179832-Who-is-Circle-USDC-for-) around the world. For example, a user in the U.K. can convert British pounds to Korean won and transfer them to a digital wallet user in Korea using the app. Centre currently runs on Ethereum's blockchain but is designed to run on other [blockchains](https://www.investopedia.com/terms/b/blockchain.asp) as well. ## How Does Circle Make Money? Circle's products are freely available in app stores, and the company does not charge fees for transactions or transfers. It makes money through the trading of bitcoin and other cryptocurrencies in [over-the-counter](https://www.investopedia.com/terms/o/otc.asp) (OTC) markets and at digital exchanges. In an August 2017 tweet, Allaire said Circle was the second biggest crypto asset trader in the world. The company trades in bitcoin and ether and is a market maker on all major exchanges. It also provides OTC liquidity services to institutions. In the future, it may launch products that generate revenue. "We will have future, higher-level products that we fully intend to be revenue-generating, but this first basic product needs to be free," co-founder Sean Neville stated in a 2014 blog post. Circle also earns revenue from the reserve balances that it holds for its customers. The company invests their clients' balances and pays them interest from those investments but takes a portion of the rate as revenue via an interest rate spread. ## Circle’s Business Strategy Circle processed $1 billion in transactions per month as of 2017, according to a statement from Allaire. It entered China, a massive market for payment apps, starting in 2016. The company’s focus in China is to “connect Chinese consumers to the rest of the world” by enabling the flow of payments going out or into China. For example, it could more easily facilitate money transfer operations for Chinese students studying abroad. Circle’s technology of using blockchain-based tokens is similar to that of Ripple, which is another company focused on reducing the cost of international money transfers. However, both apps target different markets. Ripple is working with banking institutions to implement its technology.	What Is Circle? Circle is a Boston-based financial services company that uses blockchain technology for its peer-to-peer payments and cryptocurrency-related products. It was started in 2013 by Jeremy Allaire, who previously founded Brightcove, a video platform company, and Sean Neville. Circle started as a consumer peer-to-peer cryptocurrency payments and exchange platform, sponsoring the popular cryptocurrency exchange Poloniex after the exchange experienced hardship in 2017, which was later spun out in October 2019. In 2016 the company stopped offering its cryptocurrency wallet services. In June 2019, it was announced that Circle Pay mobile and related web apps would be discontinued. In 2020, the company's focus shifted to its stablecoin as "programmable dollars" for business use. In 2021, Circle was acquired by Concord Acquisition Corp., a special purpose acquisition company (SPAC), in a deal valued at $4.5 billion. The deal will take the company public in late 2021 under the ticker symbol 'CRCL'. Key Takeaways Circle is a blockchain-focused financial services and payments company launched in 2013.Originally a consumer-facing P2P payment and cryptocurrency wallet & exchange app, the company has since refocused on commercial blockchain and crypto applications.Circle launched a stablecoin in 2018 known as USD Coin, backed by $1 or asset with equal, fair value. How Circle Works Circle's website states that its mission is to change the global economy. The company's first product was an app called Circle Pay. The app was a bitcoin trading exchange. In September 2015, Circle Pay was granted a BitLicense, New York state's license for operating bitcoin exchanges. In May of 2021, the company announced it had raised $440 million in financing from institutional and strategic investors. In 2018, Circle had raised $110 million in venture capital to create a stablecoin on Ethereum coin backed by U.S. dollars, known as USD Coin (USDC). The U.K.'s Financial Conduct Authority (FCA) granted Circle an electronic money license. In December 2016, Circle Pay's focus shifted to peer-to-peer payments or "global social payments." Circle also launched an open-source software project in 2017 to promote payment technology. The Circle App Circle’s main product was an app called Circle Pay that enabled instant and free money transfers between individuals. The service was similar to Paypal’s Venmo in that it could be used for daily transactions, such as splitting meal costs or making rent payments. The Circle Pay app was popular with Millennials in Europe. According to the company, 90% of its European customers in 2017 were below 35 years of age, and 60% were younger than 25 years old. In June 2017, Circle Pay announced the integration of a free money transfer service between the United States and Europe. While announcing the launch, Circle founder Allaire said the company was working towards realizing its vision of no distinction between international and domestic money transfers. The circle app is no longer supported. Open-Source Blockchain Toolkit Circle's open source project is called Centre and is named after the Cent Routing Exchange protocol it uses. Transfers within the app take place using Centre tokens (CENT), an Ethereum token. The project enables transfers between consumer digital wallets that support different currencies. It is also intended to help financial services companies to comply with existing regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML), by enabling disclosure. The project supports transfers in many countries around the world. For example, a user in the U.K. can convert British pounds to Korean won and transfer them to a digital wallet user in Korea using the app. Centre currently runs on Ethereum's blockchain but is designed to run on other blockchains as well. How Does Circle Make Money? Circle's products are freely available in app stores, and the company does not charge fees for transactions or transfers. It makes money through the trading of bitcoin and other cryptocurrencies in over-the-counter (OTC) markets and at digital exchanges. In an August 2017 tweet, Allaire said Circle was the second biggest crypto asset trader in the world. The company trades in bitcoin and ether and is a market maker on all major exchanges. It also provides OTC liquidity services to institutions. In the future, it may launch products that generate revenue. "We will have future, higher-level products that we fully intend to be revenue-generating, but this first basic product needs to be free," co-founder Sean Neville stated in a 2014 blog post. Circle also earns revenue from the reserve balances that it holds for its customers. The company invests their clients' balances and pays them interest from those investments but takes a portion of the rate as revenue via an interest rate spread. Circle’s Business Strategy Circle processed $1 billion in transactions per month as of 2017, according to a statement from Allaire. It entered China, a massive market for payment apps, starting in 2016. The company’s focus in China is to “connect Chinese consumers to the rest of the world” by enabling the flow of payments going out or into China. For example, it could more easily facilitate money transfer operations for Chinese students studying abroad. Circle’s technology of using blockchain-based tokens is similar to that of Ripple, which is another company focused on reducing the cost of international money transfers. However, both apps target different markets. Ripple is working with banking institutions to implement its technology.	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https://www.investopedia.com/terms/l/liquidity.asp	Understanding Liquidity and How to Measure 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-liquidity"></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 Liquidity? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Liquidity refers to the efficiency or ease with which an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">asset</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/security.asp">security</a> can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently. </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 more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost. </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>Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.</li><li>Cash is the most liquid of assets, while tangible items are less liquid.</li><li>The two main types of liquidity are market liquidity and accounting liquidity.</li><li>Current, quick, and cash ratios are most commonly used to measure liquidity.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Liquidity" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/_JZ5UHtH2IVMqaUOdiQE1rhfFTQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/_JZ5UHtH2IVMqaUOdiQE1rhfFTQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg" data-srcset="https://www.investopedia.com/thmb/-xKSve3SONQud1S-ce18R01n6hU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Liquidity" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/_JZ5UHtH2IVMqaUOdiQE1rhfFTQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg" srcset="https://www.investopedia.com/thmb/-xKSve3SONQud1S-ce18R01n6hU=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Tara Anand / Investopedia</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-liquidity"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding Liquidity </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> In other words, liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Cash is universally considered the most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidasset.asp">liquid asset</a> because it can most quickly and easily be converted into other assets. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> For example, if a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade the refrigerator for their collection. Instead, they will have to sell the collection and use the cash to purchase the refrigerator. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> That may be fine if the person can wait for months or years to make the purchase, but it could present a problem if the person has only a few days. They may have to sell the books at a discount, instead of waiting for a buyer who is willing to pay the full value. Rare books are an example of an illiquid asset.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_16-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_17-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>There are two main measures of liquidity: market liquidity and accounting liquidity.</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"> Market Liquidity </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Market liquidity refers to the extent to which a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/market.asp">market</a>, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that it does not exist.<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"> The stock market, on the other hand, is characterized by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price that a buyer offers per share (the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bidprice.asp">bid price</a>) and the price that the seller is willing to accept (the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/ask.asp">ask price</a>) will be fairly close to each other. </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"> Investors, then, will not have to give up unrealized gains for a quick sale. When the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bid-askspread.asp">spread</a> between the bid and ask prices tightens, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/number-shares-liquidity-stock/">the market is more liquid</a>; when it grows, the market instead becomes more illiquid. Markets for real estate are usually far less liquid than stock markets. The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, often depends on their size and how many open exchanges exist for them to be traded on. </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"> Accounting Liquidity </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them—the ability to pay off debts as they come due. </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 the example above, the rare book collector’s assets are relatively illiquid and would probably not be worth their full value of $1,000 in a pinch. In investment terms, assessing accounting liquidity means comparing liquid assets to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currentliabilities.asp">current liabilities</a>, or financial obligations that come due within one year. </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"> There are several ratios that measure accounting liquidity, which differ in how strictly they define liquid assets. Analysts and investors use these to identify companies with strong liquidity. It is also considered a measure of depth. </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-measuring-liquidity"></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"> Measuring Liquidity </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Financial analysts look at a firm’s ability to use liquid assets to cover its short-term obligations. Generally, when using these formulas, a ratio greater than one is desirable. </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"> Current Ratio </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currentratio.asp">current ratio</a> is the simplest and least strict. It measures <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/currentassets.asp">current assets</a> (those that can reasonably be converted to cash in one year) <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/netliquidassets.asp">against current liabilities</a>. Its formula would be: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_37-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <em>Current Ratio = Current Assets ÷ Current Liabilities</em> </blockquote> <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"> Quick Ratio (Acid-Test Ratio) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/quickratio.asp">quick ratio</a>, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/acidtest.asp">acid-test ratio</a>, is slightly more strict. It excludes inventories and other current assets, which are not as liquid as cash and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashequivalents.asp">cash equivalents</a>, accounts receivable, and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shorterminvestments.asp">short-term investments</a>. The formula is: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <em>Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities</em> </blockquote> <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"> Acid-Test Ratio (Variation) </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> A variation of the quick/acid-test ratio simply subtracts inventory from current assets, making it a bit more generous: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> <em>Acid-Test Ratio (Variation) = (Current Assets - Inventories - Prepaid Costs) ÷ Current Liabilities</em> </blockquote> <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"> Cash Ratio </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash-ratio.asp">cash ratio</a> is the most exacting of the liquidity ratios. Excluding accounts receivable, as well as inventories and other current assets, it defines liquid assets strictly as cash or cash equivalents. </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"> More than the current ratio or acid-test ratio, the cash ratio assesses an entity’s ability to stay <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/solvency.asp">solvent</a> in case of an emergency—the worst-case scenario—on the grounds that even highly profitable companies can run into trouble if they do not have the liquidity to react to unforeseen events. Its formula is:<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_54-0"></div> <blockquote class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <em>Cash Ratio = Cash and Cash Equivalents ÷ Current Liabilities</em> </blockquote> <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-liquidity-example"></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"> Liquidity Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> In terms of investments, equities as a class are among the most liquid assets. But, not all equities or other fungible securities are created equal when it comes to liquidity. Some <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/optionliquidity.asp">options and stocks trade more actively</a> than others on stock exchanges. More activity means that there is more of a market for them. In other words, they attract greater, more consistent interest from traders and investors. </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-tip" 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" 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 addition to trading volume, other factors such as the width of bid-ask spreads, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketdepth.asp">market depth</a>, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/order-book.asp">order book</a> data can provide further insight into the liquidity of a stock. So, while volume is an important factor to consider when evaluating liquidity, it should not be relied upon exclusively.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> These liquid stocks are usually identifiable by their daily <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volume.asp">volume</a>, which can be in the millions or even hundreds of millions of shares. When a stock has high volume, it means that there are a large number of buyers and sellers in the market, which makes it easier for investors to buy or sell the stock without significantly affecting its price. On the other hand, low-volume stocks may be harder to buy or sell, as there may be fewer market participants and therefore less liquidity. </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"> For example, on March 13, 2023, 69.6 million shares of 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>) traded on exchanges. By comparison, Intel Corp. (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC">INTC</a>) saw a volume of just 48.1 million shares, indicating it was somewhat less liquid. But Ford Motor Co. (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=F">F</a>) had a volume of 118.5 million shares, making it the most active, and presumably most liquid, among these three stocks on that day.<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_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-why-is-liquidity-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is Liquidity Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If markets are not liquid, it becomes difficult to sell or convert assets or securities into cash. You may, for instance, own a very rare and valuable family heirloom appraised at $150,000. However, if there is not a market (i.e., no buyers) for your object, then it is irrelevant since nobody will pay anywhere close to its appraised value—it is very illiquid. It may even require hiring an auction house to act as a broker and track down potentially interested parties, which will take time and incur costs.</p><p>Liquid assets, however, can be easily and quickly sold for their full value and with little cost. Companies also must hold enough liquid assets to cover their short-term obligations like bills or payroll; otherwise, they could face a liquidity crisis, which could lead to bankruptcy.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-are-the-most-liquid-assets-or-securities"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Most Liquid Assets or Securities?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketablesecurities.asp">Marketable securities</a>, such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker. Gold coins and certain collectibles may also be readily sold for cash.</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-what-are-some-illiquid-assets-or-securities"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Illiquid Assets or Securities?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Securities that are traded <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/otc.asp">over the counter (OTC)</a>, such as certain complex derivatives, are often quite illiquid. For individuals, a home, a time-share, or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer, and several more weeks to finalize the transaction and receive payment. Moreover, broker fees tend to be quite large (e.g., 5% to 7% on average for a real estate agent).</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-why-are-some-stocks-more-liquid-than-others"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Some Stocks More Liquid Than Others?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The most liquid stocks tend to be those with a great deal of interest from various market actors and a lot of daily transaction volume. Such stocks will also attract a larger number of <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> who maintain a tighter two-sided market.</p><p>Illiquid stocks have wider bid-ask spreads and less market depth. These names tend to be lesser known, have lower trading volume, and often have lower market value and volatility. Thus, the stock for a large multinational bank will tend to be more liquid than that of a small regional bank.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> Liquidity is the ease of converting an asset or security into cash, with cash itself being the most liquid asset of all. Other liquid assets include stocks, bonds, and other exchange-traded securities. Tangible items tend to be less liquid, meaning that it can take more time, effort, and cost to sell them (e.g., a home). </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"> Market liquidity and accounting liquidity are two main classifications of liquidity, and financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure it. Having liquidity is important for individuals and firms to pay off their short-term debts and obligations and avoid a liquidity crisis. </p></div>	## What Is Liquidity? Liquidity refers to the efficiency or ease with which an [asset](https://www.investopedia.com/terms/a/asset.asp) or [security](https://www.investopedia.com/terms/s/security.asp) can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently. The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost. ### Key Takeaways * Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. * Cash is the most liquid of assets, while tangible items are less liquid. * The two main types of liquidity are market liquidity and accounting liquidity. * Current, quick, and cash ratios are most commonly used to measure liquidity. ![Liquidity]() ![Liquidity](https://www.investopedia.com/thmb/_JZ5UHtH2IVMqaUOdiQE1rhfFTQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-Definitions_Template_liquidity.asp-c2fedffb30994838ae0ef34e3420ed93.jpg) Tara Anand / Investopedia ## Understanding Liquidity In other words, liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Cash is universally considered the most [liquid asset](https://www.investopedia.com/terms/l/liquidasset.asp) because it can most quickly and easily be converted into other assets. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum. For example, if a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade the refrigerator for their collection. Instead, they will have to sell the collection and use the cash to purchase the refrigerator. That may be fine if the person can wait for months or years to make the purchase, but it could present a problem if the person has only a few days. They may have to sell the books at a discount, instead of waiting for a buyer who is willing to pay the full value. Rare books are an example of an illiquid asset. ### There are two main measures of liquidity: market liquidity and accounting liquidity. ### Market Liquidity Market liquidity refers to the extent to which a [market](https://www.investopedia.com/terms/m/market.asp), such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that it does not exist. The stock market, on the other hand, is characterized by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price that a buyer offers per share (the [bid price](https://www.investopedia.com/terms/b/bidprice.asp)) and the price that the seller is willing to accept (the [ask price](https://www.investopedia.com/terms/a/ask.asp)) will be fairly close to each other. Investors, then, will not have to give up unrealized gains for a quick sale. When the [spread](https://www.investopedia.com/terms/b/bid-askspread.asp) between the bid and ask prices tightens, [the market is more liquid](https://www.investopedia.com/ask/answers/number-shares-liquidity-stock/); when it grows, the market instead becomes more illiquid. Markets for real estate are usually far less liquid than stock markets. The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, often depends on their size and how many open exchanges exist for them to be traded on. ### Accounting Liquidity Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them—the ability to pay off debts as they come due. In the example above, the rare book collector’s assets are relatively illiquid and would probably not be worth their full value of $1,000 in a pinch. In investment terms, assessing accounting liquidity means comparing liquid assets to [current liabilities](https://www.investopedia.com/terms/c/currentliabilities.asp), or financial obligations that come due within one year. There are several ratios that measure accounting liquidity, which differ in how strictly they define liquid assets. Analysts and investors use these to identify companies with strong liquidity. It is also considered a measure of depth. ## Measuring Liquidity Financial analysts look at a firm’s ability to use liquid assets to cover its short-term obligations. Generally, when using these formulas, a ratio greater than one is desirable. ### Current Ratio The [current ratio](https://www.investopedia.com/terms/c/currentratio.asp) is the simplest and least strict. It measures [current assets](https://www.investopedia.com/terms/c/currentassets.asp) (those that can reasonably be converted to cash in one year) [against current liabilities](https://www.investopedia.com/terms/n/netliquidassets.asp). Its formula would be: > Current Ratio = Current Assets ÷ Current Liabilities ### Quick Ratio (Acid-Test Ratio) The [quick ratio](https://www.investopedia.com/terms/q/quickratio.asp), or [acid-test ratio](https://www.investopedia.com/terms/a/acidtest.asp), is slightly more strict. It excludes inventories and other current assets, which are not as liquid as cash and [cash equivalents](https://www.investopedia.com/terms/c/cashequivalents.asp), accounts receivable, and [short-term investments](https://www.investopedia.com/terms/s/shorterminvestments.asp). The formula is: > Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities ### Acid-Test Ratio (Variation) A variation of the quick/acid-test ratio simply subtracts inventory from current assets, making it a bit more generous: > Acid-Test Ratio (Variation) = (Current Assets - Inventories - Prepaid Costs) ÷ Current Liabilities ### Cash Ratio The [cash ratio](https://www.investopedia.com/terms/c/cash-ratio.asp) is the most exacting of the liquidity ratios. Excluding accounts receivable, as well as inventories and other current assets, it defines liquid assets strictly as cash or cash equivalents. More than the current ratio or acid-test ratio, the cash ratio assesses an entity’s ability to stay [solvent](https://www.investopedia.com/terms/s/solvency.asp) in case of an emergency—the worst-case scenario—on the grounds that even highly profitable companies can run into trouble if they do not have the liquidity to react to unforeseen events. Its formula is: > Cash Ratio = Cash and Cash Equivalents ÷ Current Liabilities ## Liquidity Example In terms of investments, equities as a class are among the most liquid assets. But, not all equities or other fungible securities are created equal when it comes to liquidity. Some [options and stocks trade more actively](https://www.investopedia.com/ask/answers/05/optionliquidity.asp) than others on stock exchanges. More activity means that there is more of a market for them. In other words, they attract greater, more consistent interest from traders and investors. ### In addition to trading volume, other factors such as the width of bid-ask spreads, [market depth](https://www.investopedia.com/terms/m/marketdepth.asp), and [order book](https://www.investopedia.com/terms/o/order-book.asp) data can provide further insight into the liquidity of a stock. So, while volume is an important factor to consider when evaluating liquidity, it should not be relied upon exclusively. These liquid stocks are usually identifiable by their daily [volume](https://www.investopedia.com/terms/v/volume.asp), which can be in the millions or even hundreds of millions of shares. When a stock has high volume, it means that there are a large number of buyers and sellers in the market, which makes it easier for investors to buy or sell the stock without significantly affecting its price. On the other hand, low-volume stocks may be harder to buy or sell, as there may be fewer market participants and therefore less liquidity. For example, on March 13, 2023, 69.6 million shares of Amazon.com Inc. ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)) traded on exchanges. By comparison, Intel Corp. ([INTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=INTC)) saw a volume of just 48.1 million shares, indicating it was somewhat less liquid. But Ford Motor Co. ([F](https://www.investopedia.com/markets/quote?tvwidgetsymbol=F)) had a volume of 118.5 million shares, making it the most active, and presumably most liquid, among these three stocks on that day. ## Why Is Liquidity Important? If markets are not liquid, it becomes difficult to sell or convert assets or securities into cash. You may, for instance, own a very rare and valuable family heirloom appraised at $150,000. However, if there is not a market (i.e., no buyers) for your object, then it is irrelevant since nobody will pay anywhere close to its appraised value—it is very illiquid. It may even require hiring an auction house to act as a broker and track down potentially interested parties, which will take time and incur costs. Liquid assets, however, can be easily and quickly sold for their full value and with little cost. Companies also must hold enough liquid assets to cover their short-term obligations like bills or payroll; otherwise, they could face a liquidity crisis, which could lead to bankruptcy. ## What Are the Most Liquid Assets or Securities? Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. [Marketable securities](https://www.investopedia.com/terms/m/marketablesecurities.asp), such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker. Gold coins and certain collectibles may also be readily sold for cash. ## What Are Some Illiquid Assets or Securities? Securities that are traded [over the counter (OTC)](https://www.investopedia.com/terms/o/otc.asp), such as certain complex derivatives, are often quite illiquid. For individuals, a home, a time-share, or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer, and several more weeks to finalize the transaction and receive payment. Moreover, broker fees tend to be quite large (e.g., 5% to 7% on average for a real estate agent). ## Why Are Some Stocks More Liquid Than Others? The most liquid stocks tend to be those with a great deal of interest from various market actors and a lot of daily transaction volume. Such stocks will also attract a larger number of [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) who maintain a tighter two-sided market. Illiquid stocks have wider bid-ask spreads and less market depth. These names tend to be lesser known, have lower trading volume, and often have lower market value and volatility. Thus, the stock for a large multinational bank will tend to be more liquid than that of a small regional bank. ## The Bottom Line Liquidity is the ease of converting an asset or security into cash, with cash itself being the most liquid asset of all. Other liquid assets include stocks, bonds, and other exchange-traded securities. Tangible items tend to be less liquid, meaning that it can take more time, effort, and cost to sell them (e.g., a home). Market liquidity and accounting liquidity are two main classifications of liquidity, and financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure it. Having liquidity is important for individuals and firms to pay off their short-term debts and obligations and avoid a liquidity crisis.	What Is Liquidity? Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself. Consequently, the availability of cash to make such conversions is the biggest influence on whether a market can move efficiently. The more liquid an asset is, the easier and more efficient it is to turn it back into cash. Less liquid assets take more time and may have a higher cost. Key Takeaways Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.Cash is the most liquid of assets, while tangible items are less liquid.The two main types of liquidity are market liquidity and accounting liquidity.Current, quick, and cash ratios are most commonly used to measure liquidity. Tara Anand / Investopedia Understanding Liquidity In other words, liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. Cash is universally considered the most liquid asset because it can most quickly and easily be converted into other assets. Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum. For example, if a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade the refrigerator for their collection. Instead, they will have to sell the collection and use the cash to purchase the refrigerator. That may be fine if the person can wait for months or years to make the purchase, but it could present a problem if the person has only a few days. They may have to sell the books at a discount, instead of waiting for a buyer who is willing to pay the full value. Rare books are an example of an illiquid asset. There are two main measures of liquidity: market liquidity and accounting liquidity. Market Liquidity Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that it does not exist. The stock market, on the other hand, is characterized by higher market liquidity. If an exchange has a high volume of trade that is not dominated by selling, the price that a buyer offers per share (the bid price) and the price that the seller is willing to accept (the ask price) will be fairly close to each other. Investors, then, will not have to give up unrealized gains for a quick sale. When the spread between the bid and ask prices tightens, the market is more liquid; when it grows, the market instead becomes more illiquid. Markets for real estate are usually far less liquid than stock markets. The liquidity of markets for other assets, such as derivatives, contracts, currencies, or commodities, often depends on their size and how many open exchanges exist for them to be traded on. Accounting Liquidity Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them—the ability to pay off debts as they come due. In the example above, the rare book collector’s assets are relatively illiquid and would probably not be worth their full value of $1,000 in a pinch. In investment terms, assessing accounting liquidity means comparing liquid assets to current liabilities, or financial obligations that come due within one year. There are several ratios that measure accounting liquidity, which differ in how strictly they define liquid assets. Analysts and investors use these to identify companies with strong liquidity. It is also considered a measure of depth. Measuring Liquidity Financial analysts look at a firm’s ability to use liquid assets to cover its short-term obligations. Generally, when using these formulas, a ratio greater than one is desirable. Current Ratio The current ratio is the simplest and least strict. It measures current assets (those that can reasonably be converted to cash in one year) against current liabilities. Its formula would be: Current Ratio = Current Assets ÷ Current Liabilities Quick Ratio (Acid-Test Ratio) The quick ratio, or acid-test ratio, is slightly more strict. It excludes inventories and other current assets, which are not as liquid as cash and cash equivalents, accounts receivable, and short-term investments. The formula is: Quick Ratio = (Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable) ÷ Current Liabilities Acid-Test Ratio (Variation) A variation of the quick/acid-test ratio simply subtracts inventory from current assets, making it a bit more generous: Acid-Test Ratio (Variation) = (Current Assets - Inventories - Prepaid Costs) ÷ Current Liabilities Cash Ratio The cash ratio is the most exacting of the liquidity ratios. Excluding accounts receivable, as well as inventories and other current assets, it defines liquid assets strictly as cash or cash equivalents. More than the current ratio or acid-test ratio, the cash ratio assesses an entity’s ability to stay solvent in case of an emergency—the worst-case scenario—on the grounds that even highly profitable companies can run into trouble if they do not have the liquidity to react to unforeseen events. Its formula is: Cash Ratio = Cash and Cash Equivalents ÷ Current Liabilities Liquidity Example In terms of investments, equities as a class are among the most liquid assets. But, not all equities or other fungible securities are created equal when it comes to liquidity. Some options and stocks trade more actively than others on stock exchanges. More activity means that there is more of a market for them. In other words, they attract greater, more consistent interest from traders and investors. In addition to trading volume, other factors such as the width of bid-ask spreads, market depth, and order book data can provide further insight into the liquidity of a stock. So, while volume is an important factor to consider when evaluating liquidity, it should not be relied upon exclusively. These liquid stocks are usually identifiable by their daily volume, which can be in the millions or even hundreds of millions of shares. When a stock has high volume, it means that there are a large number of buyers and sellers in the market, which makes it easier for investors to buy or sell the stock without significantly affecting its price. On the other hand, low-volume stocks may be harder to buy or sell, as there may be fewer market participants and therefore less liquidity. For example, on March 13, 2023, 69.6 million shares of Amazon.com Inc. (AMZN) traded on exchanges. By comparison, Intel Corp. (INTC) saw a volume of just 48.1 million shares, indicating it was somewhat less liquid. But Ford Motor Co. (F) had a volume of 118.5 million shares, making it the most active, and presumably most liquid, among these three stocks on that day. Why Is Liquidity Important? If markets are not liquid, it becomes difficult to sell or convert assets or securities into cash. You may, for instance, own a very rare and valuable family heirloom appraised at $150,000. However, if there is not a market (i.e., no buyers) for your object, then it is irrelevant since nobody will pay anywhere close to its appraised value—it is very illiquid. It may even require hiring an auction house to act as a broker and track down potentially interested parties, which will take time and incur costs.Liquid assets, however, can be easily and quickly sold for their full value and with little cost. Companies also must hold enough liquid assets to cover their short-term obligations like bills or payroll; otherwise, they could face a liquidity crisis, which could lead to bankruptcy. What Are the Most Liquid Assets or Securities? Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. Marketable securities, such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker. Gold coins and certain collectibles may also be readily sold for cash. What Are Some Illiquid Assets or Securities? Securities that are traded over the counter (OTC), such as certain complex derivatives, are often quite illiquid. For individuals, a home, a time-share, or a car are all somewhat illiquid in that it may take several weeks to months to find a buyer, and several more weeks to finalize the transaction and receive payment. Moreover, broker fees tend to be quite large (e.g., 5% to 7% on average for a real estate agent). Why Are Some Stocks More Liquid Than Others? The most liquid stocks tend to be those with a great deal of interest from various market actors and a lot of daily transaction volume. Such stocks will also attract a larger number of market makers who maintain a tighter two-sided market.Illiquid stocks have wider bid-ask spreads and less market depth. These names tend to be lesser known, have lower trading volume, and often have lower market value and volatility. Thus, the stock for a large multinational bank will tend to be more liquid than that of a small regional bank. The Bottom Line Liquidity is the ease of converting an asset or security into cash, with cash itself being the most liquid asset of all. Other liquid assets include stocks, bonds, and other exchange-traded securities. Tangible items tend to be less liquid, meaning that it can take more time, effort, and cost to sell them (e.g., a home). Market liquidity and accounting liquidity are two main classifications of liquidity, and financial analysts use various ratios, such as the current ratio, quick ratio, acid-test ratio, and cash ratio, to measure it. Having liquidity is important for individuals and firms to pay off their short-term debts and obligations and avoid a liquidity crisis.	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https://www.investopedia.com/articles/active-trading/121014/best-technical-analysis-trading-software.asp	Top Technical Analysis Tools for Traders	<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 vital part of a trader's success, especially those who trade frequently, is the ability to evaluate patterns in trading data. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-technical-analysis-courses-5118327">Technical analysis techniques</a> can remove emotion from a trading decision. Technical analysis systems generate buy and sell indicators and help locate new trading opportunities. With the improvements in software and the speed of accessing millions of data points over the past 15 years, technical analysis tools are available to all online 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"> Most of the better sites that offer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> tools also guide new traders towards a fundamental understanding of the core concepts. Some of these resources are free or included in a broker's platform while others charge a fee. We'll take a look at technical analysis tools built into brokers' offerings and some standalone resources. </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-brokers-offering-technical-analysis-tools"></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"> Brokers Offering Technical Analysis Tools </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Several of the brokers listed below utilize Trading Central, a third-party provider. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/082615/5-biggest-canadian-software-companies.asp">Canadian-based</a> company, Trading Central provides excellent technical analysis tools that many brokers have integrated into their frequent trader platforms. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Trading Central's tools automatically analyze price action to identify and interpret classic chart patterns and other critical conditions based on accepted practices of technical analysis. These Technical Event notifications give traders insight into the strengths and weaknesses of stocks under consideration. </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"> These tools cannot be accessed by individual investors outside brokerage platforms, but you will find their technology built into quite a few active trader sites. </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"> Ally Invest </span> </h3> <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="externalLink" href="https://www.ally.com/invest/" rel="sponsored nofollow">Ally Invest's</a> brokerage platform includes a stock screener that is powered by Trading Central. You can read Investopedia's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ally-invest-review-4587885">review of Ally Invest</a>. </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"> Charles Schwab </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="externalLink" href="https://www.schwab.com/" rel="sponsored nofollow">Charles Schwab's</a> frequent trader platform, StreetSmart Edge, offers Screener Plus, which uses real-time streaming data, allowing clients to filter stocks and ETFs based on a range of fundamental and technical criteria, including technical signals from Trading Central (Recognia). Traders can set the parameters that are most important to them and then integrate Screener Plus results with their pre-defined watch lists. StreetSmart Edge's customizable charts incorporate Trading Central (Recognia) pattern recognition tools. </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"> Charting on mobile devices includes quite a few technical analysis indicators, though there are no drawing tools. </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"> Read Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/charles-schwab-review-4587888">review of Charles Schwab</a>. </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"> ETRADE </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> On Power <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.etrade.com" rel="sponsored nofollow">ETRADE</a>, the firm's active trader platform, the Live Action scanner has over 100 pre-defined screens that scan the market in real-time on live prices and live analytical metrics based on technical, fundamental, earnings, sentiment, and news events. </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 Oscillator scans built into Live Action help uncover overbought or oversold stocks and explore additional opportunities for a client's portfolio. Many of these built-in screens are unique to the Power ETRADE platform. </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 Recognia scanner enables you to scan stocks based on technical events or patterns, and set alerts when new criteria are met. You can use the paper trading capabilities of Power ETRADE to test out your technical trading system. You can read Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/e-trade-review-4587893">review of ETRADE</a>. </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"> Fidelity Investments </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Active Trader Pro is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.fidelity.com" rel="sponsored nofollow">Fidelity's</a> downloadable trading interface, offering a deeper feature set than is available through the website. Active Trader Pro provides customizable charting functions and trade tools upfront. The software can alert you to technical signals in stocks you are following, and provide alerts on open positions. </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"> Fidelity's web-based charting has integrated technical patterns and events provided by Trading Central. The advanced charting on the web offers the ability to see 30 days of intraday data, extended hours data, and more than 60 fully customizable technical indicators.<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_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The Fidelity Learning Center with content made up of articles, videos, webinars, infographics, and recorded webinars, includes a focus on technical analysis. </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"> Fidelity also offers weekly online coaching sessions, where clients can attend with a small group to have in-depth discussions around options and technical analysis. You can read Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fidelity-review-4587897">review of Fidelity</a>. </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"> Interactive Brokers </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Extensively customizable charting is offered on all of <a 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> platforms and includes over 100 indicators and real-time streaming data. Trader Workstation (TWS), IB's flagship trading platform, contains advanced technical analysis tools with over 120 indicators.<span class="ql-inline-citation" data-cite="12"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_40-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> There's a demo version of TWS available that allows traders to learn how the platform works and to test trading scenarios. In addition, it's possible to attach a third-party analytics platform to your IBKR account. You can search a full list of vendors at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://gdcdyn.interactivebrokers.com/Marketplace/InvestorsMarketplace" rel="sponsored nofollow">Investors Marketplace</a>. You can read Investopedia's <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/interactive-brokers-review-4587904">review of Interactive Brokers</a>. </p> <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"> Lightspeed </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Intended for very frequent traders, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.lightspeed.com" rel="sponsored nofollow">Lightspeed's</a> flagship platform, a downloadable program called Lightspeed Trader, has a highly customizable live market scanner called LightScan, which can help you screen for current trading opportunities. </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"> LightScan searches the entire universe of stocks to display symbols sorted and filtered based on your preferences. There are over 100 possible criteria to search on, which can be combined. The flagship platform has customizable charting. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> There's a demo version of the platform available for those who want a test drive. You can read Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/lightspeed-review-4587908">review of Lightspeed</a>. </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"> TradeStation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Technical analysis and statistical modeling of trading strategies is a key strength of the <a data-affiliate-link-rewriter="subid1=${DOC_ID}&subid2=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://tradestation.pxf.io/c/328256/1185053/8402" rel="sponsored nofollow">TradeStation</a> platform. The brokerage grew out of technical analysis software development firm Omega Research, so technical analysis is in its DNA. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> The downloadable TradeStation 10 platform offers incredible charting capability based on tick data. Automated technical analysis is built into the charting package, displaying technical patterns on the charts as they form. Web charting capabilities closely match TradeStation 10, including a new toolbar with access to adjust time frames, drawing tools, sessions, and styles. </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"> This is one of the best charting applications available from any broker, and it is especially notable for how well it is integrated with TradeStation's order management system. </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"> TradeStation users can also create and backtest a trading system based on technical events. TradeStation's trading simulator has all the tools you'll find on TradeStation 10 and includes a large historical database for backtesting strategies. You can read Investopedia's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tradestation-review-4587927">review of TradeStation</a>. </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"> Tradier </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tradier.com" rel="sponsored nofollow">Tradier</a> is an interesting beast, offering a brokerage-account management system, a trading engine, and some market data. Account settings and market data are based in the cloud, so customers can log into and trade from any of Tradier's developer partners. They also offer a downloadable version for your desktop. </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"> Using an application programming interface (API), front-end designers can launch their own trading platforms, mobile apps, algorithmic trading systems, or other customized features for their customers. The ability to attach a third-party platform to one's online brokerage account isn't new—quite a few of the brokers mentioned above can do it too—but Tradier is the first broker to make it the center of its business model. </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"> We will note in the next section whether a standalone technical analysis site can be bolted onto Tradier's brokerage management platform, enabling transactions while using analytical tools. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-technical-analysis-sites"></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"> Technical Analysis Sites </span> </h2> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_67-0"> <span class="mntl-sc-block-subheading__text"> eSignal </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.esignal.com" rel="sponsored nofollow">ESignal</a> is one of the venerable names in technical analysis. The current version, eSignal 12, is a downloadable Windows-based software package offering technical analysis studies, backtesting of trading strategies, customizable charting, and data from global exchanges. </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"> Via API, users can trade with several dozen brokers, including Tradier and Interactive Brokers. It's pricey though: the Classic version, which uses 15-minute delayed data, is $61 per month. Its Signature version, which runs on real-time data and offers a host of advanced features, is $204 per month. The Elite version costs $416 per month.<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_71-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_72-0"> <span class="mntl-sc-block-subheading__text"> MarketGear from iVest+ </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.marketgear.com" rel="sponsored nofollow">Market Gear's</a> charting capabilities allow you to analyze customizable indicators, view your trades, draw permanent trendlines, review past trades, and select from an array of time frames. </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"> The scanner lets you sort through over 100 customizable technical indicators to find trading opportunities based on technical data. Write as many scans as you want and set your favorites for quick access. </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"> Market Gear connects through APIs to ETRADE, ChoiceTrade, and Ally Invest. Pricing starts at $75 per month. </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"> MetaStock </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.metastock.com" rel="sponsored nofollow">MetaStock</a> is another one of the longtime players in the technical analysis industry, having been founded in the late 1980s. There are several versions of the software available; the most useful for frequent traders is MetaStock R/T which utilizes real-time trading data from your choice of exchanges. </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"> It includes over 150 indicators and line studies plus indicator interpretations that help you understand how to trade each indicator. For advanced users, The Indicator Builder lets you write your own indicators. You can build and backtest trading strategies on your own or work through the strategies that are included in the package. </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"> MetaStock can identify more than 32 candle patterns on a chart, giving you advice on how to interpret and use them.<span class="ql-inline-citation" data-cite="15"></span> A Metastock R/T subscription is $100/month; data feeds are additional. MetaStock connects via API to online brokers.<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_85-0"></div> <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"> NinjaTrader </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="externalLink" href="https://ninjatrader.com/" rel="sponsored nofollow">NinjaTrader</a> offers a trading environment that you can use to build, test, and simulate a trading system for equities, forex, and futures before investing real money in a live market. NinjaTrader itself is free to use for advanced charting, backtesting, and trade simulation, but there are fees for some indicators built by third-party developers. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> You'll find 100+ technical indicators in the basic package, plus fundamentals, charting, trade journaling, and research tools.<span class="ql-inline-citation" data-cite="17"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Via API, you can bolt NinjaTrader onto Interactive Brokers, FXCM, and others, or trade using NinjaTrader's own brokerage service. </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"> Slope of Hope </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_94-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://slopeofhope.com" rel="sponsored nofollow">Slope of Hope</a> was founded in 2005 after creator and perma-bear Tim Knight sold his charting site, Prophet.net, to TD Ameritrade, to share charts and trading experiences with a few of his fans. It is now a destination for technical analysis, trading ideas, charts, and discussions with traders of all stripes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Many of the features, including a very powerful technical charting package, are free to use, and rival the capabilities of much more expensive sites. A key feature of SlopeCharts is SlopeRules, which lets you create and test a trading system using technical rules. Drag and drop the rules you’d like to use on a chart and test them, then set up an alert to let you know when the conditions have been met. </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"> An integrated virtual trading system is available that starts off with an account with $100,000 to help you learn how to hone your trading skills. Options traders will find some terrific analytical tools. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> Premium membership levels ($14.95–$79.95 per month, two months free with an annual subscription) offer access to additional data, powerful options analysis, and access to exclusive trading ideas. </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"> Slope has launched native mobile apps for iOS and Android devices, allowing access to all posts and a subset of the tools from the website. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_104-0"> <span class="mntl-sc-block-subheading__text"> StockCharts </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://stockcharts.com/" rel="sponsored nofollow">StockCharts</a> allows you to create intraday, daily, weekly, monthly, quarterly, and yearly price charts, point & figure charts, seasonality charts, relative rotation graphs, and more. They have the ability to have 10 different ticker symbols on the same chart, and real-time data coverage for a number of cryptocurrencies, including Bitcoin, Ethereum, XRP, Litecoin, and Bitcoin Cash. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_107-0"> The ability to do technical analysis on cryptocurrencies is relatively unique. You can use a limited set of features for free; monthly subscription plans that allow additional technical studies and more historical data range from $14.95–$39.95.<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_108-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_109-0"> <span class="mntl-sc-block-subheading__text"> TC2000 </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_110-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tc2000.com/" rel="sponsored nofollow">TC2000</a> is also a venerable name in the technical analysis world and was formerly known as TeleChart. Version 20 has Windows, Mac, mobile, and web platforms available, plus you can connect directly to Interactive Brokers to place trades through TC2000 Brokerage. TC2000 combines charting, stock and option screening, and trading features, and you can use the practice version for free. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_112-0"> You’ll need the Gold or Platinum level subscription ($29.99–$49.99 per month) to use the scanners; Platinum subscriptions allow you to scan the market for specific conditions on any date that has available data, just to get an idea of how well a custom indicator you may be building will work.<span class="ql-inline-citation" data-cite="19"></span> Data feeds incur additional charges. </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"> Ticker Tocker </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://app.tickertocker.com/" rel="sponsored nofollow">Ticker Tocker</a>, launched in 2018, offers users a wide variety of trading services, including education, research, and automated trading resources. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> You can follow other members who are signed in as Leaders or use the strategy creation tools to generate your own trading system. You can backtest the strategies you've created with historical data to see how they would have performed. The charting system built-in allows you to overlay price charts with technical indicators. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_119-0"> The site also includes Ticker Tocker's in-platform and syndicated trading TV channel, Ticker Tocker TV. The platform is compatible with brokers including Interactive Brokers, E*TRADE, Tradier, Fidelity Investments, and TradeStation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_120-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_121-0"> You can join and use many of the features at no charge, though there are fees for premium services and access to experts. </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"> Trade Ideas </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_124-0"> <a data-affiliate-link-rewriter="aff_sub2=${DOC_ID}&aff_sub3=${REQUEST_ID}" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://go.trade-ideas.com/aff_c?offer_id=6&aff_id=2573&url_id=65&source=investopedia" rel="sponsored nofollow">Trade Ideas</a> launched in 2003, counts among its subscribers investors, traders, and market professionals. The system has 310 alerts and 253 filters that include technical, social media, and other non-structured data sets and identifies short-term and swing trading opportunities.<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_125-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_126-0"> Subscribers can also create their own formulas as indicators and build custom, dynamically updating watch lists and real-time alerts. These trading systems can then be back-tested and traded in a simulated trading environment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_127-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_128-0"> Premium plan subscribers with connected Interactive Brokers accounts can send live trades via the Trade Ideas platform. The Trade Ideas platform links with most trading and charting platforms. The majority of Trade Ideas subscribers now leverage TI's HOLLY AI, an artificially intelligent trading assistant to identify trades derived from continually optimized strategies that are demonstrating a consistent performance edge in the market. </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"> Trade Ideas is downloadable to Windows platforms and also offers a web version for access on any device. A standard subscription is $84 per month ($999 per year), while the premium services are $167 monthly ($1,999 per year).<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_131-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_132-0"> <span class="mntl-sc-block-subheading__text"> TradingView </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_133-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.tradingview.com" rel="sponsored nofollow">TradingView</a> has over 100 indicators combined with intelligent drawing tools that cover global stocks, currencies, and cryptocurrencies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_134-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_135-0"> The proprietary Pine Script language lets you change existing indicators or create anything from scratch. The public script library contains thousands of scripts published by other TradingView members. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_136-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_137-0"> You can use a limited set of features for free; subscriptions with access to additional features and data are $14.95–$59.95 per month.<span class="ql-inline-citation" data-cite="22"></span> There’s a paper trading system built-in, or you can link TradingView to a brokerage account with several brokers, including TradeStation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_138-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_139-0"> <span class="mntl-sc-block-subheading__text"> TrendSpider </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_140-0"> Founded in 2016, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.trendspider.com" rel="sponsored nofollow">TrendSpider</a> has an impressive array of technical analysis tools designed to help you find, plan, and time your trades with greater efficiency and precision. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_141-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_142-0"> You can generate dynamic watch lists using the Market Scanner, which can search across time frames ranging from 1 minute to 1 month. There are several dozen scanners built-in, or you can design your own. Real-time market data and 20+ years of historical data are included at no extra charge. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_143-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_144-0"> The platform is web-based, with your customizations stored in the cloud. The charting package includes the ability to backtest (for Advanced and Elite customers) the strategies you’ve created. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_145-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_146-0"> Subscriptions range from $17-135 per month, with discounts for prepaid annual plans.<span class="ql-inline-citation" data-cite="23"></span> </p></div>	A vital part of a trader's success, especially those who trade frequently, is the ability to evaluate patterns in trading data. [Technical analysis techniques](https://www.investopedia.com/best-technical-analysis-courses-5118327) can remove emotion from a trading decision. Technical analysis systems generate buy and sell indicators and help locate new trading opportunities. With the improvements in software and the speed of accessing millions of data points over the past 15 years, technical analysis tools are available to all online traders. Most of the better sites that offer [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) tools also guide new traders towards a fundamental understanding of the core concepts. Some of these resources are free or included in a broker's platform while others charge a fee. We'll take a look at technical analysis tools built into brokers' offerings and some standalone resources. ## Brokers Offering Technical Analysis Tools Several of the brokers listed below utilize Trading Central, a third-party provider. A [Canadian-based](https://www.investopedia.com/articles/markets/082615/5-biggest-canadian-software-companies.asp) company, Trading Central provides excellent technical analysis tools that many brokers have integrated into their frequent trader platforms. Trading Central's tools automatically analyze price action to identify and interpret classic chart patterns and other critical conditions based on accepted practices of technical analysis. These Technical Event notifications give traders insight into the strengths and weaknesses of stocks under consideration. These tools cannot be accessed by individual investors outside brokerage platforms, but you will find their technology built into quite a few active trader sites. ### Ally Invest [Ally Invest's](https://www.ally.com/invest/) brokerage platform includes a stock screener that is powered by Trading Central. You can read Investopedia's [review of Ally Invest](https://www.investopedia.com/ally-invest-review-4587885). ### Charles Schwab [Charles Schwab's](https://www.schwab.com/) frequent trader platform, StreetSmart Edge, offers Screener Plus, which uses real-time streaming data, allowing clients to filter stocks and ETFs based on a range of fundamental and technical criteria, including technical signals from Trading Central (Recognia). Traders can set the parameters that are most important to them and then integrate Screener Plus results with their pre-defined watch lists. StreetSmart Edge's customizable charts incorporate Trading Central (Recognia) pattern recognition tools. Charting on mobile devices includes quite a few technical analysis indicators, though there are no drawing tools. Read Investopedia's [review of Charles Schwab](https://www.investopedia.com/charles-schwab-review-4587888). ### E\TRADE On Power [E\TRADE](https://www.etrade.com), the firm's active trader platform, the Live Action scanner has over 100 pre-defined screens that scan the market in real-time on live prices and live analytical metrics based on technical, fundamental, earnings, sentiment, and news events. The Oscillator scans built into Live Action help uncover overbought or oversold stocks and explore additional opportunities for a client's portfolio. Many of these built-in screens are unique to the Power E\TRADE platform. The Recognia scanner enables you to scan stocks based on technical events or patterns, and set alerts when new criteria are met. You can use the paper trading capabilities of Power E\TRADE to test out your technical trading system. You can read Investopedia's [review of E\TRADE](https://www.investopedia.com/e-trade-review-4587893). ### Fidelity Investments Active Trader Pro is [Fidelity's](https://www.fidelity.com) downloadable trading interface, offering a deeper feature set than is available through the website. Active Trader Pro provides customizable charting functions and trade tools upfront. The software can alert you to technical signals in stocks you are following, and provide alerts on open positions. Fidelity's web-based charting has integrated technical patterns and events provided by Trading Central. The advanced charting on the web offers the ability to see 30 days of intraday data, extended hours data, and more than 60 fully customizable technical indicators. The Fidelity Learning Center with content made up of articles, videos, webinars, infographics, and recorded webinars, includes a focus on technical analysis. Fidelity also offers weekly online coaching sessions, where clients can attend with a small group to have in-depth discussions around options and technical analysis. You can read Investopedia's [review of Fidelity](https://www.investopedia.com/fidelity-review-4587897). ### Interactive Brokers Extensively customizable charting is offered on all of [Interactive Brokers'](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) platforms and includes over 100 indicators and real-time streaming data. Trader Workstation (TWS), IB's flagship trading platform, contains advanced technical analysis tools with over 120 indicators. There's a demo version of TWS available that allows traders to learn how the platform works and to test trading scenarios. In addition, it's possible to attach a third-party analytics platform to your IBKR account. You can search a full list of vendors at the [Investors Marketplace](https://gdcdyn.interactivebrokers.com/Marketplace/InvestorsMarketplace). You can read Investopedia's [review of Interactive Brokers](https://www.investopedia.com/interactive-brokers-review-4587904). ### Lightspeed Intended for very frequent traders, [Lightspeed's](https://www.lightspeed.com) flagship platform, a downloadable program called Lightspeed Trader, has a highly customizable live market scanner called LightScan, which can help you screen for current trading opportunities. LightScan searches the entire universe of stocks to display symbols sorted and filtered based on your preferences. There are over 100 possible criteria to search on, which can be combined. The flagship platform has customizable charting. There's a demo version of the platform available for those who want a test drive. You can read Investopedia's [review of Lightspeed](https://www.investopedia.com/lightspeed-review-4587908). ### TradeStation Technical analysis and statistical modeling of trading strategies is a key strength of the [TradeStation](https://tradestation.pxf.io/c/328256/1185053/8402) platform. The brokerage grew out of technical analysis software development firm Omega Research, so technical analysis is in its DNA. The downloadable TradeStation 10 platform offers incredible charting capability based on tick data. Automated technical analysis is built into the charting package, displaying technical patterns on the charts as they form. Web charting capabilities closely match TradeStation 10, including a new toolbar with access to adjust time frames, drawing tools, sessions, and styles. This is one of the best charting applications available from any broker, and it is especially notable for how well it is integrated with TradeStation's order management system. TradeStation users can also create and backtest a trading system based on technical events. TradeStation's trading simulator has all the tools you'll find on TradeStation 10 and includes a large historical database for backtesting strategies. You can read Investopedia's [review of TradeStation](https://www.investopedia.com/tradestation-review-4587927). ### Tradier [Tradier](https://www.tradier.com) is an interesting beast, offering a brokerage-account management system, a trading engine, and some market data. Account settings and market data are based in the cloud, so customers can log into and trade from any of Tradier's developer partners. They also offer a downloadable version for your desktop. Using an application programming interface (API), front-end designers can launch their own trading platforms, mobile apps, algorithmic trading systems, or other customized features for their customers. The ability to attach a third-party platform to one's online brokerage account isn't new—quite a few of the brokers mentioned above can do it too—but Tradier is the first broker to make it the center of its business model. We will note in the next section whether a standalone technical analysis site can be bolted onto Tradier's brokerage management platform, enabling transactions while using analytical tools. ## Technical Analysis Sites ### eSignal [ESignal](https://www.esignal.com) is one of the venerable names in technical analysis. The current version, eSignal 12, is a downloadable Windows-based software package offering technical analysis studies, backtesting of trading strategies, customizable charting, and data from global exchanges. Via API, users can trade with several dozen brokers, including Tradier and Interactive Brokers. It's pricey though: the Classic version, which uses 15-minute delayed data, is $61 per month. Its Signature version, which runs on real-time data and offers a host of advanced features, is $204 per month. The Elite version costs $416 per month. ### MarketGear from iVest+ [Market Gear's](https://www.marketgear.com) charting capabilities allow you to analyze customizable indicators, view your trades, draw permanent trendlines, review past trades, and select from an array of time frames. The scanner lets you sort through over 100 customizable technical indicators to find trading opportunities based on technical data. Write as many scans as you want and set your favorites for quick access. Market Gear connects through APIs to E\TRADE, ChoiceTrade, and Ally Invest. Pricing starts at $75 per month. ### MetaStock [MetaStock](https://www.metastock.com) is another one of the longtime players in the technical analysis industry, having been founded in the late 1980s. There are several versions of the software available; the most useful for frequent traders is MetaStock R/T which utilizes real-time trading data from your choice of exchanges. It includes over 150 indicators and line studies plus indicator interpretations that help you understand how to trade each indicator. For advanced users, The Indicator Builder lets you write your own indicators. You can build and backtest trading strategies on your own or work through the strategies that are included in the package. MetaStock can identify more than 32 candle patterns on a chart, giving you advice on how to interpret and use them. A Metastock R/T subscription is $100/month; data feeds are additional. MetaStock connects via API to online brokers. ### NinjaTrader [NinjaTrader](https://ninjatrader.com/) offers a trading environment that you can use to build, test, and simulate a trading system for equities, forex, and futures before investing real money in a live market. NinjaTrader itself is free to use for advanced charting, backtesting, and trade simulation, but there are fees for some indicators built by third-party developers. You'll find 100+ technical indicators in the basic package, plus fundamentals, charting, trade journaling, and research tools. Via API, you can bolt NinjaTrader onto Interactive Brokers, FXCM, and others, or trade using NinjaTrader's own brokerage service. ### Slope of Hope [Slope of Hope](https://slopeofhope.com) was founded in 2005 after creator and perma-bear Tim Knight sold his charting site, Prophet.net, to TD Ameritrade, to share charts and trading experiences with a few of his fans. It is now a destination for technical analysis, trading ideas, charts, and discussions with traders of all stripes. Many of the features, including a very powerful technical charting package, are free to use, and rival the capabilities of much more expensive sites. A key feature of SlopeCharts is SlopeRules, which lets you create and test a trading system using technical rules. Drag and drop the rules you’d like to use on a chart and test them, then set up an alert to let you know when the conditions have been met. An integrated virtual trading system is available that starts off with an account with $100,000 to help you learn how to hone your trading skills. Options traders will find some terrific analytical tools. Premium membership levels ($14.95–$79.95 per month, two months free with an annual subscription) offer access to additional data, powerful options analysis, and access to exclusive trading ideas. Slope has launched native mobile apps for iOS and Android devices, allowing access to all posts and a subset of the tools from the website. ### StockCharts [StockCharts](https://stockcharts.com/) allows you to create intraday, daily, weekly, monthly, quarterly, and yearly price charts, point & figure charts, seasonality charts, relative rotation graphs, and more. They have the ability to have 10 different ticker symbols on the same chart, and real-time data coverage for a number of cryptocurrencies, including Bitcoin, Ethereum, XRP, Litecoin, and Bitcoin Cash. The ability to do technical analysis on cryptocurrencies is relatively unique. You can use a limited set of features for free; monthly subscription plans that allow additional technical studies and more historical data range from $14.95–$39.95. ### TC2000 [TC2000](https://www.tc2000.com/) is also a venerable name in the technical analysis world and was formerly known as TeleChart. Version 20 has Windows, Mac, mobile, and web platforms available, plus you can connect directly to Interactive Brokers to place trades through TC2000 Brokerage. TC2000 combines charting, stock and option screening, and trading features, and you can use the practice version for free. You’ll need the Gold or Platinum level subscription ($29.99–$49.99 per month) to use the scanners; Platinum subscriptions allow you to scan the market for specific conditions on any date that has available data, just to get an idea of how well a custom indicator you may be building will work. Data feeds incur additional charges. ### Ticker Tocker [Ticker Tocker](https://app.tickertocker.com/), launched in 2018, offers users a wide variety of trading services, including education, research, and automated trading resources. You can follow other members who are signed in as Leaders or use the strategy creation tools to generate your own trading system. You can backtest the strategies you've created with historical data to see how they would have performed. The charting system built-in allows you to overlay price charts with technical indicators. The site also includes Ticker Tocker's in-platform and syndicated trading TV channel, Ticker Tocker TV. The platform is compatible with brokers including Interactive Brokers, E\*TRADE, Tradier, Fidelity Investments, and TradeStation. You can join and use many of the features at no charge, though there are fees for premium services and access to experts. ### Trade Ideas [Trade Ideas](https://go.trade-ideas.com/aff_c?offer_id=6&aff_id=2573&url_id=65&source=investopedia) launched in 2003, counts among its subscribers investors, traders, and market professionals. The system has 310 alerts and 253 filters that include technical, social media, and other non-structured data sets and identifies short-term and swing trading opportunities. Subscribers can also create their own formulas as indicators and build custom, dynamically updating watch lists and real-time alerts. These trading systems can then be back-tested and traded in a simulated trading environment. Premium plan subscribers with connected Interactive Brokers accounts can send live trades via the Trade Ideas platform. The Trade Ideas platform links with most trading and charting platforms. The majority of Trade Ideas subscribers now leverage TI's HOLLY AI, an artificially intelligent trading assistant to identify trades derived from continually optimized strategies that are demonstrating a consistent performance edge in the market. Trade Ideas is downloadable to Windows platforms and also offers a web version for access on any device. A standard subscription is $84 per month ($999 per year), while the premium services are $167 monthly ($1,999 per year). ### TradingView [TradingView](https://www.tradingview.com) has over 100 indicators combined with intelligent drawing tools that cover global stocks, currencies, and cryptocurrencies. The proprietary Pine Script language lets you change existing indicators or create anything from scratch. The public script library contains thousands of scripts published by other TradingView members. You can use a limited set of features for free; subscriptions with access to additional features and data are $14.95–$59.95 per month. There’s a paper trading system built-in, or you can link TradingView to a brokerage account with several brokers, including TradeStation. ### TrendSpider Founded in 2016, [TrendSpider](https://www.trendspider.com) has an impressive array of technical analysis tools designed to help you find, plan, and time your trades with greater efficiency and precision. You can generate dynamic watch lists using the Market Scanner, which can search across time frames ranging from 1 minute to 1 month. There are several dozen scanners built-in, or you can design your own. Real-time market data and 20+ years of historical data are included at no extra charge. The platform is web-based, with your customizations stored in the cloud. The charting package includes the ability to backtest (for Advanced and Elite customers) the strategies you’ve created. Subscriptions range from $17-135 per month, with discounts for prepaid annual plans.	A vital part of a trader's success, especially those who trade frequently, is the ability to evaluate patterns in trading data. Technical analysis techniques can remove emotion from a trading decision. Technical analysis systems generate buy and sell indicators and help locate new trading opportunities. With the improvements in software and the speed of accessing millions of data points over the past 15 years, technical analysis tools are available to all online traders. Most of the better sites that offer technical analysis tools also guide new traders towards a fundamental understanding of the core concepts. Some of these resources are free or included in a broker's platform while others charge a fee. We'll take a look at technical analysis tools built into brokers' offerings and some standalone resources. Brokers Offering Technical Analysis Tools Several of the brokers listed below utilize Trading Central, a third-party provider. A Canadian-based company, Trading Central provides excellent technical analysis tools that many brokers have integrated into their frequent trader platforms. Trading Central's tools automatically analyze price action to identify and interpret classic chart patterns and other critical conditions based on accepted practices of technical analysis. These Technical Event notifications give traders insight into the strengths and weaknesses of stocks under consideration. These tools cannot be accessed by individual investors outside brokerage platforms, but you will find their technology built into quite a few active trader sites. Ally Invest Ally Invest's brokerage platform includes a stock screener that is powered by Trading Central. You can read Investopedia's review of Ally Invest. Charles Schwab Charles Schwab's frequent trader platform, StreetSmart Edge, offers Screener Plus, which uses real-time streaming data, allowing clients to filter stocks and ETFs based on a range of fundamental and technical criteria, including technical signals from Trading Central (Recognia). Traders can set the parameters that are most important to them and then integrate Screener Plus results with their pre-defined watch lists. StreetSmart Edge's customizable charts incorporate Trading Central (Recognia) pattern recognition tools. Charting on mobile devices includes quite a few technical analysis indicators, though there are no drawing tools. Read Investopedia's review of Charles Schwab. ETRADE On Power ETRADE, the firm's active trader platform, the Live Action scanner has over 100 pre-defined screens that scan the market in real-time on live prices and live analytical metrics based on technical, fundamental, earnings, sentiment, and news events. The Oscillator scans built into Live Action help uncover overbought or oversold stocks and explore additional opportunities for a client's portfolio. Many of these built-in screens are unique to the Power ETRADE platform. The Recognia scanner enables you to scan stocks based on technical events or patterns, and set alerts when new criteria are met. You can use the paper trading capabilities of Power ETRADE to test out your technical trading system. You can read Investopedia's review of ETRADE. Fidelity Investments Active Trader Pro is Fidelity's downloadable trading interface, offering a deeper feature set than is available through the website. Active Trader Pro provides customizable charting functions and trade tools upfront. The software can alert you to technical signals in stocks you are following, and provide alerts on open positions. Fidelity's web-based charting has integrated technical patterns and events provided by Trading Central. The advanced charting on the web offers the ability to see 30 days of intraday data, extended hours data, and more than 60 fully customizable technical indicators. The Fidelity Learning Center with content made up of articles, videos, webinars, infographics, and recorded webinars, includes a focus on technical analysis. Fidelity also offers weekly online coaching sessions, where clients can attend with a small group to have in-depth discussions around options and technical analysis. You can read Investopedia's review of Fidelity. Interactive Brokers Extensively customizable charting is offered on all of Interactive Brokers' platforms and includes over 100 indicators and real-time streaming data. Trader Workstation (TWS), IB's flagship trading platform, contains advanced technical analysis tools with over 120 indicators. There's a demo version of TWS available that allows traders to learn how the platform works and to test trading scenarios. In addition, it's possible to attach a third-party analytics platform to your IBKR account. You can search a full list of vendors at the Investors Marketplace. You can read Investopedia's review of Interactive Brokers. Lightspeed Intended for very frequent traders, Lightspeed's flagship platform, a downloadable program called Lightspeed Trader, has a highly customizable live market scanner called LightScan, which can help you screen for current trading opportunities. LightScan searches the entire universe of stocks to display symbols sorted and filtered based on your preferences. There are over 100 possible criteria to search on, which can be combined. The flagship platform has customizable charting. There's a demo version of the platform available for those who want a test drive. You can read Investopedia's review of Lightspeed. TradeStation Technical analysis and statistical modeling of trading strategies is a key strength of the TradeStation platform. The brokerage grew out of technical analysis software development firm Omega Research, so technical analysis is in its DNA. The downloadable TradeStation 10 platform offers incredible charting capability based on tick data. Automated technical analysis is built into the charting package, displaying technical patterns on the charts as they form. Web charting capabilities closely match TradeStation 10, including a new toolbar with access to adjust time frames, drawing tools, sessions, and styles. This is one of the best charting applications available from any broker, and it is especially notable for how well it is integrated with TradeStation's order management system. TradeStation users can also create and backtest a trading system based on technical events. TradeStation's trading simulator has all the tools you'll find on TradeStation 10 and includes a large historical database for backtesting strategies. You can read Investopedia's review of TradeStation. Tradier Tradier is an interesting beast, offering a brokerage-account management system, a trading engine, and some market data. Account settings and market data are based in the cloud, so customers can log into and trade from any of Tradier's developer partners. They also offer a downloadable version for your desktop. Using an application programming interface (API), front-end designers can launch their own trading platforms, mobile apps, algorithmic trading systems, or other customized features for their customers. The ability to attach a third-party platform to one's online brokerage account isn't new—quite a few of the brokers mentioned above can do it too—but Tradier is the first broker to make it the center of its business model. We will note in the next section whether a standalone technical analysis site can be bolted onto Tradier's brokerage management platform, enabling transactions while using analytical tools. Technical Analysis Sites eSignal ESignal is one of the venerable names in technical analysis. The current version, eSignal 12, is a downloadable Windows-based software package offering technical analysis studies, backtesting of trading strategies, customizable charting, and data from global exchanges. Via API, users can trade with several dozen brokers, including Tradier and Interactive Brokers. It's pricey though: the Classic version, which uses 15-minute delayed data, is $61 per month. Its Signature version, which runs on real-time data and offers a host of advanced features, is $204 per month. The Elite version costs $416 per month. MarketGear from iVest+ Market Gear's charting capabilities allow you to analyze customizable indicators, view your trades, draw permanent trendlines, review past trades, and select from an array of time frames. The scanner lets you sort through over 100 customizable technical indicators to find trading opportunities based on technical data. Write as many scans as you want and set your favorites for quick access. Market Gear connects through APIs to ETRADE, ChoiceTrade, and Ally Invest. Pricing starts at $75 per month. MetaStock MetaStock is another one of the longtime players in the technical analysis industry, having been founded in the late 1980s. There are several versions of the software available; the most useful for frequent traders is MetaStock R/T which utilizes real-time trading data from your choice of exchanges. It includes over 150 indicators and line studies plus indicator interpretations that help you understand how to trade each indicator. For advanced users, The Indicator Builder lets you write your own indicators. You can build and backtest trading strategies on your own or work through the strategies that are included in the package. MetaStock can identify more than 32 candle patterns on a chart, giving you advice on how to interpret and use them. A Metastock R/T subscription is $100/month; data feeds are additional. MetaStock connects via API to online brokers. NinjaTrader NinjaTrader offers a trading environment that you can use to build, test, and simulate a trading system for equities, forex, and futures before investing real money in a live market. NinjaTrader itself is free to use for advanced charting, backtesting, and trade simulation, but there are fees for some indicators built by third-party developers. You'll find 100+ technical indicators in the basic package, plus fundamentals, charting, trade journaling, and research tools. Via API, you can bolt NinjaTrader onto Interactive Brokers, FXCM, and others, or trade using NinjaTrader's own brokerage service. Slope of Hope Slope of Hope was founded in 2005 after creator and perma-bear Tim Knight sold his charting site, Prophet.net, to TD Ameritrade, to share charts and trading experiences with a few of his fans. It is now a destination for technical analysis, trading ideas, charts, and discussions with traders of all stripes. Many of the features, including a very powerful technical charting package, are free to use, and rival the capabilities of much more expensive sites. A key feature of SlopeCharts is SlopeRules, which lets you create and test a trading system using technical rules. Drag and drop the rules you’d like to use on a chart and test them, then set up an alert to let you know when the conditions have been met. An integrated virtual trading system is available that starts off with an account with $100,000 to help you learn how to hone your trading skills. Options traders will find some terrific analytical tools. Premium membership levels ($14.95–$79.95 per month, two months free with an annual subscription) offer access to additional data, powerful options analysis, and access to exclusive trading ideas. Slope has launched native mobile apps for iOS and Android devices, allowing access to all posts and a subset of the tools from the website. StockCharts StockCharts allows you to create intraday, daily, weekly, monthly, quarterly, and yearly price charts, point & figure charts, seasonality charts, relative rotation graphs, and more. They have the ability to have 10 different ticker symbols on the same chart, and real-time data coverage for a number of cryptocurrencies, including Bitcoin, Ethereum, XRP, Litecoin, and Bitcoin Cash. The ability to do technical analysis on cryptocurrencies is relatively unique. You can use a limited set of features for free; monthly subscription plans that allow additional technical studies and more historical data range from $14.95–$39.95. TC2000 TC2000 is also a venerable name in the technical analysis world and was formerly known as TeleChart. Version 20 has Windows, Mac, mobile, and web platforms available, plus you can connect directly to Interactive Brokers to place trades through TC2000 Brokerage. TC2000 combines charting, stock and option screening, and trading features, and you can use the practice version for free. You’ll need the Gold or Platinum level subscription ($29.99–$49.99 per month) to use the scanners; Platinum subscriptions allow you to scan the market for specific conditions on any date that has available data, just to get an idea of how well a custom indicator you may be building will work. Data feeds incur additional charges. Ticker Tocker Ticker Tocker, launched in 2018, offers users a wide variety of trading services, including education, research, and automated trading resources. You can follow other members who are signed in as Leaders or use the strategy creation tools to generate your own trading system. You can backtest the strategies you've created with historical data to see how they would have performed. The charting system built-in allows you to overlay price charts with technical indicators. The site also includes Ticker Tocker's in-platform and syndicated trading TV channel, Ticker Tocker TV. The platform is compatible with brokers including Interactive Brokers, E*TRADE, Tradier, Fidelity Investments, and TradeStation. You can join and use many of the features at no charge, though there are fees for premium services and access to experts. Trade Ideas Trade Ideas launched in 2003, counts among its subscribers investors, traders, and market professionals. The system has 310 alerts and 253 filters that include technical, social media, and other non-structured data sets and identifies short-term and swing trading opportunities. Subscribers can also create their own formulas as indicators and build custom, dynamically updating watch lists and real-time alerts. These trading systems can then be back-tested and traded in a simulated trading environment. Premium plan subscribers with connected Interactive Brokers accounts can send live trades via the Trade Ideas platform. The Trade Ideas platform links with most trading and charting platforms. The majority of Trade Ideas subscribers now leverage TI's HOLLY AI, an artificially intelligent trading assistant to identify trades derived from continually optimized strategies that are demonstrating a consistent performance edge in the market. Trade Ideas is downloadable to Windows platforms and also offers a web version for access on any device. A standard subscription is $84 per month ($999 per year), while the premium services are $167 monthly ($1,999 per year). TradingView TradingView has over 100 indicators combined with intelligent drawing tools that cover global stocks, currencies, and cryptocurrencies. The proprietary Pine Script language lets you change existing indicators or create anything from scratch. The public script library contains thousands of scripts published by other TradingView members. You can use a limited set of features for free; subscriptions with access to additional features and data are $14.95–$59.95 per month. There’s a paper trading system built-in, or you can link TradingView to a brokerage account with several brokers, including TradeStation. TrendSpider Founded in 2016, TrendSpider has an impressive array of technical analysis tools designed to help you find, plan, and time your trades with greater efficiency and precision. You can generate dynamic watch lists using the Market Scanner, which can search across time frames ranging from 1 minute to 1 month. There are several dozen scanners built-in, or you can design your own. Real-time market data and 20+ years of historical data are included at no extra charge. The platform is web-based, with your customizations stored in the cloud. The charting package includes the ability to backtest (for Advanced and Elite customers) the strategies you’ve created. Subscriptions range from $17-135 per month, with discounts for prepaid annual plans.	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https://www.investopedia.com/terms/r/revolving-loan-facility.asp	Revolving Loan Facility Explained: How Does It 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-a-revolving-loan-facility"></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 Revolving Loan Facility? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again.<span class="ql-inline-citation" data-cite="1"></span> A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/termloan.asp">term loan</a> because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again. In contrast, a term loan provides a borrower with funds followed by a fixed payment schedule. </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 revolving loan facility provides loans to borrowers with a great deal of flexibility in terms of repayments and re-borrowing.</li><li>The interest rate on a revolving loan facility is typically that of a variable line of credit, rather than a fixed rate.</li><li>A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations, including meeting payroll and payables.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-revolving-loan-facility-works"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> How a Revolving Loan Facility Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> A revolving loan facility is typically a variable line of credit used by public and private businesses. The line is variable because the interest rate on the credit line can fluctuate. In other words, if interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan. The rate is often higher than rates charged on other loans and changes with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/primerate.asp">prime rate</a> or another market indicator. The financial institution typically charges a fee for extending the loan. </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"> Criteria for approval of the loan depends on the stage, size, and industry in which the business operates. The financial institution typically examines the company’s financial statements, including the income statement, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashflowstatement.asp">statement of cash flows</a>, and balance sheet when deciding whether the business can repay a debt. The odds of the loan getting approved increases if a company can demonstrate steady income, strong cash reserves, and a good credit score. The balance on a revolving loan facility may move between zero and the maximum approved value. </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-how-do-businesses-use-a-revolving-loan-facility"></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"> How Do Businesses Use a Revolving Loan Facility? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations. A revolving line is especially helpful during times of revenue fluctuations, since bills and unexpected expenses can be paid by drawing from the loan. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance. </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 financial institution may review the revolving loan facility annually. If a company’s revenue shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is important for the business owner to discuss the company’s circumstances with the financial institution to avoid a reduction in or termination of the loan. </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>A revolving loan facility provides a variable line of credit that allows people or businesses great flexibility with the funds they are borrowing.</p></div></div></div> <span class="heading-toc" id="toc-example-of-a-revolving-loan-facility"></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"> Example of a Revolving Loan Facility </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountsreceivable.asp">accounts receivable</a> payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machinery. </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_21-0"><span class="heading-toc" id="toc-how-long-do-you-have-to-repay-a-revolving-loan-facility"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Do You Have to Repay a Revolving Loan Facility?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Unlike a term loan with fixed payments, a revolving loan facility has no established term. Money is withdrawn by the company, reducing the amount available to borrow. It is then paid back, replenishing the line of credit.</p></div> </div> <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-are-all-revolving-loan-facilities-for-businesses"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are all Revolving Loan Facilities for Businesses?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>For the purposes of this article, yes, they are limited to businesses. Home equity lines of credit or personal lines of credit operate on the same principles for personal use.</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-do-you-pay-interest-on-a-revolving-loan-facility"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do You Pay Interest on a Revolving Loan Facility?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes. A revolving loan facility is a loan, just like any other term loan. The difference is that instead of receiving borrowed money in a lump sum, the money can be used as needed, repaid, and then used again.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> For businesses with fluctuating income, a revolving loan facility can be a great option for meeting payroll or covering unforeseen expenses. Establishing a revolving loan facility with your bank could be a wise move for your business.<br/> </p></div>	## What Is a Revolving Loan Facility? A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a [term loan](https://www.investopedia.com/terms/t/termloan.asp) because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again. In contrast, a term loan provides a borrower with funds followed by a fixed payment schedule. ### Key Takeaways * A revolving loan facility provides loans to borrowers with a great deal of flexibility in terms of repayments and re-borrowing. * The interest rate on a revolving loan facility is typically that of a variable line of credit, rather than a fixed rate. * A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations, including meeting payroll and payables. ## How a Revolving Loan Facility Works A revolving loan facility is typically a variable line of credit used by public and private businesses. The line is variable because the interest rate on the credit line can fluctuate. In other words, if interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan. The rate is often higher than rates charged on other loans and changes with the [prime rate](https://www.investopedia.com/terms/p/primerate.asp) or another market indicator. The financial institution typically charges a fee for extending the loan. Criteria for approval of the loan depends on the stage, size, and industry in which the business operates. The financial institution typically examines the company’s financial statements, including the income statement, [statement of cash flows](https://www.investopedia.com/terms/c/cashflowstatement.asp), and balance sheet when deciding whether the business can repay a debt. The odds of the loan getting approved increases if a company can demonstrate steady income, strong cash reserves, and a good credit score. The balance on a revolving loan facility may move between zero and the maximum approved value. ## How Do Businesses Use a Revolving Loan Facility? A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations. A revolving line is especially helpful during times of revenue fluctuations, since bills and unexpected expenses can be paid by drawing from the loan. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance. The financial institution may review the revolving loan facility annually. If a company’s revenue shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is important for the business owner to discuss the company’s circumstances with the financial institution to avoid a reduction in or termination of the loan. ### A revolving loan facility provides a variable line of credit that allows people or businesses great flexibility with the funds they are borrowing. ## Example of a Revolving Loan Facility Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp) payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machinery. ## How Long Do You Have to Repay a Revolving Loan Facility? Unlike a term loan with fixed payments, a revolving loan facility has no established term. Money is withdrawn by the company, reducing the amount available to borrow. It is then paid back, replenishing the line of credit. ## Are all Revolving Loan Facilities for Businesses? For the purposes of this article, yes, they are limited to businesses. Home equity lines of credit or personal lines of credit operate on the same principles for personal use. ## Do You Pay Interest on a Revolving Loan Facility? Yes. A revolving loan facility is a loan, just like any other term loan. The difference is that instead of receiving borrowed money in a lump sum, the money can be used as needed, repaid, and then used again. ## The Bottom Line For businesses with fluctuating income, a revolving loan facility can be a great option for meeting payroll or covering unforeseen expenses. Establishing a revolving loan facility with your bank could be a wise move for your business.	What Is a Revolving Loan Facility? A revolving loan facility, also called a revolving credit facility or simply revolver, is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again. In contrast, a term loan provides a borrower with funds followed by a fixed payment schedule. Key Takeaways A revolving loan facility provides loans to borrowers with a great deal of flexibility in terms of repayments and re-borrowing.The interest rate on a revolving loan facility is typically that of a variable line of credit, rather than a fixed rate.A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations, including meeting payroll and payables. How a Revolving Loan Facility Works A revolving loan facility is typically a variable line of credit used by public and private businesses. The line is variable because the interest rate on the credit line can fluctuate. In other words, if interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan. The rate is often higher than rates charged on other loans and changes with the prime rate or another market indicator. The financial institution typically charges a fee for extending the loan. Criteria for approval of the loan depends on the stage, size, and industry in which the business operates. The financial institution typically examines the company’s financial statements, including the income statement, statement of cash flows, and balance sheet when deciding whether the business can repay a debt. The odds of the loan getting approved increases if a company can demonstrate steady income, strong cash reserves, and a good credit score. The balance on a revolving loan facility may move between zero and the maximum approved value. How Do Businesses Use a Revolving Loan Facility? A revolving loan or line facility allows a business to borrow money as needed for funding working capital needs and continuing operations. A revolving line is especially helpful during times of revenue fluctuations, since bills and unexpected expenses can be paid by drawing from the loan. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance. The financial institution may review the revolving loan facility annually. If a company’s revenue shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is important for the business owner to discuss the company’s circumstances with the financial institution to avoid a reduction in or termination of the loan. A revolving loan facility provides a variable line of credit that allows people or businesses great flexibility with the funds they are borrowing. Example of a Revolving Loan Facility Supreme Packaging secures a revolving loan facility for $500,000. The company uses the credit line for covering payroll as it waits for accounts receivable payments. Although the business uses up to $250,000 of the revolving loan facility each month, it pays off most of the balance and monitors how much available credit remains. Because another company signed a $500,000 contract for Supreme Packaging to package its products for the next five years, the packaging company is using $200,000 of its revolving loan facility for purchasing the required machinery. How Long Do You Have to Repay a Revolving Loan Facility? Unlike a term loan with fixed payments, a revolving loan facility has no established term. Money is withdrawn by the company, reducing the amount available to borrow. It is then paid back, replenishing the line of credit. Are all Revolving Loan Facilities for Businesses? For the purposes of this article, yes, they are limited to businesses. Home equity lines of credit or personal lines of credit operate on the same principles for personal use. Do You Pay Interest on a Revolving Loan Facility? Yes. A revolving loan facility is a loan, just like any other term loan. The difference is that instead of receiving borrowed money in a lump sum, the money can be used as needed, repaid, and then used again. The Bottom Line For businesses with fluctuating income, a revolving loan facility can be a great option for meeting payroll or covering unforeseen expenses. Establishing a revolving loan facility with your bank could be a wise move for your business.	[ [ "term loan", "https://www.investopedia.com/terms/t/termloan.asp" ], [ "prime rate", "https://www.investopedia.com/terms/p/primerate.asp" ], [ "statement of cash flows", "https://www.investopedia.com/terms/c/cashflowstatement.asp" ], [ "accounts receivable", "https://www.investopedia.com/terms/a/accountsreceivable.asp" ] ]
https://www.investopedia.com/articles/personal-finance/081316/should-you-really-pay-erase-your-name-internet.asp	Can You Erase Your Mug Shot from the Internet?	<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 have been arrested, no matter what for, one of the first things that happens during the booking process is the mug shot. States have different laws governing the public availability of criminal records, but many make mug shots publicly available almost instantly, and yours could be online in less than 24 hours. Once it's posted, is there any way to get it taken down? </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"> On the surface, posting mug shots might seem like a valuable community service, but an arrest doesn’t equal a conviction. You could end up never being charged with a crime, or your case could be dropped. Nevertheless, your published mug shot could be enough to cost you your job or reputation, for your name to be wrongly besmirched. In such a case, should you pay to have your mug shot removed from the Internet? </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>Publishing mug shots online is a big business, which many call shady.</li><li>More than a dozen states have enacted laws prohibiting publishing mug shots online and charging to take the photos down.</li><li>In states that don't have such laws once a mug shot becomes public record, any number of for-profit websites can publish them.</li><li>Instead of contacting the sites directly, you can pay one company to remove the photos for you<strong>. </strong></li></ul></div></div></div> <span class="heading-toc" id="toc-the-business-of-mug-shots"></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 Business of Mug Shots </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In recent years, more than a dozen states have enacted laws to limit posting mug shots online. Measures include prohibiting publishing mug shots online altogether, prohibiting charging to take the photos down, and limiting access of mug shots in the private sector. But in states that don't have such laws, once a mug shot becomes public record, any number of for-profit websites can grab the photos and post them for public view. Even local newspapers generate traffic by publishing photos on their websites.<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"> A simple Google search of someone’s name may return links to these mug shot sites along with the image appearing at the top of the results. Even if the person wasn’t charged with a crime, was found not guilty, or had their records sealed, the images still appear.<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"> The problem is much larger than a single website. Because mug shot images are uploaded to a searchable database, there’s no limit on how many websites could publish the photos. This problem gave birth to a complementary business that some critics say might be as shady as the sites that publish the mug shots.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Contacting all of the websites directly may be daunting, but you can simply pay one company to remove the images for you<strong>. </strong>Costs range from a few hundred dollars to thousands, depending on how many websites publish the mugshot. One removal site is Erasemugshots.com. It claims that its service is 100% guaranteed and mug shots will be removed in as little as 72 hours.<span class="ql-inline-citation" data-cite="3"></span> <span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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>In most cases paying a fee will result in removal of the image, but that doesn’t guarantee that it is gone from the internet forever.</p></div></div></div> <span class="heading-toc" id="toc-should-you-pay-to-erase-your-mug-shot-from-the-internet"></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"> Should You Pay to Erase Your Mug Shot from the Internet? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Given that it's possible to get your mug shot removed, the next question is whether or not you should pay to have it done. As it turns out, that depends on whom you ask and which sites you use for removal. Some will do what they advertise; others won’t. “For the most part the third-party sites are a waste," says criminal defense attorney Jordan Ostroff. "They will send letters to the other sites and maybe follow up here or there, but it’s really [up to] the main sites that post the pictures to do something about it or not.” </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"> Ostroff believes the most reliable way to get your mug shot removed is paying a fee to the actual site rather than using a third-party service. “The way for that [mug shot website] to make money is to take the payment and take the photo down, whereas the third-party companies just have to [make] a good [try] for you,” he notes. </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"> Cleveland attorney <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.minclaw.com/" rel="noopener noreferrer">Aaron Minc</a>, who calls the industry “legal web extortion,” disagrees, saying that using a mug shot removal service to get rid of records from multiple websites works. Minc has used them on behalf of clients and found that they’ve done what they advertised. “They just want their money, and then they’ll go away," he says. "In the past, if you paid one site, the mug shot might pop up on other sites, but that’s not often the case anymore.” As with everyone we asked, he cautioned that there is a history in the industry of scam sites. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In fact, there’s evidence to suggest that some of the removal websites work with the posting websites or, in some cases, may actually be the same company. In May 2018 Califonia's attorney general charged four owners of Mugshots.com, which was partnered with Unpublisharrest.com,<strong> </strong>with alleged extortion, money laundering, and identity theft. At the time Mugshots.com would not remove criminal record information unless a fee was paid, usually $399, through Unpublisharrest.com, which has since been taken down.<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>States that don't allow mug shots to be posted online and/or companies to charge to take them down include: California, Colorado, Connecticut, Florida, Georgia, Missouri, New Jersey, New York, Oregon, South Carolina, Texas, Utah, and Virginia.</p></div></div></div> <span class="heading-toc" id="toc-what-if-the-case-was-sealed"></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"> What If the Case Was Sealed? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> If the case was sealed or expunged, you might be able to have the image removed free of charge. New York criminal lawyer Todd Spodek says, “[In New York] if you have a court order sealing the file, including mug shots, and present it to the actual website, they will have to take it down or face legal repercussions.… With the case sealed or expunged, it’s tough for anyone to follow up and confirm the arrest.” </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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Most experts use terms like “extortion” to describe these sites, but the practice isn’t illegal in many states. Anything posted to the internet is available somewhere. It becomes a matter of personal choice whether you want to pay a fee to have a mug shot removed from the internet. But paying to remove what is plainly visible will likely work. </p></div>	If you have been arrested, no matter what for, one of the first things that happens during the booking process is the mug shot. States have different laws governing the public availability of criminal records, but many make mug shots publicly available almost instantly, and yours could be online in less than 24 hours. Once it's posted, is there any way to get it taken down? On the surface, posting mug shots might seem like a valuable community service, but an arrest doesn’t equal a conviction. You could end up never being charged with a crime, or your case could be dropped. Nevertheless, your published mug shot could be enough to cost you your job or reputation, for your name to be wrongly besmirched. In such a case, should you pay to have your mug shot removed from the Internet? ### Key Takeaways * Publishing mug shots online is a big business, which many call shady. * More than a dozen states have enacted laws prohibiting publishing mug shots online and charging to take the photos down. * In states that don't have such laws once a mug shot becomes public record, any number of for-profit websites can publish them. * Instead of contacting the sites directly, you can pay one company to remove the photos for you. ## The Business of Mug Shots In recent years, more than a dozen states have enacted laws to limit posting mug shots online. Measures include prohibiting publishing mug shots online altogether, prohibiting charging to take the photos down, and limiting access of mug shots in the private sector. But in states that don't have such laws, once a mug shot becomes public record, any number of for-profit websites can grab the photos and post them for public view. Even local newspapers generate traffic by publishing photos on their websites. A simple Google search of someone’s name may return links to these mug shot sites along with the image appearing at the top of the results. Even if the person wasn’t charged with a crime, was found not guilty, or had their records sealed, the images still appear. The problem is much larger than a single website. Because mug shot images are uploaded to a searchable database, there’s no limit on how many websites could publish the photos. This problem gave birth to a complementary business that some critics say might be as shady as the sites that publish the mug shots. Contacting all of the websites directly may be daunting, but you can simply pay one company to remove the images for you. Costs range from a few hundred dollars to thousands, depending on how many websites publish the mugshot. One removal site is Erasemugshots.com. It claims that its service is 100% guaranteed and mug shots will be removed in as little as 72 hours. ### In most cases paying a fee will result in removal of the image, but that doesn’t guarantee that it is gone from the internet forever. ## Should You Pay to Erase Your Mug Shot from the Internet? Given that it's possible to get your mug shot removed, the next question is whether or not you should pay to have it done. As it turns out, that depends on whom you ask and which sites you use for removal. Some will do what they advertise; others won’t. “For the most part the third-party sites are a waste," says criminal defense attorney Jordan Ostroff. "They will send letters to the other sites and maybe follow up here or there, but it’s really [up to] the main sites that post the pictures to do something about it or not.” Ostroff believes the most reliable way to get your mug shot removed is paying a fee to the actual site rather than using a third-party service. “The way for that [mug shot website] to make money is to take the payment and take the photo down, whereas the third-party companies just have to [make] a good [try] for you,” he notes. Cleveland attorney [Aaron Minc](https://www.minclaw.com/), who calls the industry “legal web extortion,” disagrees, saying that using a mug shot removal service to get rid of records from multiple websites works. Minc has used them on behalf of clients and found that they’ve done what they advertised. “They just want their money, and then they’ll go away," he says. "In the past, if you paid one site, the mug shot might pop up on other sites, but that’s not often the case anymore.” As with everyone we asked, he cautioned that there is a history in the industry of scam sites. In fact, there’s evidence to suggest that some of the removal websites work with the posting websites or, in some cases, may actually be the same company. In May 2018 Califonia's attorney general charged four owners of Mugshots.com, which was partnered with Unpublisharrest.com,with alleged extortion, money laundering, and identity theft. At the time Mugshots.com would not remove criminal record information unless a fee was paid, usually $399, through Unpublisharrest.com, which has since been taken down. ### States that don't allow mug shots to be posted online and/or companies to charge to take them down include: California, Colorado, Connecticut, Florida, Georgia, Missouri, New Jersey, New York, Oregon, South Carolina, Texas, Utah, and Virginia. ## What If the Case Was Sealed? If the case was sealed or expunged, you might be able to have the image removed free of charge. New York criminal lawyer Todd Spodek says, “[In New York] if you have a court order sealing the file, including mug shots, and present it to the actual website, they will have to take it down or face legal repercussions.… With the case sealed or expunged, it’s tough for anyone to follow up and confirm the arrest.” ## The Bottom Line Most experts use terms like “extortion” to describe these sites, but the practice isn’t illegal in many states. Anything posted to the internet is available somewhere. It becomes a matter of personal choice whether you want to pay a fee to have a mug shot removed from the internet. But paying to remove what is plainly visible will likely work.	If you have been arrested, no matter what for, one of the first things that happens during the booking process is the mug shot. States have different laws governing the public availability of criminal records, but many make mug shots publicly available almost instantly, and yours could be online in less than 24 hours. Once it's posted, is there any way to get it taken down? On the surface, posting mug shots might seem like a valuable community service, but an arrest doesn’t equal a conviction. You could end up never being charged with a crime, or your case could be dropped. Nevertheless, your published mug shot could be enough to cost you your job or reputation, for your name to be wrongly besmirched. In such a case, should you pay to have your mug shot removed from the Internet? Key Takeaways Publishing mug shots online is a big business, which many call shady.More than a dozen states have enacted laws prohibiting publishing mug shots online and charging to take the photos down.In states that don't have such laws once a mug shot becomes public record, any number of for-profit websites can publish them.Instead of contacting the sites directly, you can pay one company to remove the photos for you. The Business of Mug Shots In recent years, more than a dozen states have enacted laws to limit posting mug shots online. Measures include prohibiting publishing mug shots online altogether, prohibiting charging to take the photos down, and limiting access of mug shots in the private sector. But in states that don't have such laws, once a mug shot becomes public record, any number of for-profit websites can grab the photos and post them for public view. Even local newspapers generate traffic by publishing photos on their websites. A simple Google search of someone’s name may return links to these mug shot sites along with the image appearing at the top of the results. Even if the person wasn’t charged with a crime, was found not guilty, or had their records sealed, the images still appear. The problem is much larger than a single website. Because mug shot images are uploaded to a searchable database, there’s no limit on how many websites could publish the photos. This problem gave birth to a complementary business that some critics say might be as shady as the sites that publish the mug shots. Contacting all of the websites directly may be daunting, but you can simply pay one company to remove the images for you. Costs range from a few hundred dollars to thousands, depending on how many websites publish the mugshot. One removal site is Erasemugshots.com. It claims that its service is 100% guaranteed and mug shots will be removed in as little as 72 hours. In most cases paying a fee will result in removal of the image, but that doesn’t guarantee that it is gone from the internet forever. Should You Pay to Erase Your Mug Shot from the Internet? Given that it's possible to get your mug shot removed, the next question is whether or not you should pay to have it done. As it turns out, that depends on whom you ask and which sites you use for removal. Some will do what they advertise; others won’t. “For the most part the third-party sites are a waste," says criminal defense attorney Jordan Ostroff. "They will send letters to the other sites and maybe follow up here or there, but it’s really [up to] the main sites that post the pictures to do something about it or not.” Ostroff believes the most reliable way to get your mug shot removed is paying a fee to the actual site rather than using a third-party service. “The way for that [mug shot website] to make money is to take the payment and take the photo down, whereas the third-party companies just have to [make] a good [try] for you,” he notes. Cleveland attorney Aaron Minc, who calls the industry “legal web extortion,” disagrees, saying that using a mug shot removal service to get rid of records from multiple websites works. Minc has used them on behalf of clients and found that they’ve done what they advertised. “They just want their money, and then they’ll go away," he says. "In the past, if you paid one site, the mug shot might pop up on other sites, but that’s not often the case anymore.” As with everyone we asked, he cautioned that there is a history in the industry of scam sites. In fact, there’s evidence to suggest that some of the removal websites work with the posting websites or, in some cases, may actually be the same company. In May 2018 Califonia's attorney general charged four owners of Mugshots.com, which was partnered with Unpublisharrest.com, with alleged extortion, money laundering, and identity theft. At the time Mugshots.com would not remove criminal record information unless a fee was paid, usually $399, through Unpublisharrest.com, which has since been taken down. States that don't allow mug shots to be posted online and/or companies to charge to take them down include: California, Colorado, Connecticut, Florida, Georgia, Missouri, New Jersey, New York, Oregon, South Carolina, Texas, Utah, and Virginia. What If the Case Was Sealed? If the case was sealed or expunged, you might be able to have the image removed free of charge. New York criminal lawyer Todd Spodek says, “[In New York] if you have a court order sealing the file, including mug shots, and present it to the actual website, they will have to take it down or face legal repercussions.… With the case sealed or expunged, it’s tough for anyone to follow up and confirm the arrest.” The Bottom Line Most experts use terms like “extortion” to describe these sites, but the practice isn’t illegal in many states. Anything posted to the internet is available somewhere. It becomes a matter of personal choice whether you want to pay a fee to have a mug shot removed from the internet. But paying to remove what is plainly visible will likely work.	[ [ "Aaron Minc", "https://www.minclaw.com/" ] ]
https://www.investopedia.com/terms/l/leeds-school-ff-business.asp	Leeds School of Business: What It is, 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-leeds-school-of-business-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Leeds School of Business: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Leeds School of Business is located at the University of Colorado in Boulder, Colorado. It offers both undergraduate and graduate courses and awards degrees including a Master of Business Administration (MBA) degree program and a Ph.D. 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"> Leeds regularly ranks among the top 100 b-schools in the U.S. It ranks 21st in the <em>U.S. News & World Report 2021 Best Undergraduate Business Programs</em>.<span class="ql-inline-citation" data-cite="2"></span> It ranked 60th on the 2019 <em>Forbes</em> list of business schools.<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_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>Leeds School of Business ranks 21st in the <em>U.S. News & World Report 2021 Best Undergraduate Business Programs</em>.</li><li>A part of the University of Colorado, its public status keeps its tuition fees a tad lower than those of many private business schools.</li><li>The school’s MBA program is known for placing graduates in finance, accounting, marketing, and sales.</li></ul></div></div></div> <span class="heading-toc" id="toc-leeds-school-of-business-in-depth"></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"> Leeds School of Business In-Depth </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Founded in 1906 as the University of Colorado’s College of Commerce, the college received its current name in October 2001 after a $35 million donation by the family of businessman and philanthropist Michael Leeds.<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"> As part of this donation, the Leeds family mandated that all students at the Leeds School of Business receive meaningful training in social responsibility, business ethics, diversity and inclusion, and sustainability. An undergraduate student can earn a certificate in socially-responsible enterprise, while executive education students can study corporate social responsibility theory.<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"> The school also embraces global commerce, with programs including internships abroad. </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"> As of 2021, the school had about 3,400 full-time undergraduates and about 400 graduate students enrolled.<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_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">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The Leeds School of Business is accredited by the Association to Advance Collegiate Schools of Business (AACSB). Of more than 16,000 degree-granting business schools in the world, fewer than 5% have earned AACSB accreditation.<span class="ql-inline-citation" data-cite="7"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Today, the Leeds School offers undergraduate degrees in accounting, finance, marketing, and entrepreneurship. MBA programs include a full-time option as well as an evening MBA program designed for students already actively working. Classes on tax preparation are conducted jointly with the university's College of Law. </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 degree programs are offered in real estate, business analytics, and supply chain management. </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"> Leeds School of Business by the Numbers </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Due to the Leeds School's status as part of a public university system, tuition is somewhat lower than at many private business colleges. For the 2022-2023 academic year, MBA graduate program costs were $57,177 for full-time in-state students and $75,272 for out-of-state students.<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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The median GMT score of students is 610, according to <em>Forbes</em>. </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 college estimates that 53.9% of its graduates have a job on graduation. The average postgraduate salary as of 2018 was $100,000.<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"> Prospects </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Historically, the Leeds School of Business MBA program has been an effective conduit for professionals seeking a career in accounting and other financial services disciplines, which in recent years have represented about 30% of the job placements of MBA graduates. Sales and marketing is another significant industry area, representing about 25% of job placements. </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"> Alumni told Forbes they particularly prized the "360-degree entrepreneurial immersion" of its program. The school's proximity to the Colorado tech startup scene was cited as a bonus, not to mention its spectacular Rocky Mountains location.<span class="ql-inline-citation" data-cite="5"></span> </p></div>	## Leeds School of Business: An Overview Leeds School of Business is located at the University of Colorado in Boulder, Colorado. It offers both undergraduate and graduate courses and awards degrees including a Master of Business Administration (MBA) degree program and a Ph.D. program. Leeds regularly ranks among the top 100 b-schools in the U.S. It ranks 21st in the U.S. News & World Report 2021 Best Undergraduate Business Programs. It ranked 60th on the 2019 Forbes list of business schools. ### Key Takeaways * Leeds School of Business ranks 21st in the U.S. News & World Report 2021 Best Undergraduate Business Programs. * A part of the University of Colorado, its public status keeps its tuition fees a tad lower than those of many private business schools. * The school’s MBA program is known for placing graduates in finance, accounting, marketing, and sales. ## Leeds School of Business In-Depth Founded in 1906 as the University of Colorado’s College of Commerce, the college received its current name in October 2001 after a $35 million donation by the family of businessman and philanthropist Michael Leeds. As part of this donation, the Leeds family mandated that all students at the Leeds School of Business receive meaningful training in social responsibility, business ethics, diversity and inclusion, and sustainability. An undergraduate student can earn a certificate in socially-responsible enterprise, while executive education students can study corporate social responsibility theory. The school also embraces global commerce, with programs including internships abroad. As of 2021, the school had about 3,400 full-time undergraduates and about 400 graduate students enrolled. ### Important The Leeds School of Business is accredited by the Association to Advance Collegiate Schools of Business (AACSB). Of more than 16,000 degree-granting business schools in the world, fewer than 5% have earned AACSB accreditation. Today, the Leeds School offers undergraduate degrees in accounting, finance, marketing, and entrepreneurship. MBA programs include a full-time option as well as an evening MBA program designed for students already actively working. Classes on tax preparation are conducted jointly with the university's College of Law. Master's degree programs are offered in real estate, business analytics, and supply chain management. ### Leeds School of Business by the Numbers Due to the Leeds School's status as part of a public university system, tuition is somewhat lower than at many private business colleges. For the 2022-2023 academic year, MBA graduate program costs were $57,177 for full-time in-state students and $75,272 for out-of-state students. The median GMT score of students is 610, according to Forbes. The college estimates that 53.9% of its graduates have a job on graduation. The average postgraduate salary as of 2018 was $100,000. ### Prospects Historically, the Leeds School of Business MBA program has been an effective conduit for professionals seeking a career in accounting and other financial services disciplines, which in recent years have represented about 30% of the job placements of MBA graduates. Sales and marketing is another significant industry area, representing about 25% of job placements. Alumni told Forbes they particularly prized the "360-degree entrepreneurial immersion" of its program. The school's proximity to the Colorado tech startup scene was cited as a bonus, not to mention its spectacular Rocky Mountains location.	Leeds School of Business: An Overview Leeds School of Business is located at the University of Colorado in Boulder, Colorado. It offers both undergraduate and graduate courses and awards degrees including a Master of Business Administration (MBA) degree program and a Ph.D. program. Leeds regularly ranks among the top 100 b-schools in the U.S. It ranks 21st in the U.S. News & World Report 2021 Best Undergraduate Business Programs. It ranked 60th on the 2019 Forbes list of business schools. Key Takeaways Leeds School of Business ranks 21st in the U.S. News & World Report 2021 Best Undergraduate Business Programs.A part of the University of Colorado, its public status keeps its tuition fees a tad lower than those of many private business schools.The school’s MBA program is known for placing graduates in finance, accounting, marketing, and sales. Leeds School of Business In-Depth Founded in 1906 as the University of Colorado’s College of Commerce, the college received its current name in October 2001 after a $35 million donation by the family of businessman and philanthropist Michael Leeds. As part of this donation, the Leeds family mandated that all students at the Leeds School of Business receive meaningful training in social responsibility, business ethics, diversity and inclusion, and sustainability. An undergraduate student can earn a certificate in socially-responsible enterprise, while executive education students can study corporate social responsibility theory. The school also embraces global commerce, with programs including internships abroad. As of 2021, the school had about 3,400 full-time undergraduates and about 400 graduate students enrolled. Important The Leeds School of Business is accredited by the Association to Advance Collegiate Schools of Business (AACSB). Of more than 16,000 degree-granting business schools in the world, fewer than 5% have earned AACSB accreditation. Today, the Leeds School offers undergraduate degrees in accounting, finance, marketing, and entrepreneurship. MBA programs include a full-time option as well as an evening MBA program designed for students already actively working. Classes on tax preparation are conducted jointly with the university's College of Law. Master's degree programs are offered in real estate, business analytics, and supply chain management. Leeds School of Business by the Numbers Due to the Leeds School's status as part of a public university system, tuition is somewhat lower than at many private business colleges. For the 2022-2023 academic year, MBA graduate program costs were $57,177 for full-time in-state students and $75,272 for out-of-state students. The median GMT score of students is 610, according to Forbes. The college estimates that 53.9% of its graduates have a job on graduation. The average postgraduate salary as of 2018 was $100,000. Prospects Historically, the Leeds School of Business MBA program has been an effective conduit for professionals seeking a career in accounting and other financial services disciplines, which in recent years have represented about 30% of the job placements of MBA graduates. Sales and marketing is another significant industry area, representing about 25% of job placements. Alumni told Forbes they particularly prized the "360-degree entrepreneurial immersion" of its program. The school's proximity to the Colorado tech startup scene was cited as a bonus, not to mention its spectacular Rocky Mountains location.	[]
https://www.investopedia.com/the-history-of-lending-discrimination-5076948	The History of Lending Discrimination	<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"> Laws today aim to protect borrowers from <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">discriminatory lending</a> practices, but that wasn't always the case. For decades, U.S. banks denied mortgages to Black applicants—and those belonging to other racial and ethnic minority groups—who lived in certain areas <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redlining.asp">redlined</a> by a federal agency called the Home Owners' Loan Corp. (HOLC). Although HOLC has been defunct since the early 1950s, those practices still resonate today. </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>Lending discrimination occurs when lenders base <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bias-in-the-mortgage-approval-process-5181654">credit decisions</a> on factors other than the applicant's creditworthiness.</li> <li>Denying financial services to residents of certain neighborhoods due to race or ethnicity is commonly called redlining.</li> <li>The discriminatory practice of redlining made it impossible for many members of racial and ethnic minority groups to qualify for mortgages.</li> <li>Though now outlawed, redlining is one factor behind the racial wealth gap that persists in the United States today.</li> <li>Laws today forbid discrimination based on race, color, national origin, religion, sex, familial status, or disability.</li> </ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="The History of Lending Discrimination" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/uNaaMxa6V8gmvK2KGBH-YcdMvkw=/1200x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/e9n6H32DiiEy6qdL5jrjZaf30rI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg" data-srcset="https://www.investopedia.com/thmb/QLzYKwZymxv2voeVzQJK7DIXONo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg 750w" data-tracking-container="true" height="800" id="mntl-sc-block-image_1-0" width="1200"/> <noscript> <img alt="The History of Lending Discrimination" class="img--noscript universal-image__image" height="800" sizes="750px" src="https://www.investopedia.com/thmb/e9n6H32DiiEy6qdL5jrjZaf30rI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg" srcset="https://www.investopedia.com/thmb/QLzYKwZymxv2voeVzQJK7DIXONo=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg 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>Investopedia / Sabrina Jiang</p></span> </figcaption></figure> <span class="heading-toc" id="toc-what-is-lending-discrimination"></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"> What Is Lending Discrimination? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Lending discrimination occurs when lenders base credit decisions on factors other than a borrower's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/average-credit-scores-by-race-5214521">creditworthiness</a>. Today, three federal laws offer protection against such discrimination: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <li>The Fair Housing Act (FHA)<span class="ql-inline-citation" data-cite="28"></span></li><li>The Equal Credit Opportunity Act (ECOA)<span class="ql-inline-citation" data-cite="30"></span></li><li>The Community Reinvestment Act (CRA)<span class="ql-inline-citation" data-cite="29"></span></li> </ol> <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-fair-housing-act-fha-of-1968"></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"> Fair Housing Act (FHA) of 1968 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> In 1948, the U.S. Supreme Court deemed racially restrictive deed covenants unenforceable. Twenty years later, the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fair-housing-act.asp">Fair Housing Act (FHA)</a> was enacted. The law protects people from discrimination when they rent or buy a home, apply for a mortgage, seek housing assistance, or engage in other housing-related activities. It forbids discrimination based on race, color, national origin, religion, sex (including gender, gender identity, and sexual orientation), familial status, or disability during any part of a residential real estate transaction.<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_13-0"></div> <span class="heading-toc" id="toc-equal-credit-opportunity-act-ecoa-of-1974"></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"> Equal Credit Opportunity Act (ECOA) of 1974 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Discriminatory lending and housing practices continued despite the Fair Housing Act, and civil rights groups advocated for additional laws. In 1974, Congress passed the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecoa.asp">Equal Credit Opportunity Act (ECOA)</a>. According to the Federal Trade Commission, the ECOA "makes it illegal for creditors to discriminate based on race, color, religion, national origin, sex, marital status, age, or because all (or part) of a person's income comes from public assistance."<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"> Creditors may ask for some of this information, but they can't use it to deny you credit or establish the terms of your credit. For example, lenders can ask if you receive alimony or child support, but only if you need that income to qualify for the loan. </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-community-reinvestment-act-cra-of-1977"></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"> Community Reinvestment Act (CRA) of 1977 </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Even with the FHA and ECOA on the books, redlining continued in low- to moderate-income (LMI) neighborhoods. In its discussion of this period, the website Federal Reserve History notes, "There is some evidence that overt discrimination in mortgage lending persisted."<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> A few things happened as a result: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> <li>Illinois became the first state to pass a law prohibiting redlining, and it required banks to disclose their lending practices.<span class="ql-inline-citation" data-cite="3"></span></li> <li>Congress passed the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/home-mortgage-disclosure-act-hmda.asp">Home Mortgage Disclosure Act (HMDA)</a>, which required banks to disclose the location of financed properties and the borrowers' race and gender.<span class="ql-inline-citation" data-cite="32"></span></li> <li>Then-President Jimmy Carter signed into law the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/community_reinvestment_act.asp">Community Reinvestment Act (CRA)</a>.</li> </ul> <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 CRA was enacted to prevent redlining and to encourage banks and savings associations to help meet the credit needs of all segments of their communities, including LMI neighborhoods.<span class="ql-inline-citation" data-cite="29"></span> The law directed federal regulatory agencies to "(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods," and "(2) take such record into account in its evaluation of an application for a deposit facility by such institution."<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_27-0"></div> <span class="heading-toc" id="toc-what-is-redlining"></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"> What Is Redlining? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Before laws expressly prohibited discrimination in lending, the practice known as redlining prevented certain populations from accessing credit. Redlining is the discriminatory practice of denying financial services to residents of certain neighborhoods due to race or ethnicity. </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"> Sociologist John McKnight coined the term in the 1960s, based on maps that marked racial and ethnic minority neighborhoods in red—labeling them "hazardous" to lenders. The maps were created by a federal agency, the Home Owners' Loan Corp. (HOLC). </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-what-the-home-owners-loan-corp-holc-did"></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"> What the Home Owners' Loan Corp. (HOLC) Did </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> During the late 1930s, the HOLC—a federal agency—was created as part of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/new-deal.asp">New Deal</a>. The New Deal was a series of programs enacted under then-President Franklin Delano Roosevelt that were intended to help the U.S. recover from the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/great_depression.asp">Great Depression</a>. The new agency's purpose was to provide low-interest long-term mortgages to homeowners unable to obtain financing through normal banking channels.<span class="ql-inline-citation" data-cite="35"></span> The HOLC drafted "Residential Security" maps of major cities as part of its City Survey Program. </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"> To create the maps, HOLC examiners classified neighborhoods on a "perceived level of lending risk" using information gathered from local <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bias-in-the-home-appraisal-process-5191272">appraisers</a>, bank loan officers, city officials, and real estate agents. According to the National Community Reinvestment Coalition, the examiners graded the neighborhoods based on factors including:<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> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <li>The age and condition of the housing</li><li>Access to transportation</li><li>The closeness of popular amenities, such as parks</li><li>Proximity to undesirable properties, such as polluting industries</li><li>The residents' economic class and employment status</li><li>The residents' ethnic and racial composition</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The neighborhoods were color-coded on maps, with each color representing the area's perceived risk to lenders.<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_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 class="mntl-sc-block-table__title" colspan="3">HOLC Maps Used in Redlining</th> </tr> <tr> <th>Color</th> <th>Grade</th> <th>HOLC Description</th> </tr> </thead> <tbody data-check="0"> <tr> <td>Green</td> <td>A "Best"</td> <td>HOLC described A areas as "'hot spots'…where good mortgage lenders with available funds are willing to make their maximum loans…—perhaps up to 75–80% of appraisal."</td> </tr> <tr> <td>Blue</td> <td>B "Still Desirable" </td> <td>HOLC described B areas as "still good" but not as "'hot' as A areas." "They are neighborhoods where good mortgage lenders will have a tendency to hold commitments 10–15% under the limit," or around 65% of appraisal. </td> </tr> <tr> <td>Yellow</td> <td>C "Definitely Declining"</td> <td>C neighborhoods were characterized by "obsolescence [and] infiltration of lower grade population." "Good mortgage lenders are more conservative in Third grade or C areas and hold commitments under the lending ratio for the A and B areas."</td> </tr> <tr> <td>Red</td> <td>D "Hazardous"</td> <td>HOLC described D areas as "characterized by detrimental influences in a pronounced degree, undesirable population or an infiltration of it." It recommended that lenders "refuse to make loans in these areas [or do so] only on a conservative basis."</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> <span class="heading-toc" id="toc-how-maps-became-a-tool-for-discrimination"></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 Maps Became a Tool for Discrimination </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> The HOLC maps became a tool for widespread discrimination. Would-be homeowners in certain areas found it difficult or impossible to get a mortgage because capital was directed to White families living in green and blue neighborhoods—away from Black and other minority families in yellow and red communities. The rare loans that were available in redlined areas were very expensive, which made it even harder to buy a home and build wealth. </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"> Unable to get regular mortgages, people of color who wanted to own a house were forced to resort to exploitatively priced housing contracts that massively increased the cost of housing and gave them no equity until their last payment was delivered. Chicago's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/contract-buyers-league-5101680">Contract Buyers League</a> was formed in the 1960s by a group of inner-city residents to fight these practices. </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"> With nearly 65% of its neighborhoods marked in red, Macon, Ga., was the most redlined city in the U.S. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></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_51-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:86.2%;"> <img alt="Home Owners’ Loan Corp. (HOLC) map of Macon, Ga." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/c63idlkRze4imQSjmXQZBLfzg_M=/1009x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/nzPo0TyS_bwMUucP09RjZMzs7ss=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg" data-srcset="https://www.investopedia.com/thmb/5rfwQ_e8V9kLQKbQe5gHoEqzr6g=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg 750w" data-tracking-container="true" height="870" id="mntl-sc-block-image_2-0" width="1009"/> <noscript> <img alt="Home Owners’ Loan Corp. (HOLC) map of Macon, Ga." class="img--noscript universal-image__image" height="870" sizes="750px" src="https://www.investopedia.com/thmb/nzPo0TyS_bwMUucP09RjZMzs7ss=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg" srcset="https://www.investopedia.com/thmb/5rfwQ_e8V9kLQKbQe5gHoEqzr6g=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg 750w" width="1009"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-text">Image source: Mapping Inequality.</span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Here's a list of the 10 cities with the highest percentage of neighborhoods marked "hazardous" in the 1930s, per a National Community Reinvestment Coalition (NCRC) study as reported by the nonprofit news website NextCity.com.<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_53-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> <li>Macon, Ga., 64.99%</li><li>Birmingham, Ala., 63.91%</li><li>Wichita, Kan., 63.87%</li><li>Springfield, Mo., 60.19%</li><li>Augusta, Ga., 58.70%</li><li>Columbus, Ga., 57.98%</li><li>Newport News, Va., 57.51%</li><li>Muskegon, Mich., 57.24</li><li>Flint, Mich., 54.19%</li><li>Montgomery, Ala., 53.11%</li> </ol> <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-economic-and-racial-segregation-from-redlining-persists-today"></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"> Economic and Racial Segregation from Redlining Persists Today </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> The immediate effect of redlining was that residents in racial and ethnic minority neighborhoods couldn't access capital to improve their housing (to buy or renovate) or for other economic opportunities. Of course, the impacts of redlining didn't magically end when the FHA was passed in 1968. Instead, as a 2018 study by the NCRC showed, the economic and racial segregation created by redlining persisted in many cities.<span class="ql-inline-citation" data-cite="17"></span> For example: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_58-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_59-0"> <li>74% of neighborhoods that the HOLC graded as "hazardous" more than 80 years earlier remained LMI.</li><li>64% of HOLC's hazardous-graded areas were still racial and ethnic minority neighborhoods.<span class="ql-inline-citation" data-cite="5"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_60-0"></div> <figure class="comp mntl-sc-block finance-sc-block-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_61-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:39.4%;"> <img alt="Home Owners’ Loan Corp. (HOLC) graded cities" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/BEPSCy9lRrPfhgH6jQYrg2Vdw9U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/BEPSCy9lRrPfhgH6jQYrg2Vdw9U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg" data-srcset="https://www.investopedia.com/thmb/mLQAnHylyckoj8SzYERFiwh7HkI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg 750w" data-tracking-container="true" height="649" id="mntl-sc-block-image_3-0" width="1646"/> <noscript> <img alt="Home Owners’ Loan Corp. (HOLC) graded cities" class="img--noscript universal-image__image" height="649" sizes="750px" src="https://www.investopedia.com/thmb/BEPSCy9lRrPfhgH6jQYrg2Vdw9U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg" srcset="https://www.investopedia.com/thmb/mLQAnHylyckoj8SzYERFiwh7HkI=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg 750w" width="1646"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_3-0"> <span class="figure-article-caption-text">Image source: Mapping Inequality (https://dsl.richmond.edu/panorama/redlining/#loc=5/39.1/-94.58).</span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> By comparison, 91% of areas deemed "best" in the 1930s remained middle- to upper-income (MUI), and more than 85% were still predominantly White.<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_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_64-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_65-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" 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 median net worth of Black families is about 16% that of White families; Hispanic families' median net worth is about 22% that of White families.<span class="ql-inline-citation" data-cite="33"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_66-0"> According to the Mapping Inequality project of the University of Richmond, "As homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth inequalities that we still see today."<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_67-0"></div> <span class="heading-toc" id="toc-the-lingering-legacy-of-discriminatory-lending"></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"> The Lingering Legacy of Discriminatory Lending </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> Past redlining is one factor behind the persistent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-racial-wealth-gap-5105010">racial wealth gap</a> in the U.S. And even though discriminatory lending practices are prohibited under the FHA, ECOA, and CRA, Black borrowers and those from other racial and ethnic minority groups remain at a disadvantage. These are a few of the lingering effects of redlining: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-subheading__text"> Higher Interest Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> An analysis of nearly 7 million 30-year mortgages by the University of California at Berkeley found that Black and Latinx/Hispanic applicants were charged 0.08% higher interest rates compared with White borrowers, costing them $765 million in extra interest per year.<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_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"> Lower Loan Approval Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> In a 2020 mortgage study conducted by the Consumer Financial Protection Bureau, Black and Hispanic White borrowers had higher denial rates than non-Hispanic White and Asian borrowers. For Black loan seekers, the denial rate was 18.1%, and for Hispanic White loan seekers, it was 12.5%. By contrast, the denial rate for Asian applicants was 9.7%, and for non-Hispanic White applicants, it was 6.9%.<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_76-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_77-0"> <span class="mntl-sc-block-subheading__text"> Lower Homeownership Rates </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_78-0"> Discrimination has led to a significant homeownership gap between Blacks and Whites in the U.S. The national homeownership rate for Black families in late 2023 was 45.5%, compared to 74.5% for White families, according to the U.S. Census Bureau.<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_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"> Lower Personal Wealth </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> According to a 2020 report from real estate firm Redfin, over the past 40 years, the typical homeowner in previously redlined neighborhoods has gained 52% less—or $212,023 less—in personal wealth from property value increases than homeowners in greenlined areas.<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_82-0"></div> <span class="heading-toc" id="toc-corporate-redlining-hampers-black-owned-businesses"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_83-0"> <span class="mntl-sc-block-heading__text"> "Corporate Redlining" Hampers Black-Owned Businesses </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> Discrimination goes beyond mortgage lending. A 2020 analysis by <em>The Business Journals</em> found that White neighborhoods received roughly twice as much per person in small-business loans compared with Black neighborhoods. Similarly, predominantly White neighborhoods received, on average, about twice as many small-business loans per capita.<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_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> The report also noted that, since peaking before the 2008 financial crisis, the number of loans made to Black-owned businesses through the Small Business Administration's 7(a) program decreased by 84%, compared to a 53% drop in 7(a) loans awarded overall.<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_87-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_88-0"> The decline came despite other positive trends, including a 48% growth in the economy, an 82% rise in commercial loans, and a 101% increase in bank deposits. Orv Kimbrough, chair and chief executive officer at Midwest BankCentre, called this disparity "corporate redlining."<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_89-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> Discrimination, whether seen in mortgage or small-business lending, has lasting effects. "When you don't invest, you get social problems, you get crime, less education, all of which reduces the chances of people climbing the social and economic ladder," noted Andre Perry, a fellow at the Brookings Institution who studies wealth creation and race.<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_91-0"></div> <span class="heading-toc" id="toc-if-you-experience-lending-discrimination"></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"> If You Experience Lending Discrimination </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> Mortgage applicants and homebuyers who believe they have been discriminated against should contact the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.hud.gov/program_offices/fair_housing_equal_opp/online-complaint">Office of Fair Housing and Equal Opportunity (FHEO) </a>at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau (CFPB).<span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> Small business owners who believe they have been discriminated against based on race, sex, or another protected category can submit a lending discrimination complaint online with the CFPB.<span class="ql-inline-citation" data-cite="23"></span><br/> </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-what-is-redlining"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is Redlining?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Redlining is the now-illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity. The term was coined by sociologist John McKnight in the 1960s, based on Home Owners' Loan Corp. (HOLC) maps that marked racial and ethnic minority neighborhoods in red, labeling them "hazardous" to lenders.</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-does-redlining-happen-today"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does Redlining Happen Today?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Redlining is illegal now. But the redlining that occurred in the past still contributes significantly to the racial wealth gap that persists today.</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-what-are-the-us-fair-lending-laws"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the U.S. Fair Lending Laws?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Fair lending laws in the United States prohibit lenders from discriminating based on certain factors (such as an applicant's race, color, national origin, or religion) during any aspect of a credit transaction.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_103-0"><span class="heading-toc" id="toc-what-are-the-three-types-of-lending-discrimination"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Three Types of Lending Discrimination?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Federal law recognizes three types of lending discrimination. According to the Federal Deposit Insurance Corp. (FDIC), they are:<span class="ql-inline-citation" data-cite="25"></span></p><ul><li>Overt discrimination—when a lender blatantly discriminates based on a prohibited factor</li><li>Disparate treatment—when a lender treats applicants differently based on one of the prohibited factors</li><li>Disparate impact—when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity</li></ul></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_105-0"><span class="heading-toc" id="toc-what-is-the-racial-wealth-gap"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Racial Wealth Gap?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The racial wealth gap describes the difference in accumulated wealth held by different racial or ethnic groups. It reflects the generations-long inequality in access to financial and educational opportunities, income, and resources.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_107-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> Lending practices have gradually become more equitable in the U.S. But more equitable is not equal. The residual effects of redlining—and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/race-and-insurance-5075141">ongoing discrimination against people of color today</a>—continue to perpetuate the country's racial wealth divide. Three-quarters of neighborhoods redlined in the 1930s continue to struggle economically today and are much more likely than other communities to be home to lower-income, racial and ethnic minority residents. They are also more likely to be the target of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subprime.asp">subprime</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/predatory_lending.asp">predatory lenders</a>.<span class="ql-inline-citation" data-cite="27"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_110-0"> There are other enduring negative outcomes, too. A 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin-Milwaukee, and the University of Richmond reported that, "the history of redlining, segregation and disinvestment not only reduced minority wealth, it impacted health and longevity, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods." In fact, the study found, life expectancy is 3.6 years lower in formerly redlined communities than in communities that had received high grades from the HOLC.<span class="ql-inline-citation" data-cite="21"></span> </p></div>	Laws today aim to protect borrowers from [discriminatory lending](https://www.investopedia.com/housing-discrimination-what-can-you-do-5074478) practices, but that wasn't always the case. For decades, U.S. banks denied mortgages to Black applicants—and those belonging to other racial and ethnic minority groups—who lived in certain areas [redlined](https://www.investopedia.com/terms/r/redlining.asp) by a federal agency called the Home Owners' Loan Corp. (HOLC). Although HOLC has been defunct since the early 1950s, those practices still resonate today. ### Key Takeaways * Lending discrimination occurs when lenders base [credit decisions](https://www.investopedia.com/bias-in-the-mortgage-approval-process-5181654) on factors other than the applicant's creditworthiness. * Denying financial services to residents of certain neighborhoods due to race or ethnicity is commonly called redlining. * The discriminatory practice of redlining made it impossible for many members of racial and ethnic minority groups to qualify for mortgages. * Though now outlawed, redlining is one factor behind the racial wealth gap that persists in the United States today. * Laws today forbid discrimination based on race, color, national origin, religion, sex, familial status, or disability. ![The History of Lending Discrimination]() ![The History of Lending Discrimination](https://www.investopedia.com/thmb/e9n6H32DiiEy6qdL5jrjZaf30rI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash-the-history-of-lending-discrimination-5076948-Final-93e5c7733a534ae18fd5d08bcd7d08fe.jpg) Investopedia / Sabrina Jiang ## What Is Lending Discrimination? Lending discrimination occurs when lenders base credit decisions on factors other than a borrower's [creditworthiness](https://www.investopedia.com/average-credit-scores-by-race-5214521). Today, three federal laws offer protection against such discrimination: 1. The Fair Housing Act (FHA) 2. The Equal Credit Opportunity Act (ECOA) 3. The Community Reinvestment Act (CRA) ## Fair Housing Act (FHA) of 1968 In 1948, the U.S. Supreme Court deemed racially restrictive deed covenants unenforceable. Twenty years later, the [Fair Housing Act (FHA)](https://www.investopedia.com/terms/f/fair-housing-act.asp) was enacted. The law protects people from discrimination when they rent or buy a home, apply for a mortgage, seek housing assistance, or engage in other housing-related activities. It forbids discrimination based on race, color, national origin, religion, sex (including gender, gender identity, and sexual orientation), familial status, or disability during any part of a residential real estate transaction. ## Equal Credit Opportunity Act (ECOA) of 1974 Discriminatory lending and housing practices continued despite the Fair Housing Act, and civil rights groups advocated for additional laws. In 1974, Congress passed the [Equal Credit Opportunity Act (ECOA)](https://www.investopedia.com/terms/e/ecoa.asp). According to the Federal Trade Commission, the ECOA "makes it illegal for creditors to discriminate based on race, color, religion, national origin, sex, marital status, age, or because all (or part) of a person's income comes from public assistance." Creditors may ask for some of this information, but they can't use it to deny you credit or establish the terms of your credit. For example, lenders can ask if you receive alimony or child support, but only if you need that income to qualify for the loan. ## Community Reinvestment Act (CRA) of 1977 Even with the FHA and ECOA on the books, redlining continued in low- to moderate-income (LMI) neighborhoods. In its discussion of this period, the website Federal Reserve History notes, "There is some evidence that overt discrimination in mortgage lending persisted." A few things happened as a result: * Illinois became the first state to pass a law prohibiting redlining, and it required banks to disclose their lending practices. * Congress passed the [Home Mortgage Disclosure Act (HMDA)](https://www.investopedia.com/terms/h/home-mortgage-disclosure-act-hmda.asp), which required banks to disclose the location of financed properties and the borrowers' race and gender. * Then-President Jimmy Carter signed into law the [Community Reinvestment Act (CRA)](https://www.investopedia.com/terms/c/community_reinvestment_act.asp). The CRA was enacted to prevent redlining and to encourage banks and savings associations to help meet the credit needs of all segments of their communities, including LMI neighborhoods. The law directed federal regulatory agencies to "(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods," and "(2) take such record into account in its evaluation of an application for a deposit facility by such institution." ## What Is Redlining? Before laws expressly prohibited discrimination in lending, the practice known as redlining prevented certain populations from accessing credit. Redlining is the discriminatory practice of denying financial services to residents of certain neighborhoods due to race or ethnicity. Sociologist John McKnight coined the term in the 1960s, based on maps that marked racial and ethnic minority neighborhoods in red—labeling them "hazardous" to lenders. The maps were created by a federal agency, the Home Owners' Loan Corp. (HOLC). ## What the Home Owners' Loan Corp. (HOLC) Did During the late 1930s, the HOLC—a federal agency—was created as part of the [New Deal](https://www.investopedia.com/terms/n/new-deal.asp). The New Deal was a series of programs enacted under then-President Franklin Delano Roosevelt that were intended to help the U.S. recover from the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp). The new agency's purpose was to provide low-interest long-term mortgages to homeowners unable to obtain financing through normal banking channels. The HOLC drafted "Residential Security" maps of major cities as part of its City Survey Program. To create the maps, HOLC examiners classified neighborhoods on a "perceived level of lending risk" using information gathered from local [appraisers](https://www.investopedia.com/bias-in-the-home-appraisal-process-5191272), bank loan officers, city officials, and real estate agents. According to the National Community Reinvestment Coalition, the examiners graded the neighborhoods based on factors including: * The age and condition of the housing * Access to transportation * The closeness of popular amenities, such as parks * Proximity to undesirable properties, such as polluting industries * The residents' economic class and employment status * The residents' ethnic and racial composition The neighborhoods were color-coded on maps, with each color representing the area's perceived risk to lenders. \| HOLC Maps Used in Redlining \| \| \| \| --- \| --- \| --- \| \| Color \| Grade \| HOLC Description \| \| Green \| A "Best" \| HOLC described A areas as "'hot spots'…where good mortgage lenders with available funds are willing to make their maximum loans…—perhaps up to 75–80% of appraisal." \| \| Blue \| B "Still Desirable" \| HOLC described B areas as "still good" but not as "'hot' as A areas." "They are neighborhoods where good mortgage lenders will have a tendency to hold commitments 10–15% under the limit," or around 65% of appraisal. \| \| Yellow \| C "Definitely Declining" \| C neighborhoods were characterized by "obsolescence [and] infiltration of lower grade population." "Good mortgage lenders are more conservative in Third grade or C areas and hold commitments under the lending ratio for the A and B areas." \| \| Red \| D "Hazardous" \| HOLC described D areas as "characterized by detrimental influences in a pronounced degree, undesirable population or an infiltration of it." It recommended that lenders "refuse to make loans in these areas [or do so] only on a conservative basis." \| ## How Maps Became a Tool for Discrimination The HOLC maps became a tool for widespread discrimination. Would-be homeowners in certain areas found it difficult or impossible to get a mortgage because capital was directed to White families living in green and blue neighborhoods—away from Black and other minority families in yellow and red communities. The rare loans that were available in redlined areas were very expensive, which made it even harder to buy a home and build wealth. Unable to get regular mortgages, people of color who wanted to own a house were forced to resort to exploitatively priced housing contracts that massively increased the cost of housing and gave them no equity until their last payment was delivered. Chicago's [Contract Buyers League](https://www.investopedia.com/contract-buyers-league-5101680) was formed in the 1960s by a group of inner-city residents to fight these practices. With nearly 65% of its neighborhoods marked in red, Macon, Ga., was the most redlined city in the U.S. ![Home Owners’ Loan Corp. (HOLC) map of Macon, Ga.]() ![Home Owners’ Loan Corp. (HOLC) map of Macon, Ga.](https://www.investopedia.com/thmb/nzPo0TyS_bwMUucP09RjZMzs7ss=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MaconGeorgia-0ea0367ced9143e79c427231fd1d94a6.jpg) Image source: Mapping Inequality. Here's a list of the 10 cities with the highest percentage of neighborhoods marked "hazardous" in the 1930s, per a National Community Reinvestment Coalition (NCRC) study as reported by the nonprofit news website NextCity.com. 1. Macon, Ga., 64.99% 2. Birmingham, Ala., 63.91% 3. Wichita, Kan., 63.87% 4. Springfield, Mo., 60.19% 5. Augusta, Ga., 58.70% 6. Columbus, Ga., 57.98% 7. Newport News, Va., 57.51% 8. Muskegon, Mich., 57.24 9. Flint, Mich., 54.19% 10. Montgomery, Ala., 53.11% ## Economic and Racial Segregation from Redlining Persists Today The immediate effect of redlining was that residents in racial and ethnic minority neighborhoods couldn't access capital to improve their housing (to buy or renovate) or for other economic opportunities. Of course, the impacts of redlining didn't magically end when the FHA was passed in 1968. Instead, as a 2018 study by the NCRC showed, the economic and racial segregation created by redlining persisted in many cities. For example: * 74% of neighborhoods that the HOLC graded as "hazardous" more than 80 years earlier remained LMI. * 64% of HOLC's hazardous-graded areas were still racial and ethnic minority neighborhoods. ![Home Owners’ Loan Corp. (HOLC) graded cities]() ![Home Owners’ Loan Corp. (HOLC) graded cities](https://www.investopedia.com/thmb/BEPSCy9lRrPfhgH6jQYrg2Vdw9U=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HOLCgradedcities-2454fbc9411e49c88030b65da7136200.jpg) Image source: Mapping Inequality (https://dsl.richmond.edu/panorama/redlining/#loc=5/39.1/-94.58). By comparison, 91% of areas deemed "best" in the 1930s remained middle- to upper-income (MUI), and more than 85% were still predominantly White. ### The median net worth of Black families is about 16% that of White families; Hispanic families' median net worth is about 22% that of White families. According to the Mapping Inequality project of the University of Richmond, "As homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth inequalities that we still see today." ## The Lingering Legacy of Discriminatory Lending Past redlining is one factor behind the persistent [racial wealth gap](https://www.investopedia.com/the-racial-wealth-gap-5105010) in the U.S. And even though discriminatory lending practices are prohibited under the FHA, ECOA, and CRA, Black borrowers and those from other racial and ethnic minority groups remain at a disadvantage. These are a few of the lingering effects of redlining: ### Higher Interest Rates An analysis of nearly 7 million 30-year mortgages by the University of California at Berkeley found that Black and Latinx/Hispanic applicants were charged 0.08% higher interest rates compared with White borrowers, costing them $765 million in extra interest per year. ### Lower Loan Approval Rates In a 2020 mortgage study conducted by the Consumer Financial Protection Bureau, Black and Hispanic White borrowers had higher denial rates than non-Hispanic White and Asian borrowers. For Black loan seekers, the denial rate was 18.1%, and for Hispanic White loan seekers, it was 12.5%. By contrast, the denial rate for Asian applicants was 9.7%, and for non-Hispanic White applicants, it was 6.9%. ### Lower Homeownership Rates Discrimination has led to a significant homeownership gap between Blacks and Whites in the U.S. The national homeownership rate for Black families in late 2023 was 45.5%, compared to 74.5% for White families, according to the U.S. Census Bureau. ### Lower Personal Wealth According to a 2020 report from real estate firm Redfin, over the past 40 years, the typical homeowner in previously redlined neighborhoods has gained 52% less—or $212,023 less—in personal wealth from property value increases than homeowners in greenlined areas. ## "Corporate Redlining" Hampers Black-Owned Businesses Discrimination goes beyond mortgage lending. A 2020 analysis by The Business Journals found that White neighborhoods received roughly twice as much per person in small-business loans compared with Black neighborhoods. Similarly, predominantly White neighborhoods received, on average, about twice as many small-business loans per capita. The report also noted that, since peaking before the 2008 financial crisis, the number of loans made to Black-owned businesses through the Small Business Administration's 7(a) program decreased by 84%, compared to a 53% drop in 7(a) loans awarded overall. The decline came despite other positive trends, including a 48% growth in the economy, an 82% rise in commercial loans, and a 101% increase in bank deposits. Orv Kimbrough, chair and chief executive officer at Midwest BankCentre, called this disparity "corporate redlining." Discrimination, whether seen in mortgage or small-business lending, has lasting effects. "When you don't invest, you get social problems, you get crime, less education, all of which reduces the chances of people climbing the social and economic ladder," noted Andre Perry, a fellow at the Brookings Institution who studies wealth creation and race. ## If You Experience Lending Discrimination Mortgage applicants and homebuyers who believe they have been discriminated against should contact the [Office of Fair Housing and Equal Opportunity (FHEO)](https://www.hud.gov/program_offices/fair_housing_equal_opp/online-complaint) at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau (CFPB). Small business owners who believe they have been discriminated against based on race, sex, or another protected category can submit a lending discrimination complaint online with the CFPB. ## What is Redlining? Redlining is the now-illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity. The term was coined by sociologist John McKnight in the 1960s, based on Home Owners' Loan Corp. (HOLC) maps that marked racial and ethnic minority neighborhoods in red, labeling them "hazardous" to lenders. ## Does Redlining Happen Today? Redlining is illegal now. But the redlining that occurred in the past still contributes significantly to the racial wealth gap that persists today. ## What Are the U.S. Fair Lending Laws? Fair lending laws in the United States prohibit lenders from discriminating based on certain factors (such as an applicant's race, color, national origin, or religion) during any aspect of a credit transaction. ## What Are the Three Types of Lending Discrimination? Federal law recognizes three types of lending discrimination. According to the Federal Deposit Insurance Corp. (FDIC), they are: * Overt discrimination—when a lender blatantly discriminates based on a prohibited factor * Disparate treatment—when a lender treats applicants differently based on one of the prohibited factors * Disparate impact—when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity ## What Is the Racial Wealth Gap? The racial wealth gap describes the difference in accumulated wealth held by different racial or ethnic groups. It reflects the generations-long inequality in access to financial and educational opportunities, income, and resources. ## The Bottom Line Lending practices have gradually become more equitable in the U.S. But more equitable is not equal. The residual effects of redlining—and the [ongoing discrimination against people of color today](https://www.investopedia.com/race-and-insurance-5075141)—continue to perpetuate the country's racial wealth divide. Three-quarters of neighborhoods redlined in the 1930s continue to struggle economically today and are much more likely than other communities to be home to lower-income, racial and ethnic minority residents. They are also more likely to be the target of [subprime](https://www.investopedia.com/terms/s/subprime.asp) and [predatory lenders](https://www.investopedia.com/terms/p/predatory_lending.asp). There are other enduring negative outcomes, too. A 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin-Milwaukee, and the University of Richmond reported that, "the history of redlining, segregation and disinvestment not only reduced minority wealth, it impacted health and longevity, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods." In fact, the study found, life expectancy is 3.6 years lower in formerly redlined communities than in communities that had received high grades from the HOLC.	Laws today aim to protect borrowers from discriminatory lending practices, but that wasn't always the case. For decades, U.S. banks denied mortgages to Black applicants—and those belonging to other racial and ethnic minority groups—who lived in certain areas redlined by a federal agency called the Home Owners' Loan Corp. (HOLC). Although HOLC has been defunct since the early 1950s, those practices still resonate today. Key Takeaways Lending discrimination occurs when lenders base credit decisions on factors other than the applicant's creditworthiness. Denying financial services to residents of certain neighborhoods due to race or ethnicity is commonly called redlining. The discriminatory practice of redlining made it impossible for many members of racial and ethnic minority groups to qualify for mortgages. Though now outlawed, redlining is one factor behind the racial wealth gap that persists in the United States today. Laws today forbid discrimination based on race, color, national origin, religion, sex, familial status, or disability. Investopedia / Sabrina Jiang What Is Lending Discrimination? Lending discrimination occurs when lenders base credit decisions on factors other than a borrower's creditworthiness. Today, three federal laws offer protection against such discrimination: The Fair Housing Act (FHA)The Equal Credit Opportunity Act (ECOA)The Community Reinvestment Act (CRA) Fair Housing Act (FHA) of 1968 In 1948, the U.S. Supreme Court deemed racially restrictive deed covenants unenforceable. Twenty years later, the Fair Housing Act (FHA) was enacted. The law protects people from discrimination when they rent or buy a home, apply for a mortgage, seek housing assistance, or engage in other housing-related activities. It forbids discrimination based on race, color, national origin, religion, sex (including gender, gender identity, and sexual orientation), familial status, or disability during any part of a residential real estate transaction. Equal Credit Opportunity Act (ECOA) of 1974 Discriminatory lending and housing practices continued despite the Fair Housing Act, and civil rights groups advocated for additional laws. In 1974, Congress passed the Equal Credit Opportunity Act (ECOA). According to the Federal Trade Commission, the ECOA "makes it illegal for creditors to discriminate based on race, color, religion, national origin, sex, marital status, age, or because all (or part) of a person's income comes from public assistance." Creditors may ask for some of this information, but they can't use it to deny you credit or establish the terms of your credit. For example, lenders can ask if you receive alimony or child support, but only if you need that income to qualify for the loan. Community Reinvestment Act (CRA) of 1977 Even with the FHA and ECOA on the books, redlining continued in low- to moderate-income (LMI) neighborhoods. In its discussion of this period, the website Federal Reserve History notes, "There is some evidence that overt discrimination in mortgage lending persisted." A few things happened as a result: Illinois became the first state to pass a law prohibiting redlining, and it required banks to disclose their lending practices. Congress passed the Home Mortgage Disclosure Act (HMDA), which required banks to disclose the location of financed properties and the borrowers' race and gender. Then-President Jimmy Carter signed into law the Community Reinvestment Act (CRA). The CRA was enacted to prevent redlining and to encourage banks and savings associations to help meet the credit needs of all segments of their communities, including LMI neighborhoods. The law directed federal regulatory agencies to "(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods," and "(2) take such record into account in its evaluation of an application for a deposit facility by such institution." What Is Redlining? Before laws expressly prohibited discrimination in lending, the practice known as redlining prevented certain populations from accessing credit. Redlining is the discriminatory practice of denying financial services to residents of certain neighborhoods due to race or ethnicity. Sociologist John McKnight coined the term in the 1960s, based on maps that marked racial and ethnic minority neighborhoods in red—labeling them "hazardous" to lenders. The maps were created by a federal agency, the Home Owners' Loan Corp. (HOLC). What the Home Owners' Loan Corp. (HOLC) Did During the late 1930s, the HOLC—a federal agency—was created as part of the New Deal. The New Deal was a series of programs enacted under then-President Franklin Delano Roosevelt that were intended to help the U.S. recover from the Great Depression. The new agency's purpose was to provide low-interest long-term mortgages to homeowners unable to obtain financing through normal banking channels. The HOLC drafted "Residential Security" maps of major cities as part of its City Survey Program. To create the maps, HOLC examiners classified neighborhoods on a "perceived level of lending risk" using information gathered from local appraisers, bank loan officers, city officials, and real estate agents. According to the National Community Reinvestment Coalition, the examiners graded the neighborhoods based on factors including: The age and condition of the housingAccess to transportationThe closeness of popular amenities, such as parksProximity to undesirable properties, such as polluting industriesThe residents' economic class and employment statusThe residents' ethnic and racial composition The neighborhoods were color-coded on maps, with each color representing the area's perceived risk to lenders. HOLC Maps Used in Redlining Color Grade HOLC Description Green A "Best" HOLC described A areas as "'hot spots'…where good mortgage lenders with available funds are willing to make their maximum loans…—perhaps up to 75–80% of appraisal." Blue B "Still Desirable" HOLC described B areas as "still good" but not as "'hot' as A areas." "They are neighborhoods where good mortgage lenders will have a tendency to hold commitments 10–15% under the limit," or around 65% of appraisal. Yellow C "Definitely Declining" C neighborhoods were characterized by "obsolescence [and] infiltration of lower grade population." "Good mortgage lenders are more conservative in Third grade or C areas and hold commitments under the lending ratio for the A and B areas." Red D "Hazardous" HOLC described D areas as "characterized by detrimental influences in a pronounced degree, undesirable population or an infiltration of it." It recommended that lenders "refuse to make loans in these areas [or do so] only on a conservative basis." How Maps Became a Tool for Discrimination The HOLC maps became a tool for widespread discrimination. Would-be homeowners in certain areas found it difficult or impossible to get a mortgage because capital was directed to White families living in green and blue neighborhoods—away from Black and other minority families in yellow and red communities. The rare loans that were available in redlined areas were very expensive, which made it even harder to buy a home and build wealth. Unable to get regular mortgages, people of color who wanted to own a house were forced to resort to exploitatively priced housing contracts that massively increased the cost of housing and gave them no equity until their last payment was delivered. Chicago's Contract Buyers League was formed in the 1960s by a group of inner-city residents to fight these practices. With nearly 65% of its neighborhoods marked in red, Macon, Ga., was the most redlined city in the U.S. Image source: Mapping Inequality. Here's a list of the 10 cities with the highest percentage of neighborhoods marked "hazardous" in the 1930s, per a National Community Reinvestment Coalition (NCRC) study as reported by the nonprofit news website NextCity.com. Macon, Ga., 64.99%Birmingham, Ala., 63.91%Wichita, Kan., 63.87%Springfield, Mo., 60.19%Augusta, Ga., 58.70%Columbus, Ga., 57.98%Newport News, Va., 57.51%Muskegon, Mich., 57.24Flint, Mich., 54.19%Montgomery, Ala., 53.11% Economic and Racial Segregation from Redlining Persists Today The immediate effect of redlining was that residents in racial and ethnic minority neighborhoods couldn't access capital to improve their housing (to buy or renovate) or for other economic opportunities. Of course, the impacts of redlining didn't magically end when the FHA was passed in 1968. Instead, as a 2018 study by the NCRC showed, the economic and racial segregation created by redlining persisted in many cities. For example: 74% of neighborhoods that the HOLC graded as "hazardous" more than 80 years earlier remained LMI.64% of HOLC's hazardous-graded areas were still racial and ethnic minority neighborhoods. Image source: Mapping Inequality (https://dsl.richmond.edu/panorama/redlining/#loc=5/39.1/-94.58). By comparison, 91% of areas deemed "best" in the 1930s remained middle- to upper-income (MUI), and more than 85% were still predominantly White. The median net worth of Black families is about 16% that of White families; Hispanic families' median net worth is about 22% that of White families. According to the Mapping Inequality project of the University of Richmond, "As homeownership was arguably the most significant means of intergenerational wealth building in the United States in the twentieth century, these redlining practices from eight decades ago had long-term effects in creating wealth inequalities that we still see today." The Lingering Legacy of Discriminatory Lending Past redlining is one factor behind the persistent racial wealth gap in the U.S. And even though discriminatory lending practices are prohibited under the FHA, ECOA, and CRA, Black borrowers and those from other racial and ethnic minority groups remain at a disadvantage. These are a few of the lingering effects of redlining: Higher Interest Rates An analysis of nearly 7 million 30-year mortgages by the University of California at Berkeley found that Black and Latinx/Hispanic applicants were charged 0.08% higher interest rates compared with White borrowers, costing them $765 million in extra interest per year. Lower Loan Approval Rates In a 2020 mortgage study conducted by the Consumer Financial Protection Bureau, Black and Hispanic White borrowers had higher denial rates than non-Hispanic White and Asian borrowers. For Black loan seekers, the denial rate was 18.1%, and for Hispanic White loan seekers, it was 12.5%. By contrast, the denial rate for Asian applicants was 9.7%, and for non-Hispanic White applicants, it was 6.9%. Lower Homeownership Rates Discrimination has led to a significant homeownership gap between Blacks and Whites in the U.S. The national homeownership rate for Black families in late 2023 was 45.5%, compared to 74.5% for White families, according to the U.S. Census Bureau. Lower Personal Wealth According to a 2020 report from real estate firm Redfin, over the past 40 years, the typical homeowner in previously redlined neighborhoods has gained 52% less—or $212,023 less—in personal wealth from property value increases than homeowners in greenlined areas. "Corporate Redlining" Hampers Black-Owned Businesses Discrimination goes beyond mortgage lending. A 2020 analysis by The Business Journals found that White neighborhoods received roughly twice as much per person in small-business loans compared with Black neighborhoods. Similarly, predominantly White neighborhoods received, on average, about twice as many small-business loans per capita. The report also noted that, since peaking before the 2008 financial crisis, the number of loans made to Black-owned businesses through the Small Business Administration's 7(a) program decreased by 84%, compared to a 53% drop in 7(a) loans awarded overall. The decline came despite other positive trends, including a 48% growth in the economy, an 82% rise in commercial loans, and a 101% increase in bank deposits. Orv Kimbrough, chair and chief executive officer at Midwest BankCentre, called this disparity "corporate redlining." Discrimination, whether seen in mortgage or small-business lending, has lasting effects. "When you don't invest, you get social problems, you get crime, less education, all of which reduces the chances of people climbing the social and economic ladder," noted Andre Perry, a fellow at the Brookings Institution who studies wealth creation and race. If You Experience Lending Discrimination Mortgage applicants and homebuyers who believe they have been discriminated against should contact the Office of Fair Housing and Equal Opportunity (FHEO) at the U.S. Department of Housing and Urban Development (HUD) or the Consumer Financial Protection Bureau (CFPB). Small business owners who believe they have been discriminated against based on race, sex, or another protected category can submit a lending discrimination complaint online with the CFPB. What is Redlining? Redlining is the now-illegal discriminatory practice of denying credit to residents of certain areas based on their race or ethnicity. The term was coined by sociologist John McKnight in the 1960s, based on Home Owners' Loan Corp. (HOLC) maps that marked racial and ethnic minority neighborhoods in red, labeling them "hazardous" to lenders. Does Redlining Happen Today? Redlining is illegal now. But the redlining that occurred in the past still contributes significantly to the racial wealth gap that persists today. What Are the U.S. Fair Lending Laws? Fair lending laws in the United States prohibit lenders from discriminating based on certain factors (such as an applicant's race, color, national origin, or religion) during any aspect of a credit transaction. What Are the Three Types of Lending Discrimination? Federal law recognizes three types of lending discrimination. According to the Federal Deposit Insurance Corp. (FDIC), they are:Overt discrimination—when a lender blatantly discriminates based on a prohibited factorDisparate treatment—when a lender treats applicants differently based on one of the prohibited factorsDisparate impact—when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity What Is the Racial Wealth Gap? The racial wealth gap describes the difference in accumulated wealth held by different racial or ethnic groups. It reflects the generations-long inequality in access to financial and educational opportunities, income, and resources. The Bottom Line Lending practices have gradually become more equitable in the U.S. But more equitable is not equal. The residual effects of redlining—and the ongoing discrimination against people of color today—continue to perpetuate the country's racial wealth divide. Three-quarters of neighborhoods redlined in the 1930s continue to struggle economically today and are much more likely than other communities to be home to lower-income, racial and ethnic minority residents. They are also more likely to be the target of subprime and predatory lenders. There are other enduring negative outcomes, too. A 2020 study by researchers at the National Community Reinvestment Coalition, the University of Wisconsin-Milwaukee, and the University of Richmond reported that, "the history of redlining, segregation and disinvestment not only reduced minority wealth, it impacted health and longevity, resulting in a legacy of chronic disease and premature death in many high minority neighborhoods." In fact, the study found, life expectancy is 3.6 years lower in formerly redlined communities than in communities that had received high grades from the HOLC.	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(HOLC) map of Macon, Ga.", "https://www.investopedia.com/thmb/nzPo0TyS_bwMUucP09RjZMzs7ss=/1500x0/filters:no_upscale(" ], [ "Home Owners’ Loan Corp. (HOLC) graded cities", "https://www.investopedia.com/thmb/BEPSCy9lRrPfhgH6jQYrg2Vdw9U=/1500x0/filters:no_upscale(" ], [ "racial wealth gap", "https://www.investopedia.com/the-racial-wealth-gap-5105010" ], [ "Office of Fair Housing and Equal Opportunity (FHEO)", "https://www.hud.gov/program_offices/fair_housing_equal_opp/online-complaint" ], [ "ongoing discrimination against people of color today", "https://www.investopedia.com/race-and-insurance-5075141" ], [ "subprime", "https://www.investopedia.com/terms/s/subprime.asp" ], [ "predatory lenders", "https://www.investopedia.com/terms/p/predatory_lending.asp" ] ]
https://www.investopedia.com/new-credit-card-rewards-you-for-working-out-regularly-5220452	New Credit Card Rewards You for Working Out Regularly	<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"> Paceline, a fitness rewards platform, has expanded its product line to offer a new credit card. The Paceline Card is designed to incentivize cardholders to exercise regularly. In addition to offering up to 5% cash back on purchases, the card may also reimburse you for an Apple Watch over time. </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 new Paceline Card will offer increased cash back when you meet a weekly exercise goal.</li><li>Cardholders can earn up to 5% back on wellness-related purchases and up to 3% back on everything else, as long as they meet their goals in the Paceline app.</li><li>The card can be worth it for fitness-minded consumers who want to maximize their cash-back rewards.</li></ul></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-subheading__text"> The New Paceline Card Rewards You for Getting to the Gym </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Paceline began by offering rewards and discounts to users when they meet weekly exercise goals, and now the company is offering a much bigger incentive. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> With the new Paceline Card, you'll start by earning 2.5% cash back on health and wellness purchases and 1.5% cash back on everything else. However, if you meet your weekly activity goal in the Paceline app, you'll double those numbers, resulting in 5% back on health and wellness purchases and 3% back on everything else. </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 qualify for the double reward bonus, you simply need to get at least 150 minutes of elevated heart rate activity each week between Monday and Sunday.<span class="ql-inline-citation" data-cite="2"></span> Cash back is automatically redeemed as a statement credit to your 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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Paceline uses supported fitness trackers to monitor your activity when connected to the Paceline app. Options include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li>Apple Watch</li><li>Fitbit wearable (must have a heart rate monitor and track activity minutes)</li><li>Garmin watch (must have a heart rate monitor and track intensity minutes)<span class="ql-inline-citation" data-cite="1"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> If you don't have one of these devices or you want an upgrade, you can get reimbursed up to $429 for an Apple Watch. Simply purchase the watch with your Paceline Card, keep your card account in good standing, and meet your weekly activity goals. For each week in which you meet the activity goal, you'll receive 1/52 of the purchase price at a statement credit. For example, with a $429 watch, you'd get $8.25 for each week that you exercise for at least 150 minutes.<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_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The card charges a $60 annual fee, but you can easily make up for that by spending at least $4,000—or $2,000 during weeks in which you meet your activity goal. Finally, as a cardholder, you'll be upgraded to an elevated level of membership with Paceline's core platform, though it's unclear what benefits you'll receive. </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"> Note that while the company does gather data about you, including your age, gender, workout activity and spending habits, it doesn't sell the data to other companies.<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_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"> Should You Consider the Paceline Card? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> If you exercise regularly or simply need an extra nudge to start a regular exercise program, the chance to earn 3% cash back as a base rewards rate could be an attractive incentive to add this card to your wallet. There are no other cards that offer that high of a rewards rate on everything, with or without an annual fee. The elevated rewards rate could even encourage you to work out more than you already do. </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"> Just remember that if you don't meet your activity goal in a certain week, you'll only get 1.5% back on most of your purchases. </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 card's approach to a sign-up bonus in the form of reimbursement for an Apple Watch is unique, not only because it comes in weekly statement credits but also because it's tied to your exercise activity. Just be sure that your habits align with your aspirations before you make the purchase. Otherwise, you may end up footing most of the bill. Even if you can get most or all of it reimbursed because you exercise regularly enough, you'll still need to make the upfront purchase. </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"> Overall, the Paceline Card is intriguing as the first credit card to offer cash-back rewards tied to your fitness habits. For Paceline's part, the company may be counting on most cardholders not consistently meeting the weekly 150 minute exercise requirement. Otherwise, paying the high cash back rate on most accounts would likely be unprofitable unless unless most customers also carried card balances and paid interest. Regardless, for those who are disciplined about their exercise habits this is a rich offer. </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 with any credit card, be sure to consider all of the card's features and compare it to other options to determine the best fit for you.<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>	Paceline, a fitness rewards platform, has expanded its product line to offer a new credit card. The Paceline Card is designed to incentivize cardholders to exercise regularly. In addition to offering up to 5% cash back on purchases, the card may also reimburse you for an Apple Watch over time. ### Key Takeaways * The new Paceline Card will offer increased cash back when you meet a weekly exercise goal. * Cardholders can earn up to 5% back on wellness-related purchases and up to 3% back on everything else, as long as they meet their goals in the Paceline app. * The card can be worth it for fitness-minded consumers who want to maximize their cash-back rewards. ### The New Paceline Card Rewards You for Getting to the Gym Paceline began by offering rewards and discounts to users when they meet weekly exercise goals, and now the company is offering a much bigger incentive. With the new Paceline Card, you'll start by earning 2.5% cash back on health and wellness purchases and 1.5% cash back on everything else. However, if you meet your weekly activity goal in the Paceline app, you'll double those numbers, resulting in 5% back on health and wellness purchases and 3% back on everything else. To qualify for the double reward bonus, you simply need to get at least 150 minutes of elevated heart rate activity each week between Monday and Sunday. Cash back is automatically redeemed as a statement credit to your account. Paceline uses supported fitness trackers to monitor your activity when connected to the Paceline app. Options include: * Apple Watch * Fitbit wearable (must have a heart rate monitor and track activity minutes) * Garmin watch (must have a heart rate monitor and track intensity minutes) If you don't have one of these devices or you want an upgrade, you can get reimbursed up to $429 for an Apple Watch. Simply purchase the watch with your Paceline Card, keep your card account in good standing, and meet your weekly activity goals. For each week in which you meet the activity goal, you'll receive 1/52 of the purchase price at a statement credit. For example, with a $429 watch, you'd get $8.25 for each week that you exercise for at least 150 minutes. The card charges a $60 annual fee, but you can easily make up for that by spending at least $4,000—or $2,000 during weeks in which you meet your activity goal. Finally, as a cardholder, you'll be upgraded to an elevated level of membership with Paceline's core platform, though it's unclear what benefits you'll receive. Note that while the company does gather data about you, including your age, gender, workout activity and spending habits, it doesn't sell the data to other companies. ### Should You Consider the Paceline Card? If you exercise regularly or simply need an extra nudge to start a regular exercise program, the chance to earn 3% cash back as a base rewards rate could be an attractive incentive to add this card to your wallet. There are no other cards that offer that high of a rewards rate on everything, with or without an annual fee. The elevated rewards rate could even encourage you to work out more than you already do. Just remember that if you don't meet your activity goal in a certain week, you'll only get 1.5% back on most of your purchases. The card's approach to a sign-up bonus in the form of reimbursement for an Apple Watch is unique, not only because it comes in weekly statement credits but also because it's tied to your exercise activity. Just be sure that your habits align with your aspirations before you make the purchase. Otherwise, you may end up footing most of the bill. Even if you can get most or all of it reimbursed because you exercise regularly enough, you'll still need to make the upfront purchase. Overall, the Paceline Card is intriguing as the first credit card to offer cash-back rewards tied to your fitness habits. For Paceline's part, the company may be counting on most cardholders not consistently meeting the weekly 150 minute exercise requirement. Otherwise, paying the high cash back rate on most accounts would likely be unprofitable unless unless most customers also carried card balances and paid interest. Regardless, for those who are disciplined about their exercise habits this is a rich offer. As with any credit card, be sure to consider all of the card's features and compare it to other options to determine the best fit for you. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Paceline, a fitness rewards platform, has expanded its product line to offer a new credit card. The Paceline Card is designed to incentivize cardholders to exercise regularly. In addition to offering up to 5% cash back on purchases, the card may also reimburse you for an Apple Watch over time. Key Takeaways The new Paceline Card will offer increased cash back when you meet a weekly exercise goal.Cardholders can earn up to 5% back on wellness-related purchases and up to 3% back on everything else, as long as they meet their goals in the Paceline app.The card can be worth it for fitness-minded consumers who want to maximize their cash-back rewards. The New Paceline Card Rewards You for Getting to the Gym Paceline began by offering rewards and discounts to users when they meet weekly exercise goals, and now the company is offering a much bigger incentive. With the new Paceline Card, you'll start by earning 2.5% cash back on health and wellness purchases and 1.5% cash back on everything else. However, if you meet your weekly activity goal in the Paceline app, you'll double those numbers, resulting in 5% back on health and wellness purchases and 3% back on everything else. To qualify for the double reward bonus, you simply need to get at least 150 minutes of elevated heart rate activity each week between Monday and Sunday. Cash back is automatically redeemed as a statement credit to your account. Paceline uses supported fitness trackers to monitor your activity when connected to the Paceline app. Options include: Apple WatchFitbit wearable (must have a heart rate monitor and track activity minutes)Garmin watch (must have a heart rate monitor and track intensity minutes) If you don't have one of these devices or you want an upgrade, you can get reimbursed up to $429 for an Apple Watch. Simply purchase the watch with your Paceline Card, keep your card account in good standing, and meet your weekly activity goals. For each week in which you meet the activity goal, you'll receive 1/52 of the purchase price at a statement credit. For example, with a $429 watch, you'd get $8.25 for each week that you exercise for at least 150 minutes. The card charges a $60 annual fee, but you can easily make up for that by spending at least $4,000—or $2,000 during weeks in which you meet your activity goal. Finally, as a cardholder, you'll be upgraded to an elevated level of membership with Paceline's core platform, though it's unclear what benefits you'll receive. Note that while the company does gather data about you, including your age, gender, workout activity and spending habits, it doesn't sell the data to other companies. Should You Consider the Paceline Card? If you exercise regularly or simply need an extra nudge to start a regular exercise program, the chance to earn 3% cash back as a base rewards rate could be an attractive incentive to add this card to your wallet. There are no other cards that offer that high of a rewards rate on everything, with or without an annual fee. The elevated rewards rate could even encourage you to work out more than you already do. Just remember that if you don't meet your activity goal in a certain week, you'll only get 1.5% back on most of your purchases. The card's approach to a sign-up bonus in the form of reimbursement for an Apple Watch is unique, not only because it comes in weekly statement credits but also because it's tied to your exercise activity. Just be sure that your habits align with your aspirations before you make the purchase. Otherwise, you may end up footing most of the bill. Even if you can get most or all of it reimbursed because you exercise regularly enough, you'll still need to make the upfront purchase. Overall, the Paceline Card is intriguing as the first credit card to offer cash-back rewards tied to your fitness habits. For Paceline's part, the company may be counting on most cardholders not consistently meeting the weekly 150 minute exercise requirement. Otherwise, paying the high cash back rate on most accounts would likely be unprofitable unless unless most customers also carried card balances and paid interest. Regardless, for those who are disciplined about their exercise habits this is a rich offer. As with any credit card, be sure to consider all of the card's features and compare it to other options to determine the best fit for you. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/western-digital-receives-analyst-upgrade-on-projected-memory-chip-growth-8625286	Western Digital Receives Analyst Upgrade on Projected Memory Chip Growth	<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>Western Digital shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target.</li><li>The memory device manufacturer could benefit from a projected increase in prices across the industry later this year, Rosenblatt analyst Kevin Cassidy wrote.</li><li>Western Digital received an upgrade to a "buy" rating and an increased price target of $115 from $65, a level the stock recently surpassed.</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"> Western Digital (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WDC">WDC</a>) shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target, anticipating an increase in demand for the company's flash memory chips. </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"> Rosenblatt analyst Kevin Cassidy wrote that Western Digital could benefit from an expected increase in price around the industry for the type of memory chips it makes, upgrading the stock to "buy" from "neutral," and raising its price target to $115 from $65. </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"> "Our upgrade of WDC to a Buy recommendation is anchored on the strengthening NAND Flash market, with expected 15%+ sequential price increases in 2Q24, driven by rising demand, low inventories, and controlled capacity," Cassidy wrote. "This outlook, coupled with an adjustment in our NAND Flash ASP forecasts, underpins our increased 12-month price target of $115 for WDC, reflecting a 13x multiple on our projected NTM Non-GAAP EPS." </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"> Rosenblatt also increased its projection for Western Digital's fourth-quarter revenue to $3.85 billion, up from $3.55 billion, as well as 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>) to 79 cents per share, up from 55 cents previously. </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"> Western Digital is set to spin off its flash memory business from its hard drive business in the second half of 2024, after <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/western-digital-shares-soar-company-splits-off-flash-memory-business-8384368">first announcing the move</a> in October, with executives saying separating would allow the companies to focus and invest more in their respective segments of the market. </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"> Last month, the company announced it was progressing toward the split, and said <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>) David Goeckeler will take over the flash memory business, while Executive Vice President of Global Operations Irving Tan is set to lead the hard disk drive (HDD) company, which will retain the name Western Digital.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Western Digital shares were up about 3% as markets opened Friday before paring back some gains. They were 1.5% higher at $71.56 as of 11:25 a.m. ET. Shares are up about 40% so far this year and have more than doubled in value over the last 12 months. </p></div>	### Key Takeaways * Western Digital shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target. * The memory device manufacturer could benefit from a projected increase in prices across the industry later this year, Rosenblatt analyst Kevin Cassidy wrote. * Western Digital received an upgrade to a "buy" rating and an increased price target of $115 from $65, a level the stock recently surpassed. Western Digital ([WDC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WDC)) shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target, anticipating an increase in demand for the company's flash memory chips. Rosenblatt analyst Kevin Cassidy wrote that Western Digital could benefit from an expected increase in price around the industry for the type of memory chips it makes, upgrading the stock to "buy" from "neutral," and raising its price target to $115 from $65. "Our upgrade of WDC to a Buy recommendation is anchored on the strengthening NAND Flash market, with expected 15%+ sequential price increases in 2Q24, driven by rising demand, low inventories, and controlled capacity," Cassidy wrote. "This outlook, coupled with an adjustment in our NAND Flash ASP forecasts, underpins our increased 12-month price target of $115 for WDC, reflecting a 13x multiple on our projected NTM Non-GAAP EPS." Rosenblatt also increased its projection for Western Digital's fourth-quarter revenue to $3.85 billion, up from $3.55 billion, as well as adjusted [earnings per share (EPS](https://www.investopedia.com/terms/e/eps.asp)) to 79 cents per share, up from 55 cents previously. Western Digital is set to spin off its flash memory business from its hard drive business in the second half of 2024, after [first announcing the move](https://www.investopedia.com/western-digital-shares-soar-company-splits-off-flash-memory-business-8384368) in October, with executives saying separating would allow the companies to focus and invest more in their respective segments of the market. Last month, the company announced it was progressing toward the split, and said [Chief Executive Officer (CEO](https://www.investopedia.com/terms/c/ceo.asp)) David Goeckeler will take over the flash memory business, while Executive Vice President of Global Operations Irving Tan is set to lead the hard disk drive (HDD) company, which will retain the name Western Digital. Western Digital shares were up about 3% as markets opened Friday before paring back some gains. They were 1.5% higher at $71.56 as of 11:25 a.m. ET. Shares are up about 40% so far this year and have more than doubled in value over the last 12 months.	Key Takeaways Western Digital shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target.The memory device manufacturer could benefit from a projected increase in prices across the industry later this year, Rosenblatt analyst Kevin Cassidy wrote.Western Digital received an upgrade to a "buy" rating and an increased price target of $115 from $65, a level the stock recently surpassed. Western Digital (WDC) shares surged before paring back some gains in early trading Friday as Rosenblatt upgraded its stock and raised its price target, anticipating an increase in demand for the company's flash memory chips. Rosenblatt analyst Kevin Cassidy wrote that Western Digital could benefit from an expected increase in price around the industry for the type of memory chips it makes, upgrading the stock to "buy" from "neutral," and raising its price target to $115 from $65. "Our upgrade of WDC to a Buy recommendation is anchored on the strengthening NAND Flash market, with expected 15%+ sequential price increases in 2Q24, driven by rising demand, low inventories, and controlled capacity," Cassidy wrote. "This outlook, coupled with an adjustment in our NAND Flash ASP forecasts, underpins our increased 12-month price target of $115 for WDC, reflecting a 13x multiple on our projected NTM Non-GAAP EPS." Rosenblatt also increased its projection for Western Digital's fourth-quarter revenue to $3.85 billion, up from $3.55 billion, as well as adjusted earnings per share (EPS) to 79 cents per share, up from 55 cents previously. Western Digital is set to spin off its flash memory business from its hard drive business in the second half of 2024, after first announcing the move in October, with executives saying separating would allow the companies to focus and invest more in their respective segments of the market. Last month, the company announced it was progressing toward the split, and said Chief Executive Officer (CEO) David Goeckeler will take over the flash memory business, while Executive Vice President of Global Operations Irving Tan is set to lead the hard disk drive (HDD) company, which will retain the name Western Digital. Western Digital shares were up about 3% as markets opened Friday before paring back some gains. They were 1.5% higher at $71.56 as of 11:25 a.m. ET. Shares are up about 40% so far this year and have more than doubled in value over the last 12 months.	[ [ "WDC", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=WDC" ], [ "earnings per share (EPS", "https://www.investopedia.com/terms/e/eps.asp" ], [ "first announcing the move", "https://www.investopedia.com/western-digital-shares-soar-company-splits-off-flash-memory-business-8384368" ], [ "Chief Executive Officer (CEO", "https://www.investopedia.com/terms/c/ceo.asp" ] ]
https://www.investopedia.com/terms/s/shareturnover.asp	Share Turnover: Definition, What It Signals, Formula, 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-share-turnover"></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 Share Turnover? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Share turnover is a measure of stock <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>, calculated by dividing the total number of shares traded during some period by the average number of shares outstanding for the same period. The higher the share turnover, the more liquid company shares are. </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"> Share turnover should not be confused with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolioturnover.asp" rel="noopener noreferrer">turnover rate</a> of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is. </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>Share turnover reflects the liquidity of a market by dividing trading volume over outstanding supply for a given period.</li><li>Share turnover does not signal anything about the quality of the stock or why, for the period being measured, it may be more or less liquid than other stocks.</li><li>Because it only speaks to the quantity and not the quality, share turnover should not be used as a primary investing criterion.</li><li>Stocks with higher share turnover ratios are considered more liquid and easier to buy or sell, while stocks with lower share turnover ratios show stock is more illiquid.</li><li>A higher share turnover may also indicate momentum; if good news or bad news drives trading activity, a stock's share turnover ratio will likely be higher for a given period. </li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-share-turnover"></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 Share Turnover </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Share turnover ratio indicates how easy, or difficult, it is to sell shares of a particular stock on the market. It compares the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/number-shares-liquidity-stock/">number of shares</a> that change hands during a particular period with the total number of shares that could have been traded during that same period. Investors may be unwilling to put their money at risk by acquiring the shares of a company with low share turnover. That said, share turnover is interesting as a measure because the correlations don't always hold up. </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"> Investors often assume that smaller companies will see less share turnover because they are, in theory, less liquid than large companies. However, these companies often see a greater portion of share turnover compared to large companies. </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"> Part of this is pricing. Some large companies have share prices in the hundreds of dollars. Although their huge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-is-companys-float/">floats</a> mean hundreds of thousands of shares can trade a day, the actual percentage of the total outstanding is small. In contrast, smaller companies usually have correspondingly cheaper shares; the opportunity cost of loading up and unloading based on the growth prospects is smaller in terms of capital commitment. One reason companies <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stocksplit.asp">split their stock</a> is to try to keep their shares affordable and, therefore, more liquid. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_15-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_16-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Sometimes large, high-quality companies have less share turnover than smaller, lower-quality companies because the share price of the larger company is so high it inhibits frequent trading.</p></div></div></div> <span class="heading-toc" id="toc-calculating-the-share-turnover-ratio"></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"> Calculating the Share Turnover Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> To compute a company's share turnover ratio, you need two numbers. The formula for share turnover is: </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"> <strong>Share Turnover = Trading Volume / Average Shares Outstanding</strong> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The first number is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/volumeoftrade.asp">trading volume</a>. The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security. </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 second number is the average shares outstanding. This is the total number of shares of a stock a company has issued. It is important to note that this is not the total number of authorized shares a company has; the number of shares outstanding is often less (but may be equal to) what they are authorized to issue. </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-interpreting-share-turnover"></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"> Interpreting Share Turnover </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Unfortunately, there is no rule of thumb for what a healthy share turnover ratio is as it depends on the company and the sector it is in. Moreover, stocks with large amounts of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seasonality.asp">seasonality</a> will see their share turnover ratios surge along with the demand for the stock at these times. </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"> Often, companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. This may unfortunately make a stock seem less desirable; as a company performs better and its stock price rises, its liquidity may fall. </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"> Another aspect of share turnover is defining an investor's desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can't be bought or sold as quickly. Therefore, while most investors generally want liquid assets, stocks with lower share turnover may still fit into the investment goals of some investors. </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-example-of-share-turnover"></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"> Example of Share Turnover </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The share turnover ratio only tells you how easily an investor can get trade of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. For example, at the end of 2021, Apple had approximately 16.4 billion shares issued and outstanding.<span class="ql-inline-citation" data-cite="3"></span> On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares.<span class="ql-inline-citation" data-cite="5"></span> Therefore, at the end of 2021, Apple's share turnover ratio for the month of December was: </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"> <strong>Apple's Share Turnover = 110.78 million / 16.4 billion = 0.68% </strong> </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"> Alternatively, at the end of 2021, Microsoft had 7.547 billion shares outstanding, and its 30-day average daily volume on the last day of 2021 was 28.31 million<span class="ql-inline-citation" data-cite="6"></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_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <strong>Microsoft's Share Turnover = 28.31 million / 7.547 billion = 0.38%</strong> </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"> At a glance, it may seem that Apple's stock performed nearly twice as well. However, these percentages are simply measures of liquidity. Investors traded more shares of stock of Apple <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/sharestradedoutstanding.asp">relative to the number of outstanding shares</a> available to trade than compared to Microsoft. </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-limitations-of-share-turnover"></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"> Limitations of Share Turnover </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> While it is still a useful measurement, share turnover does have its limitations. Share turnover doesn't rely any actual financial performance; a stock can simply begin and end a trading period with a very high turnover ratio but end at the exact same price as before. </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 share turnover ratio also fails to indicate the direction a stock may be heading. For example, imagine the news that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/11/government-regulations.asp">government regulation</a> will no longer allow U.S. citizens from buying gas-powered vehicles. Shares of companies impacted would likely fall as investors would seek to sell their shares. As the stock gets bought up at a materially reduced price, the stock's share turnover will likely be high. Though a higher share turnover is often better, that may not always be the case.<br/> </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-how-do-you-calculate-share-turnover"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Calculate Share Turnover?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Share turnover is calculated by dividing the average number of shares traded over a given period by the average number of total outstanding shares for that same period. The percentage result represents what percent of all available shares that could have been traded were actually traded.</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-why-is-share-turnover-important"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is Share Turnover Important?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Share turnover communicates to investors the liquidity of the stock they hold. Some investors were more comfortable knowing they could easily buy or sell a specific company's stock. Alternatively, some investors may want lower liquidity, as this makes it harder for traders to emotionally sell their shares. Though share turnover doesn't indicate anything about the price movement of a stock, it simply informs investors on how easily their shares may be sold in the future.</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-is-a-low-or-high-share-turnover-ratio-better"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is a Low or High Share Turnover Ratio Better?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Generally, a high share turnover ratio is better if investors want to more easily buy or sell securities. A high share turnover calculation means the stock is more liquid. If an investor is intentionally seeking stock that is more difficult to sell (which may stabilize its value during emotional periods of trading), it would then be better to seek out companies with low share turnover calculations.</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-how-can-a-company-improve-its-share-turnover-ratio"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can a Company Improve Its Share Turnover Ratio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A company can not directly improve its share turnover ratio, as share turnover is simply a reflection of how the market interacts with a company's stock. If a company wants higher liquidity, it can do several things.</p><p>First, a company can perform a stock split. Although this will increase the number of shares outstanding, a stock split will divide the company's stock price and make it more accessible for new investors to buy full shares. Second, a company can perform well. Should a company improve its bottom line and begin performing tremendously well, more investors will demand the stock, driving up the number of shares people trade and increasing the share turnover.</p></div> </div> <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"> <em>Correction—June 22, 2022: </em>A previous version of this article misidentified Apple stock as illiquid. </p></div>	## What Is Share Turnover? Share turnover is a measure of stock [liquidity](https://www.investopedia.com/terms/l/liquidity.asp), calculated by dividing the total number of shares traded during some period by the average number of shares outstanding for the same period. The higher the share turnover, the more liquid company shares are. Share turnover should not be confused with the [turnover rate](https://www.investopedia.com/terms/p/portfolioturnover.asp) of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is. ### Key Takeaways * Share turnover reflects the liquidity of a market by dividing trading volume over outstanding supply for a given period. * Share turnover does not signal anything about the quality of the stock or why, for the period being measured, it may be more or less liquid than other stocks. * Because it only speaks to the quantity and not the quality, share turnover should not be used as a primary investing criterion. * Stocks with higher share turnover ratios are considered more liquid and easier to buy or sell, while stocks with lower share turnover ratios show stock is more illiquid. * A higher share turnover may also indicate momentum; if good news or bad news drives trading activity, a stock's share turnover ratio will likely be higher for a given period. ## Understanding Share Turnover Share turnover ratio indicates how easy, or difficult, it is to sell shares of a particular stock on the market. It compares the [number of shares](https://www.investopedia.com/ask/answers/number-shares-liquidity-stock/) that change hands during a particular period with the total number of shares that could have been traded during that same period. Investors may be unwilling to put their money at risk by acquiring the shares of a company with low share turnover. That said, share turnover is interesting as a measure because the correlations don't always hold up. Investors often assume that smaller companies will see less share turnover because they are, in theory, less liquid than large companies. However, these companies often see a greater portion of share turnover compared to large companies. Part of this is pricing. Some large companies have share prices in the hundreds of dollars. Although their huge [floats](https://www.investopedia.com/ask/answers/what-is-companys-float/) mean hundreds of thousands of shares can trade a day, the actual percentage of the total outstanding is small. In contrast, smaller companies usually have correspondingly cheaper shares; the opportunity cost of loading up and unloading based on the growth prospects is smaller in terms of capital commitment. One reason companies [split their stock](https://www.investopedia.com/terms/s/stocksplit.asp) is to try to keep their shares affordable and, therefore, more liquid. ### Sometimes large, high-quality companies have less share turnover than smaller, lower-quality companies because the share price of the larger company is so high it inhibits frequent trading. ## Calculating the Share Turnover Ratio To compute a company's share turnover ratio, you need two numbers. The formula for share turnover is: Share Turnover = Trading Volume / Average Shares Outstanding The first number is the [trading volume](https://www.investopedia.com/terms/v/volumeoftrade.asp). The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security. The second number is the average shares outstanding. This is the total number of shares of a stock a company has issued. It is important to note that this is not the total number of authorized shares a company has; the number of shares outstanding is often less (but may be equal to) what they are authorized to issue. ## Interpreting Share Turnover Unfortunately, there is no rule of thumb for what a healthy share turnover ratio is as it depends on the company and the sector it is in. Moreover, stocks with large amounts of [seasonality](https://www.investopedia.com/terms/s/seasonality.asp) will see their share turnover ratios surge along with the demand for the stock at these times. Often, companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. This may unfortunately make a stock seem less desirable; as a company performs better and its stock price rises, its liquidity may fall. Another aspect of share turnover is defining an investor's desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can't be bought or sold as quickly. Therefore, while most investors generally want liquid assets, stocks with lower share turnover may still fit into the investment goals of some investors. ## Example of Share Turnover The share turnover ratio only tells you how easily an investor can get trade of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. For example, at the end of 2021, Apple had approximately 16.4 billion shares issued and outstanding. On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares. Therefore, at the end of 2021, Apple's share turnover ratio for the month of December was: Apple's Share Turnover = 110.78 million / 16.4 billion = 0.68% Alternatively, at the end of 2021, Microsoft had 7.547 billion shares outstanding, and its 30-day average daily volume on the last day of 2021 was 28.31 million Microsoft's Share Turnover = 28.31 million / 7.547 billion = 0.38% At a glance, it may seem that Apple's stock performed nearly twice as well. However, these percentages are simply measures of liquidity. Investors traded more shares of stock of Apple [relative to the number of outstanding shares](https://www.investopedia.com/ask/answers/05/sharestradedoutstanding.asp) available to trade than compared to Microsoft. ## Limitations of Share Turnover While it is still a useful measurement, share turnover does have its limitations. Share turnover doesn't rely any actual financial performance; a stock can simply begin and end a trading period with a very high turnover ratio but end at the exact same price as before. The share turnover ratio also fails to indicate the direction a stock may be heading. For example, imagine the news that [government regulation](https://www.investopedia.com/articles/economics/11/government-regulations.asp) will no longer allow U.S. citizens from buying gas-powered vehicles. Shares of companies impacted would likely fall as investors would seek to sell their shares. As the stock gets bought up at a materially reduced price, the stock's share turnover will likely be high. Though a higher share turnover is often better, that may not always be the case. ## How Do You Calculate Share Turnover? Share turnover is calculated by dividing the average number of shares traded over a given period by the average number of total outstanding shares for that same period. The percentage result represents what percent of all available shares that could have been traded were actually traded. ## Why Is Share Turnover Important? Share turnover communicates to investors the liquidity of the stock they hold. Some investors were more comfortable knowing they could easily buy or sell a specific company's stock. Alternatively, some investors may want lower liquidity, as this makes it harder for traders to emotionally sell their shares. Though share turnover doesn't indicate anything about the price movement of a stock, it simply informs investors on how easily their shares may be sold in the future. ## Is a Low or High Share Turnover Ratio Better? Generally, a high share turnover ratio is better if investors want to more easily buy or sell securities. A high share turnover calculation means the stock is more liquid. If an investor is intentionally seeking stock that is more difficult to sell (which may stabilize its value during emotional periods of trading), it would then be better to seek out companies with low share turnover calculations. ## How Can a Company Improve Its Share Turnover Ratio? A company can not directly improve its share turnover ratio, as share turnover is simply a reflection of how the market interacts with a company's stock. If a company wants higher liquidity, it can do several things. First, a company can perform a stock split. Although this will increase the number of shares outstanding, a stock split will divide the company's stock price and make it more accessible for new investors to buy full shares. Second, a company can perform well. Should a company improve its bottom line and begin performing tremendously well, more investors will demand the stock, driving up the number of shares people trade and increasing the share turnover. Correction—June 22, 2022: A previous version of this article misidentified Apple stock as illiquid.	What Is Share Turnover? Share turnover is a measure of stock liquidity, calculated by dividing the total number of shares traded during some period by the average number of shares outstanding for the same period. The higher the share turnover, the more liquid company shares are. Share turnover should not be confused with the turnover rate of a mutual fund or an exchange traded fund (ETF), which measures how actively managed the portfolio is. Key Takeaways Share turnover reflects the liquidity of a market by dividing trading volume over outstanding supply for a given period.Share turnover does not signal anything about the quality of the stock or why, for the period being measured, it may be more or less liquid than other stocks.Because it only speaks to the quantity and not the quality, share turnover should not be used as a primary investing criterion.Stocks with higher share turnover ratios are considered more liquid and easier to buy or sell, while stocks with lower share turnover ratios show stock is more illiquid.A higher share turnover may also indicate momentum; if good news or bad news drives trading activity, a stock's share turnover ratio will likely be higher for a given period. Understanding Share Turnover Share turnover ratio indicates how easy, or difficult, it is to sell shares of a particular stock on the market. It compares the number of shares that change hands during a particular period with the total number of shares that could have been traded during that same period. Investors may be unwilling to put their money at risk by acquiring the shares of a company with low share turnover. That said, share turnover is interesting as a measure because the correlations don't always hold up. Investors often assume that smaller companies will see less share turnover because they are, in theory, less liquid than large companies. However, these companies often see a greater portion of share turnover compared to large companies. Part of this is pricing. Some large companies have share prices in the hundreds of dollars. Although their huge floats mean hundreds of thousands of shares can trade a day, the actual percentage of the total outstanding is small. In contrast, smaller companies usually have correspondingly cheaper shares; the opportunity cost of loading up and unloading based on the growth prospects is smaller in terms of capital commitment. One reason companies split their stock is to try to keep their shares affordable and, therefore, more liquid. Sometimes large, high-quality companies have less share turnover than smaller, lower-quality companies because the share price of the larger company is so high it inhibits frequent trading. Calculating the Share Turnover Ratio To compute a company's share turnover ratio, you need two numbers. The formula for share turnover is: Share Turnover = Trading Volume / Average Shares Outstanding The first number is the trading volume. The trading volume is the average number of shares traded in a given period. Many exchanges or financial information websites will provide this information for any given security. The second number is the average shares outstanding. This is the total number of shares of a stock a company has issued. It is important to note that this is not the total number of authorized shares a company has; the number of shares outstanding is often less (but may be equal to) what they are authorized to issue. Interpreting Share Turnover Unfortunately, there is no rule of thumb for what a healthy share turnover ratio is as it depends on the company and the sector it is in. Moreover, stocks with large amounts of seasonality will see their share turnover ratios surge along with the demand for the stock at these times. Often, companies with higher stock prices will have lower turnover as a single share of stock is more expensive to buy, limiting its liquidity. This may unfortunately make a stock seem less desirable; as a company performs better and its stock price rises, its liquidity may fall. Another aspect of share turnover is defining an investor's desired goal for liquidity. During economic downturns where it is easier to trade on emotions, investors may want stock that is harder to buy or sell. These types of illiquid assets may help preserve its value during volatility as they can't be bought or sold as quickly. Therefore, while most investors generally want liquid assets, stocks with lower share turnover may still fit into the investment goals of some investors. Example of Share Turnover The share turnover ratio only tells you how easily an investor can get trade of shares. It doesn't necessarily tell you anything about the performance of a company behind the stock. For example, at the end of 2021, Apple had approximately 16.4 billion shares issued and outstanding. On Dec. 31, 2021, Apple's 30-day average daily volume was 110.78 million shares. Therefore, at the end of 2021, Apple's share turnover ratio for the month of December was: Apple's Share Turnover = 110.78 million / 16.4 billion = 0.68% Alternatively, at the end of 2021, Microsoft had 7.547 billion shares outstanding, and its 30-day average daily volume on the last day of 2021 was 28.31 million Microsoft's Share Turnover = 28.31 million / 7.547 billion = 0.38% At a glance, it may seem that Apple's stock performed nearly twice as well. However, these percentages are simply measures of liquidity. Investors traded more shares of stock of Apple relative to the number of outstanding shares available to trade than compared to Microsoft. Limitations of Share Turnover While it is still a useful measurement, share turnover does have its limitations. Share turnover doesn't rely any actual financial performance; a stock can simply begin and end a trading period with a very high turnover ratio but end at the exact same price as before. The share turnover ratio also fails to indicate the direction a stock may be heading. For example, imagine the news that government regulation will no longer allow U.S. citizens from buying gas-powered vehicles. Shares of companies impacted would likely fall as investors would seek to sell their shares. As the stock gets bought up at a materially reduced price, the stock's share turnover will likely be high. Though a higher share turnover is often better, that may not always be the case. How Do You Calculate Share Turnover? Share turnover is calculated by dividing the average number of shares traded over a given period by the average number of total outstanding shares for that same period. The percentage result represents what percent of all available shares that could have been traded were actually traded. Why Is Share Turnover Important? Share turnover communicates to investors the liquidity of the stock they hold. Some investors were more comfortable knowing they could easily buy or sell a specific company's stock. Alternatively, some investors may want lower liquidity, as this makes it harder for traders to emotionally sell their shares. Though share turnover doesn't indicate anything about the price movement of a stock, it simply informs investors on how easily their shares may be sold in the future. Is a Low or High Share Turnover Ratio Better? Generally, a high share turnover ratio is better if investors want to more easily buy or sell securities. A high share turnover calculation means the stock is more liquid. If an investor is intentionally seeking stock that is more difficult to sell (which may stabilize its value during emotional periods of trading), it would then be better to seek out companies with low share turnover calculations. How Can a Company Improve Its Share Turnover Ratio? A company can not directly improve its share turnover ratio, as share turnover is simply a reflection of how the market interacts with a company's stock. If a company wants higher liquidity, it can do several things.First, a company can perform a stock split. Although this will increase the number of shares outstanding, a stock split will divide the company's stock price and make it more accessible for new investors to buy full shares. Second, a company can perform well. Should a company improve its bottom line and begin performing tremendously well, more investors will demand the stock, driving up the number of shares people trade and increasing the share turnover. Correction—June 22, 2022: A previous version of this article misidentified Apple stock as illiquid.	[ [ "liquidity", "https://www.investopedia.com/terms/l/liquidity.asp" ], [ "turnover rate", "https://www.investopedia.com/terms/p/portfolioturnover.asp" ], [ "number of shares", "https://www.investopedia.com/ask/answers/number-shares-liquidity-stock/" ], [ "floats", "https://www.investopedia.com/ask/answers/what-is-companys-float/" ], [ "split their stock", "https://www.investopedia.com/terms/s/stocksplit.asp" ], [ "trading volume", "https://www.investopedia.com/terms/v/volumeoftrade.asp" ], [ "seasonality", "https://www.investopedia.com/terms/s/seasonality.asp" ], [ "relative to the number of outstanding shares", "https://www.investopedia.com/ask/answers/05/sharestradedoutstanding.asp" ], [ "government regulation", "https://www.investopedia.com/articles/economics/11/government-regulations.asp" ] ]
https://www.investopedia.com/articles/personal-finance/020215/visa-vs-mastercard-there-difference.asp	Visa vs. Mastercard: What’s the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-visa-vs-mastercard-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Visa vs. Mastercard: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/electronic-billpayment-presentment.asp">electronic payments industry</a> is dominated by four companies. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/visa-card.asp">Visa</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mastercard-card.asp">Mastercard</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/american-express-card.asp">American Express</a>, and <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/discover-card.asp">Discover</a> are responsible for handling the majority of the world’s card payments.<span class="ql-inline-citation" data-cite="1"></span> Visa and Mastercard present distinct offerings, as neither company is involved with extending credit or issuing cards. This means that all Visa and Mastercard payment cards are issued through some type of co-branded relationship.<span class="ql-inline-citation" data-cite="2"></span> While the two companies don’t extend credit or issue cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options. </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>Visa and Mastercard are the two largest payment processing networks in the world.</li><li>Visa and Mastercard do not issue cards directly to the public, as Discover and American Express do, but rather through member financial institutions.</li><li>Member banks and credit unions issue Visa and Mastercard credit and debit cards directly to their customers and, in many cases, through co-branded credit card partnerships with airlines, hotels, and national retailers.</li></ul></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> According to the Federal Reserve’s 2020 Diary of Consumer Payment Choice survey, 42% of Americans preferred to pay bills with a <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>, while 29% used a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditcard.asp">credit card</a>, meaning that 71% had at least one or the other.<span class="ql-inline-citation" data-cite="14"></span> Many people have a number of them, seeking to take advantage of all the rewards, cash back opportunities, and promotional benefits that issuers offer. </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"> Credit cards often dominate the headlines, with nearly $1 trillion in outstanding <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolvingcredit.asp">revolving credit</a> balances as of the end of the first quarter of 2021.<span class="ql-inline-citation" data-cite="4"></span> Consumers are easily familiar with debit cards, which, along with credit cards and other forms of non-cash payments, accounted for around 174.2 billion payment transactions in 2018—representing $97.04 trillion in value—annually, according to the 2019 Federal Reserve Payments Study (the most recent available).<span class="ql-inline-citation" data-cite="5"></span> As the financial technology market evolves, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp">more prepaid card offerings are also being brought to market</a>, generating around $294.44 billion in annual volume in 2020, an increase of 38.1% over 2019, no doubt fueled by the economic crisis of 2020.<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_9-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_10-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/GuX8B/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Capital One Announces Agreement to Acquire Discover Financial Services"></iframe></div> <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-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_12-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Visa vs. Mastercard" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/qgu-Jjem5Tw0j6vtSYORNPkQ5Vo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/qgu-Jjem5Tw0j6vtSYORNPkQ5Vo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg" data-srcset="https://www.investopedia.com/thmb/6HGLxKRE8bkBje9ArsAnmJ8FzLM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Visa vs. Mastercard" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/qgu-Jjem5Tw0j6vtSYORNPkQ5Vo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg" srcset="https://www.investopedia.com/thmb/6HGLxKRE8bkBje9ArsAnmJ8FzLM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Catherine Song</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-visa-and-mastercard"></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"> Understanding Visa and Mastercard </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Visa and Mastercard are the only network payment processors involved in all three areas of the payments market. Working exclusively as network processors, these two companies have a unique edge, but they operate differently. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/news/why-mastercard-shares-may-outperform-visa/">Visa and Mastercard are both publicly traded</a>. Visa (trading symbol <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=V">V</a>) commands a $497.5 billion market capitalization, while Mastercard (trading symbol <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MA">MA</a>) follows closely behind at $359.8 billion (market caps as of May 18, 2021).<span class="ql-inline-citation" data-cite="9"></span><span class="ql-inline-citation" data-cite="8"></span> As neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings. </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 business models of both companies are very similar. Visa and Mastercard do not issue cards directly to the public but rather through partner member 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>. The member financial institution then issues cards for individuals and businesses, either directly or in partnership with airline, hotel, or retail brands. </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"> Setting Terms and Conditions </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> The issuing financial institution sets the payment card’s terms and conditions, including fees, rewards, and other features. (Retailers usually work with a third-party financial institution.) For credit cards, the issuing bank is responsible for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriting.asp">underwriting</a>, interest rate structuring, and the full development of rewards programs.<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_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Card issuers can also offer other perks, such as <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 fraud protection, car rental insurance, and business purchase discounts. While differences in interest rates, credit limits, rewards programs, and perks are controlled by the issuing financial institution, Visa and Mastercard compete for the co-branded relationship and take part in the drafting of card terms. </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"> Overall, the card payment industry is complex, involving merchants, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/merchant-account.asp">merchant acquiring banks</a>, issuer banking, network processing, and cardholders. Network processors, and specifically Mastercard and Visa, have the freedom to structure their fees any way that they like. This structuring and reporting is one of the biggest differences between the two largest network processors. </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-visa-card-overview"></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"> Visa Card Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> In 2020, Visa generated $21.8 billion in net revenue with a payments volume of $8.8 trillion. Visa’s core products include credit, debit, and prepaid cards as well as business solutions and global ATM services. The company’s reportable business segments include the following:<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_29-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> <li>Service ($9.8 billion in 2020)</li><li>Data Processing ($11.0 billion in 2020)</li><li>International Transactions ($6.3 billion in 2020)</li><li>Other ($1.4 billion in 2020)</li> </ul> <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"> Both Visa and Mastercard earn the majority of their revenue from service and data processing fees, but the two companies characterize these fees differently and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-visa-makes-money-4799098">have their own fee structures</a>. Service fees are charged to the issuer and based on card volume. </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"> Data processing fees are also generally charged to the issuer, who in turn retrieves these fees by charging merchants for each individual transaction. Data processing fees are typically very small, fixed fees, charged on a per-transaction basis, that cover the costs of providing transactional information communicated on the network. </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"> In general, Visa is known for offering three card levels: traditional, signature, and infinite. These categories come with standardized provisions for issuers.<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_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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>While Visa is larger in terms of transactions, purchase volume, and cards in circulation, Visa and Mastercard have nearly identical global merchant acceptance footprints.</p></div></div></div> <span class="heading-toc" id="toc-mastercard-overview"></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"> Mastercard Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> In 2020, Mastercard generated total net revenue of $15.3 billion, with a payment volume of $6.3 trillion.<span class="ql-inline-citation" data-cite="12"></span> Mastercard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business. Mastercard has one reportable business segment, known as Payment Solutions, which is broken out by geographies across the United States and other countries. </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"> Like Visa, Mastercard earns the majority of its revenue from service and data processing fees. However, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/032615/how-mastercard-makes-its-money-ma.asp">it characterizes the fees differently</a>. Service fees for Mastercard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as “switching fees,” which are a small, fixed cost per transaction charged to the issuer. </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"> Mastercard is known for offering three card levels: standard, world, and world elite.<span class="ql-inline-citation" data-cite="13"></span> </p></div>	## Visa vs. Mastercard: An Overview The [electronic payments industry](https://www.investopedia.com/terms/e/electronic-billpayment-presentment.asp) is dominated by four companies. [Visa](https://www.investopedia.com/terms/v/visa-card.asp), [Mastercard](https://www.investopedia.com/terms/m/mastercard-card.asp), [American Express](https://www.investopedia.com/terms/a/american-express-card.asp), and [Discover](https://www.investopedia.com/terms/d/discover-card.asp) are responsible for handling the majority of the world’s card payments. Visa and Mastercard present distinct offerings, as neither company is involved with extending credit or issuing cards. This means that all Visa and Mastercard payment cards are issued through some type of co-branded relationship. While the two companies don’t extend credit or issue cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options. ### Key Takeaways * Visa and Mastercard are the two largest payment processing networks in the world. * Visa and Mastercard do not issue cards directly to the public, as Discover and American Express do, but rather through member financial institutions. * Member banks and credit unions issue Visa and Mastercard credit and debit cards directly to their customers and, in many cases, through co-branded credit card partnerships with airlines, hotels, and national retailers. According to the Federal Reserve’s 2020 Diary of Consumer Payment Choice survey, 42% of Americans preferred to pay bills with a [debit card](https://www.investopedia.com/terms/d/debitcard.asp), while 29% used a [credit card](https://www.investopedia.com/terms/c/creditcard.asp), meaning that 71% had at least one or the other. Many people have a number of them, seeking to take advantage of all the rewards, cash back opportunities, and promotional benefits that issuers offer. Credit cards often dominate the headlines, with nearly $1 trillion in outstanding [revolving credit](https://www.investopedia.com/terms/r/revolvingcredit.asp) balances as of the end of the first quarter of 2021. Consumers are easily familiar with debit cards, which, along with credit cards and other forms of non-cash payments, accounted for around 174.2 billion payment transactions in 2018—representing $97.04 trillion in value—annually, according to the 2019 Federal Reserve Payments Study (the most recent available). As the financial technology market evolves, [more prepaid card offerings are also being brought to market](https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp), generating around $294.44 billion in annual volume in 2020, an increase of 38.1% over 2019, no doubt fueled by the economic crisis of 2020. ![Visa vs. Mastercard]() ![Visa vs. Mastercard](https://www.investopedia.com/thmb/qgu-Jjem5Tw0j6vtSYORNPkQ5Vo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/visa-vs-mastercard-there-difference-final-e9248e661f324cda9d141effa8b9df95.jpg) Investopedia / Catherine Song ## Understanding Visa and Mastercard Visa and Mastercard are the only network payment processors involved in all three areas of the payments market. Working exclusively as network processors, these two companies have a unique edge, but they operate differently. [Visa and Mastercard are both publicly traded](https://www.investopedia.com/news/why-mastercard-shares-may-outperform-visa/). Visa (trading symbol [V](https://www.investopedia.com/markets/quote?tvwidgetsymbol=V)) commands a $497.5 billion market capitalization, while Mastercard (trading symbol [MA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MA)) follows closely behind at $359.8 billion (market caps as of May 18, 2021). As neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings. The business models of both companies are very similar. Visa and Mastercard do not issue cards directly to the public but rather through partner member financial institutions such as banks and [credit unions](https://www.investopedia.com/terms/c/creditunion.asp). The member financial institution then issues cards for individuals and businesses, either directly or in partnership with airline, hotel, or retail brands. ### Setting Terms and Conditions The issuing financial institution sets the payment card’s terms and conditions, including fees, rewards, and other features. (Retailers usually work with a third-party financial institution.) For credit cards, the issuing bank is responsible for [underwriting](https://www.investopedia.com/terms/u/underwriting.asp), interest rate structuring, and the full development of rewards programs. Card issuers can also offer other perks, such as [identity theft](https://www.investopedia.com/terms/i/identitytheft.asp) and fraud protection, car rental insurance, and business purchase discounts. While differences in interest rates, credit limits, rewards programs, and perks are controlled by the issuing financial institution, Visa and Mastercard compete for the co-branded relationship and take part in the drafting of card terms. Overall, the card payment industry is complex, involving merchants, [merchant acquiring banks](https://www.investopedia.com/terms/m/merchant-account.asp), issuer banking, network processing, and cardholders. Network processors, and specifically Mastercard and Visa, have the freedom to structure their fees any way that they like. This structuring and reporting is one of the biggest differences between the two largest network processors. ## Visa Card Overview In 2020, Visa generated $21.8 billion in net revenue with a payments volume of $8.8 trillion. Visa’s core products include credit, debit, and prepaid cards as well as business solutions and global ATM services. The company’s reportable business segments include the following: * Service ($9.8 billion in 2020) * Data Processing ($11.0 billion in 2020) * International Transactions ($6.3 billion in 2020) * Other ($1.4 billion in 2020) Both Visa and Mastercard earn the majority of their revenue from service and data processing fees, but the two companies characterize these fees differently and [have their own fee structures](https://www.investopedia.com/how-visa-makes-money-4799098). Service fees are charged to the issuer and based on card volume. Data processing fees are also generally charged to the issuer, who in turn retrieves these fees by charging merchants for each individual transaction. Data processing fees are typically very small, fixed fees, charged on a per-transaction basis, that cover the costs of providing transactional information communicated on the network. In general, Visa is known for offering three card levels: traditional, signature, and infinite. These categories come with standardized provisions for issuers. ### While Visa is larger in terms of transactions, purchase volume, and cards in circulation, Visa and Mastercard have nearly identical global merchant acceptance footprints. ## Mastercard Overview In 2020, Mastercard generated total net revenue of $15.3 billion, with a payment volume of $6.3 trillion. Mastercard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business. Mastercard has one reportable business segment, known as Payment Solutions, which is broken out by geographies across the United States and other countries. Like Visa, Mastercard earns the majority of its revenue from service and data processing fees. However, [it characterizes the fees differently](https://www.investopedia.com/articles/markets/032615/how-mastercard-makes-its-money-ma.asp). Service fees for Mastercard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as “switching fees,” which are a small, fixed cost per transaction charged to the issuer. Mastercard is known for offering three card levels: standard, world, and world elite.	Visa vs. Mastercard: An Overview The electronic payments industry is dominated by four companies. Visa, Mastercard, American Express, and Discover are responsible for handling the majority of the world’s card payments. Visa and Mastercard present distinct offerings, as neither company is involved with extending credit or issuing cards. This means that all Visa and Mastercard payment cards are issued through some type of co-branded relationship. While the two companies don’t extend credit or issue cards, they do partner to offer the broadest array of products encompassing credit, debit, and prepaid card options. Key Takeaways Visa and Mastercard are the two largest payment processing networks in the world.Visa and Mastercard do not issue cards directly to the public, as Discover and American Express do, but rather through member financial institutions.Member banks and credit unions issue Visa and Mastercard credit and debit cards directly to their customers and, in many cases, through co-branded credit card partnerships with airlines, hotels, and national retailers. According to the Federal Reserve’s 2020 Diary of Consumer Payment Choice survey, 42% of Americans preferred to pay bills with a debit card, while 29% used a credit card, meaning that 71% had at least one or the other. Many people have a number of them, seeking to take advantage of all the rewards, cash back opportunities, and promotional benefits that issuers offer. Credit cards often dominate the headlines, with nearly $1 trillion in outstanding revolving credit balances as of the end of the first quarter of 2021. Consumers are easily familiar with debit cards, which, along with credit cards and other forms of non-cash payments, accounted for around 174.2 billion payment transactions in 2018—representing $97.04 trillion in value—annually, according to the 2019 Federal Reserve Payments Study (the most recent available). As the financial technology market evolves, more prepaid card offerings are also being brought to market, generating around $294.44 billion in annual volume in 2020, an increase of 38.1% over 2019, no doubt fueled by the economic crisis of 2020. Investopedia / Catherine Song Understanding Visa and Mastercard Visa and Mastercard are the only network payment processors involved in all three areas of the payments market. Working exclusively as network processors, these two companies have a unique edge, but they operate differently. Visa and Mastercard are both publicly traded. Visa (trading symbol V) commands a $497.5 billion market capitalization, while Mastercard (trading symbol MA) follows closely behind at $359.8 billion (market caps as of May 18, 2021). As neither company extends credit or issues cards through a banking division, both have a broad portfolio of co-branded offerings. The business models of both companies are very similar. Visa and Mastercard do not issue cards directly to the public but rather through partner member financial institutions such as banks and credit unions. The member financial institution then issues cards for individuals and businesses, either directly or in partnership with airline, hotel, or retail brands. Setting Terms and Conditions The issuing financial institution sets the payment card’s terms and conditions, including fees, rewards, and other features. (Retailers usually work with a third-party financial institution.) For credit cards, the issuing bank is responsible for underwriting, interest rate structuring, and the full development of rewards programs. Card issuers can also offer other perks, such as identity theft and fraud protection, car rental insurance, and business purchase discounts. While differences in interest rates, credit limits, rewards programs, and perks are controlled by the issuing financial institution, Visa and Mastercard compete for the co-branded relationship and take part in the drafting of card terms. Overall, the card payment industry is complex, involving merchants, merchant acquiring banks, issuer banking, network processing, and cardholders. Network processors, and specifically Mastercard and Visa, have the freedom to structure their fees any way that they like. This structuring and reporting is one of the biggest differences between the two largest network processors. Visa Card Overview In 2020, Visa generated $21.8 billion in net revenue with a payments volume of $8.8 trillion. Visa’s core products include credit, debit, and prepaid cards as well as business solutions and global ATM services. The company’s reportable business segments include the following: Service ($9.8 billion in 2020)Data Processing ($11.0 billion in 2020)International Transactions ($6.3 billion in 2020)Other ($1.4 billion in 2020) Both Visa and Mastercard earn the majority of their revenue from service and data processing fees, but the two companies characterize these fees differently and have their own fee structures. Service fees are charged to the issuer and based on card volume. Data processing fees are also generally charged to the issuer, who in turn retrieves these fees by charging merchants for each individual transaction. Data processing fees are typically very small, fixed fees, charged on a per-transaction basis, that cover the costs of providing transactional information communicated on the network. In general, Visa is known for offering three card levels: traditional, signature, and infinite. These categories come with standardized provisions for issuers. While Visa is larger in terms of transactions, purchase volume, and cards in circulation, Visa and Mastercard have nearly identical global merchant acceptance footprints. Mastercard Overview In 2020, Mastercard generated total net revenue of $15.3 billion, with a payment volume of $6.3 trillion. Mastercard’s core products include consumer credit, consumer debit, prepaid cards, and a commercial product business. Mastercard has one reportable business segment, known as Payment Solutions, which is broken out by geographies across the United States and other countries. Like Visa, Mastercard earns the majority of its revenue from service and data processing fees. However, it characterizes the fees differently. Service fees for Mastercard are negotiated and calculated as a percentage of global dollar volume. Data processing fees are known as “switching fees,” which are a small, fixed cost per transaction charged to the issuer. Mastercard is known for offering three card levels: standard, world, and world elite.	[ [ "electronic payments industry", "https://www.investopedia.com/terms/e/electronic-billpayment-presentment.asp" ], [ "Visa", "https://www.investopedia.com/terms/v/visa-card.asp" ], [ "Mastercard", "https://www.investopedia.com/terms/m/mastercard-card.asp" ], [ "American Express", "https://www.investopedia.com/terms/a/american-express-card.asp" ], [ "Discover", "https://www.investopedia.com/terms/d/discover-card.asp" ], [ "debit card", "https://www.investopedia.com/terms/d/debitcard.asp" ], [ "credit card", "https://www.investopedia.com/terms/c/creditcard.asp" ], [ "revolving credit", "https://www.investopedia.com/terms/r/revolvingcredit.asp" ], [ "more prepaid card offerings are also being brought to market", "https://www.investopedia.com/ask/answers/042315/how-do-prepaid-debit-cards-work.asp" ], [ "Visa vs. Mastercard", "https://www.investopedia.com/thmb/qgu-Jjem5Tw0j6vtSYORNPkQ5Vo=/1500x0/filters:no_upscale(" ], [ "Visa and Mastercard are both publicly traded", "https://www.investopedia.com/news/why-mastercard-shares-may-outperform-visa/" ], [ "V", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=V" ], [ "MA", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=MA" ], [ "credit unions", "https://www.investopedia.com/terms/c/creditunion.asp" ], [ "underwriting", "https://www.investopedia.com/terms/u/underwriting.asp" ], [ "identity theft", "https://www.investopedia.com/terms/i/identitytheft.asp" ], [ "merchant acquiring banks", "https://www.investopedia.com/terms/m/merchant-account.asp" ], [ "have their own fee structures", "https://www.investopedia.com/how-visa-makes-money-4799098" ], [ "it characterizes the fees differently", "https://www.investopedia.com/articles/markets/032615/how-mastercard-makes-its-money-ma.asp" ] ]
https://www.investopedia.com/terms/f/fastmarketrule.asp	Fast Market Rule Definition	<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-fast-market-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is the Fast Market Rule? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The fast market rule is a rule in the United Kingdom that permits <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketmaker.asp" rel="noopener noreferrer">market makers</a> to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current. </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 purpose of the fast market rule is to maintain an orderly market during a time of chaos. Under the rule, market makers must turn off their computerized trading systems (called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blackbox.asp" rel="noopener noreferrer">black boxes</a>). They do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes. </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 fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current.</li><li>The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. (A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices.)</li><li>When the fast market rule is enacted, market makers must turn off their computerized trading systems (called black boxes).</li><li>Market makers do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-the-fast-market-rule"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding the Fast Market Rule </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The fast market rule is used in the United Kingdom, primarily in 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 (LSE)</a>, when a fast market occurs. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fastmarket.asp">fast market</a> is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices </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"> Fast markets are rare and are triggered by highly unusual circumstances. For example, the London Stock Exchange declared a fast market on July 7, 2005, after the city experienced a terrorist attack. Share prices were falling dramatically and trading was exceptionally heavy.<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"> Normally, shares must be traded within a certain range—quoted as the highest price a buyer will pay and the lowest price a seller will accept. Because it is virtually impossible to keep up with these ranges during a fast market, the fast market rule allows trades to happen outside those quoted ranges. </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 prevents the market from grinding to a halt because traders get stuck or confused. So, to facilitate the fast market rule, traders turn off their black boxes while the rule is in effect. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The fast market rule was created to keep the market trading when it became a fast market. Previously, the only option during a fast market was to enact a circuit breaker, which triggers an automatic halt on trading when the market falls too quickly. </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-fast-market-rule-vs-circuit-breaker"></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"> Fast Market Rule vs. Circuit Breaker </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The fast market rule was created to replace the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/circuitbreaker.asp">circuit breaker</a>. According to some, the circuit breaker was harming the market by halting trading. A circuit breaker is a mechanism that allows an exchange to temporarily halt trading when prices decline sharply in order to prevent panic selling. </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"> Since halting the market prevents all exchange activity, it is healthier to continue trading while providing a way for traders to be unrestricted so they can trade freely without becoming confused or paralyzed. The fast market rule allows that to happen by forcing traders to trade without electronic assistance and allowing them to trade outside the quoted range. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_24-0"><span class="heading-toc" id="toc-what-is-a-fast-moving-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Fast-Moving Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A fast-moving market is a financial market that is undergoing stress, either from positive or negative news, where there are high levels of volatility. In a fast market, quotes for securities may be inaccurate because they aren't able to keep up with the high levels of trading.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-can-americans-buy-on-the-london-stock-exchange"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Americans Buy on the London Stock Exchange?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, Americans can buy on the London Stock Exchange (LSE) by purchasing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/adr.asp">American Depository Receipts</a> (ADRs) that are listed on U.S. exchanges. The offering may be limited and not include all of the stocks listed on the LSE.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-who-can-declare-a-fast-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Can Declare a Fast Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A fast market is declared by a specific stock exchange. So for example, if there is a certain event in the U.K. that causes extreme market volatility, the London Stock Exchange can declare a fast market.<br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-the-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"> When markets are particularly volatile, the fast market rule in the U.K. allows for trading to occur outside of established ranges. This allows for maintaining order in the chaotic markets, allowing for the process of buying and selling, and for orders to be fulfilled, to happen smoothly, protecting all individuals involved in the process. </p></div>	## What Is the Fast Market Rule? The fast market rule is a rule in the United Kingdom that permits [market makers](https://www.investopedia.com/terms/m/marketmaker.asp) to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current. The purpose of the fast market rule is to maintain an orderly market during a time of chaos. Under the rule, market makers must turn off their computerized trading systems (called [black boxes](https://www.investopedia.com/terms/b/blackbox.asp)). They do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes. ### Key Takeaways * The fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current. * The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. (A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices.) * When the fast market rule is enacted, market makers must turn off their computerized trading systems (called black boxes). * Market makers do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes. ## Understanding the Fast Market Rule The fast market rule is used in the United Kingdom, primarily in the [London Stock Exchange (LSE)](https://www.investopedia.com/terms/l/lse.asp), when a fast market occurs. A [fast market](https://www.investopedia.com/terms/f/fastmarket.asp) is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices Fast markets are rare and are triggered by highly unusual circumstances. For example, the London Stock Exchange declared a fast market on July 7, 2005, after the city experienced a terrorist attack. Share prices were falling dramatically and trading was exceptionally heavy. Normally, shares must be traded within a certain range—quoted as the highest price a buyer will pay and the lowest price a seller will accept. Because it is virtually impossible to keep up with these ranges during a fast market, the fast market rule allows trades to happen outside those quoted ranges. This prevents the market from grinding to a halt because traders get stuck or confused. So, to facilitate the fast market rule, traders turn off their black boxes while the rule is in effect. The fast market rule was created to keep the market trading when it became a fast market. Previously, the only option during a fast market was to enact a circuit breaker, which triggers an automatic halt on trading when the market falls too quickly. ## Fast Market Rule vs. Circuit Breaker The fast market rule was created to replace the [circuit breaker](https://www.investopedia.com/terms/c/circuitbreaker.asp). According to some, the circuit breaker was harming the market by halting trading. A circuit breaker is a mechanism that allows an exchange to temporarily halt trading when prices decline sharply in order to prevent panic selling. Since halting the market prevents all exchange activity, it is healthier to continue trading while providing a way for traders to be unrestricted so they can trade freely without becoming confused or paralyzed. The fast market rule allows that to happen by forcing traders to trade without electronic assistance and allowing them to trade outside the quoted range. ## What Is a Fast-Moving Market? A fast-moving market is a financial market that is undergoing stress, either from positive or negative news, where there are high levels of volatility. In a fast market, quotes for securities may be inaccurate because they aren't able to keep up with the high levels of trading. ## Can Americans Buy on the London Stock Exchange? Yes, Americans can buy on the London Stock Exchange (LSE) by purchasing [American Depository Receipts](https://www.investopedia.com/terms/a/adr.asp) (ADRs) that are listed on U.S. exchanges. The offering may be limited and not include all of the stocks listed on the LSE. ## Who Can Declare a Fast Market? A fast market is declared by a specific stock exchange. So for example, if there is a certain event in the U.K. that causes extreme market volatility, the London Stock Exchange can declare a fast market. ## The Bottom Line When markets are particularly volatile, the fast market rule in the U.K. allows for trading to occur outside of established ranges. This allows for maintaining order in the chaotic markets, allowing for the process of buying and selling, and for orders to be fulfilled, to happen smoothly, protecting all individuals involved in the process.	What Is the Fast Market Rule? The fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current. The purpose of the fast market rule is to maintain an orderly market during a time of chaos. Under the rule, market makers must turn off their computerized trading systems (called black boxes). They do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes. Key Takeaways The fast market rule is a rule in the United Kingdom that permits market makers to trade outside quoted ranges when an exchange determines that market movements are so sharp that quotes cannot be kept current.The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. (A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices.)When the fast market rule is enacted, market makers must turn off their computerized trading systems (called black boxes).Market makers do not have to quote share prices based on the London Stock Exchange's screen prices while the fast market is in effect, but they are still required to make firm quotes. Understanding the Fast Market Rule The fast market rule is used in the United Kingdom, primarily in the London Stock Exchange (LSE), when a fast market occurs. A fast market is a market that trades at a heavy volume and becomes chaotic, especially in terms of falling prices Fast markets are rare and are triggered by highly unusual circumstances. For example, the London Stock Exchange declared a fast market on July 7, 2005, after the city experienced a terrorist attack. Share prices were falling dramatically and trading was exceptionally heavy. Normally, shares must be traded within a certain range—quoted as the highest price a buyer will pay and the lowest price a seller will accept. Because it is virtually impossible to keep up with these ranges during a fast market, the fast market rule allows trades to happen outside those quoted ranges. This prevents the market from grinding to a halt because traders get stuck or confused. So, to facilitate the fast market rule, traders turn off their black boxes while the rule is in effect. The fast market rule was created to keep the market trading when it became a fast market. Previously, the only option during a fast market was to enact a circuit breaker, which triggers an automatic halt on trading when the market falls too quickly. Fast Market Rule vs. Circuit Breaker The fast market rule was created to replace the circuit breaker. According to some, the circuit breaker was harming the market by halting trading. A circuit breaker is a mechanism that allows an exchange to temporarily halt trading when prices decline sharply in order to prevent panic selling. Since halting the market prevents all exchange activity, it is healthier to continue trading while providing a way for traders to be unrestricted so they can trade freely without becoming confused or paralyzed. The fast market rule allows that to happen by forcing traders to trade without electronic assistance and allowing them to trade outside the quoted range. What Is a Fast-Moving Market? A fast-moving market is a financial market that is undergoing stress, either from positive or negative news, where there are high levels of volatility. In a fast market, quotes for securities may be inaccurate because they aren't able to keep up with the high levels of trading. Can Americans Buy on the London Stock Exchange? Yes, Americans can buy on the London Stock Exchange (LSE) by purchasing American Depository Receipts (ADRs) that are listed on U.S. exchanges. The offering may be limited and not include all of the stocks listed on the LSE. Who Can Declare a Fast Market? A fast market is declared by a specific stock exchange. So for example, if there is a certain event in the U.K. that causes extreme market volatility, the London Stock Exchange can declare a fast market. The Bottom Line When markets are particularly volatile, the fast market rule in the U.K. allows for trading to occur outside of established ranges. This allows for maintaining order in the chaotic markets, allowing for the process of buying and selling, and for orders to be fulfilled, to happen smoothly, protecting all individuals involved in the process.	[ [ "market makers", "https://www.investopedia.com/terms/m/marketmaker.asp" ], [ "black boxes", "https://www.investopedia.com/terms/b/blackbox.asp" ], [ "London Stock Exchange (LSE)", "https://www.investopedia.com/terms/l/lse.asp" ], [ "fast market", "https://www.investopedia.com/terms/f/fastmarket.asp" ], [ "circuit breaker", "https://www.investopedia.com/terms/c/circuitbreaker.asp" ], [ "American Depository Receipts", "https://www.investopedia.com/terms/a/adr.asp" ] ]
https://www.investopedia.com/student-loan-debt-2019-statistics-and-outlook-4772007	Student Loan Debt: 2023 Statistics and Outlook	<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"> Obtaining a college degree requires a much bigger financial sacrifice today than it did a generation or two ago. The upshot is that more students and families are relying on loans to pursue higher education, and total <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-debt.asp">student loan debt</a> keeps growing. According to the College Board, families paid an average of $11,260 in 2023–2024 to send their children to a public four-year school. Sending a child to a private school costs an average of $41,540 in tuition and fees.<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_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 total amount of outstanding student loan debt in the United States was $1.6 trillion as of Q4'23.</li><li>Soaring college costs and pressure to compete in the job marketplace are big factors for student loan debt.</li><li>Student loans are the most common form of educational debt, followed by credit cards and other types of credit.</li><li>Borrowers who don't complete their degrees are more likely to default.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-the-average-student-loan-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 the Average Student Loan Debt? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> How big a role do student loans play in today's colleges and universities? Here's a snapshot of borrowing. </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> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="2">Student Loans Snapshot</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>$1.6 trillion</b></td> <td>Amount of student loan debt outstanding in the U.S.</td> </tr> <tr> <td><b>43.2 million</b></td> <td>Number of borrowers with federal student loan debt.</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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> The total amount of outstanding student loans was $1.6 trillion in the fourth quarter of 2023, up from just over $1 trillion a decade ago. This equates to approximately $37,037.04 per borrower.<span class="ql-inline-citation" data-cite="59"></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-average-loan-balances"></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"> Average Loan Balances </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> According to the Federal Reserve’s 2021 and 2022 data, 30% of all U.S. adults took on some form of debt to go to college. Student loans were by far the most common borrowing option: 96% of those who hold education debt took out a student loan. But borrowers took on other forms of debt to finance their degrees, including credit card debt (19%), <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/">home equity lines of credit</a> (4%), and other types of credit (11%).<span class="ql-inline-citation" data-cite="42"></span><span class="ql-inline-citation" data-cite="62"></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 issue of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-age-5200927">student loan debt cuts across generations</a>. As of the fourth quarter of 2023, borrowers between the ages of 25 and 34 held $491 billion in federal student loan debt. Adults aged 35 to 49 carried even more debt, with balances totaling $624 billion. People ages 50 to 61 owe about $278 billion in student loan debt. Another $110 billion is held by those 62 and older.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Those who get advanced degrees tend to accumulate more debt but are also less likely to fall behind on their student loan payments. Meanwhile, borrowers who obtain a technical degree or never graduate are more likely to have a harder time <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp">keeping current with their payments</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"> A 2022 Federal Reserve survey of U.S. households found that 28% of respondents who took out student loans but completed less than an associate degree were behind on payments. The delinquency rate was 19% for those who had obtained an associate degree, 7% for those with a bachelor's degree, and 6% for those with a graduate degree. Overall, 8% of adults who took out student loans reported they were behind on their payments.<span class="ql-inline-citation" data-cite="42"></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-decline-in-delinquencies"></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"> Decline in Delinquencies </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The Federal Reserve reports that less than 1% of student loan debt was at least 90 days <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/delinquent.asp">delinquent</a> or in <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a> in the third quarter of 2023.<span class="ql-inline-citation" data-cite="54"></span> But this figure likely understates borrowers’ true ability to pay back their loans. </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"> In response to the COVID-19 pandemic, student loan payments and interest were suspended, and collections on defaulted student loans also came to a halt. Those measures have now come to an end. Student loan interest resumed on Sept. 1, 2023, and the first student loan payments since the pandemic began were due on October 1.<span class="ql-inline-citation" data-cite="55"></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"> Though payments have resumed, delinquency rates are likely to remain unchanged, at least in the short term. The Biden administration instituted a one-year easing-in period starting from Oct. 1, 2023, to help financially vulnerable borrowers. If borrowers miss their monthly payment during this one-year period, they will not be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies.<span class="ql-inline-citation" data-cite="56"></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"> Acting under the Higher Education Relief Opportunities for Students Act of 2003, the Biden administration had sought to provide direct relief to students, canceling up to $20,000 in debt for Pell Grant recipients and $10,000 in debt for other federal student loan borrowers. But the U.S. Supreme Court ruled on June 30, 2023, that the administration lacked the authority to do so.<span class="ql-inline-citation" data-cite="44"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Two months later, the White House Biden responded by launching an income-driven assistance program, 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>. The plan cuts monthly student loan payments for undergraduate borrowers to 5% of discretionary income, changes the discretionary income formula so that an estimated 1 million low-income borrowers will see their monthly payments drop to $0, eliminates the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/040915/what-does-it-mean-capitalize-accrued-interest.asp">capitalization of unpaid interest</a> (so as long as borrowers keep current with their payments), and allows borrowers with balances of $12,000 or less to receive loan forgiveness after 10 years of payments.<span class="ql-inline-citation" data-cite="57"></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-economic-impact-of-debt-cancellation"></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"> Economic Impact of Debt Cancellation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The sheer size of student debt can be characterized as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-debt-affect-economy-8550501">weight on the U.S. economy</a> as well as a burden on the millions of individuals who owe it. The federal government holds $1.6 trillion in student loans, compared with an estimated $130 billion held by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-student-loans-4775346">private lenders</a>.<span class="ql-inline-citation" data-cite="59"></span><span class="ql-inline-citation" data-cite="58"></span> </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-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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>After the Supreme Court rejected White House efforts to cancel a portion of federal student loan balances, the Biden administration announced the Saving on a Valuable Education (SAVE) plan, an income-driven repayment program that it says will lower monthly payments for 20 million borrowers.<span class="ql-inline-citation" data-cite="57"></span></p></div></div></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"> Pros and Cons of Debt Cancellation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Research from the Center for American Progress suggested that <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cost-cancel-student-debt-8585118">wiping out student debt</a> would have minimal effects on inflation while helping workers "build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility."<span class="ql-inline-citation" data-cite="61"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> A 2018 study from the Levy Economics Institute at Bard College estimated that outright debt cancellation would boost <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gdp.asp">gross domestic product (GDP)</a> by $86 billion to $108 billion per year.<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_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> But detractors warned of the risk of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/moralhazard.asp">moral hazard</a> caused by implying that the cost of your decisions would be borne by someone else. This would lead to even higher student debt burdens as borrowers assume additional forgiveness would be forthcoming. </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"> The Committee for a Responsible Federal Budget argued that student loan forgiveness would have, at best, provided only a weak <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/economic-stimulus.asp">stimulus to the economy</a>. The group believed that for every dollar of loan forgiveness, just 2 to 27 cents of economic activity would be generated.<span class="ql-inline-citation" data-cite="50"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-how-much-of-the-us-population-has-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much of the U.S. Population Has Student Loan Debt?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The U.S. Department of Education reports that 43.2 million borrowers had outstanding federal student loans as of the fourth quarter of 2023, representing $1.6 trillion in debt.<span class="ql-inline-citation" data-cite="59"></span> That figure reflects the growing importance of a college degree to getting a well-paying job. It also reflects just how much college costs have increased.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_48-0"><span class="heading-toc" id="toc-how-can-i-get-my-student-loans-forgiven"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Get My Student Loans Forgiven?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>In addition to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/student-loan-debt-by-state-5198562">state student loan forgiveness</a> programs, there are several ways to qualify for forgiveness from the federal government. Teachers can receive up to $17,500 in debt forgiveness after teaching in low-income schools for five years. A similar debt forgiveness program provides relief for public service employees who work in government, for hospitals, or at approved nonprofits. If you become totally and permanently disabled, you may be eligible for a discharge of the debt. For other borrowers, income-driven repayment programs provide debt forgiveness after 20 to 25 years of making payments. If you haven’t paid off your student loans by then, the balance is wiped clean. Those interested in loan forgiveness programs should visit the Federal Student Aid website or contact their loan service provider.<span class="ql-inline-citation" data-cite="60"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-is-student-debt-worth-it"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Student Debt Worth It?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Whether or not student debt is worth it depends on a borrower's financial circumstances and if they graduate. Ideally, when a borrower takes out loans to pay for college, the degree they earn is able to help put them on the path to a high-paying career. Of course, not everyone is able to finish school or secure work after graduating, leaving them stuck with student debt and nothing to show for it.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> Most students who attend college are hoping to earn a degree that will dramatically increase their earning power after graduation. But for many adults, much of those earnings will have to go toward paying back student loans. This is a heavy burden to carry, especially before someone has earned their first professional paycheck. </p></div>	Obtaining a college degree requires a much bigger financial sacrifice today than it did a generation or two ago. The upshot is that more students and families are relying on loans to pursue higher education, and total [student loan debt](https://www.investopedia.com/terms/s/student-debt.asp) keeps growing. According to the College Board, families paid an average of $11,260 in 2023–2024 to send their children to a public four-year school. Sending a child to a private school costs an average of $41,540 in tuition and fees. ### Key Takeaways * The total amount of outstanding student loan debt in the United States was $1.6 trillion as of Q4'23. * Soaring college costs and pressure to compete in the job marketplace are big factors for student loan debt. * Student loans are the most common form of educational debt, followed by credit cards and other types of credit. * Borrowers who don't complete their degrees are more likely to default. ## What Is the Average Student Loan Debt? How big a role do student loans play in today's colleges and universities? Here's a snapshot of borrowing. \| Student Loans Snapshot \| \| \| --- \| --- \| \| $1.6 trillion \| Amount of student loan debt outstanding in the U.S. \| \| 43.2 million \| Number of borrowers with federal student loan debt. \| The total amount of outstanding student loans was $1.6 trillion in the fourth quarter of 2023, up from just over $1 trillion a decade ago. This equates to approximately $37,037.04 per borrower. ## Average Loan Balances According to the Federal Reserve’s 2021 and 2022 data, 30% of all U.S. adults took on some form of debt to go to college. Student loans were by far the most common borrowing option: 96% of those who hold education debt took out a student loan. But borrowers took on other forms of debt to finance their degrees, including credit card debt (19%), [home equity lines of credit](https://www.investopedia.com/mortgage/heloc/) (4%), and other types of credit (11%). The issue of [student loan debt cuts across generations](https://www.investopedia.com/student-loan-debt-by-age-5200927). As of the fourth quarter of 2023, borrowers between the ages of 25 and 34 held $491 billion in federal student loan debt. Adults aged 35 to 49 carried even more debt, with balances totaling $624 billion. People ages 50 to 61 owe about $278 billion in student loan debt. Another $110 billion is held by those 62 and older. Those who get advanced degrees tend to accumulate more debt but are also less likely to fall behind on their student loan payments. Meanwhile, borrowers who obtain a technical degree or never graduate are more likely to have a harder time [keeping current with their payments](https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp). A 2022 Federal Reserve survey of U.S. households found that 28% of respondents who took out student loans but completed less than an associate degree were behind on payments. The delinquency rate was 19% for those who had obtained an associate degree, 7% for those with a bachelor's degree, and 6% for those with a graduate degree. Overall, 8% of adults who took out student loans reported they were behind on their payments. ## Decline in Delinquencies The Federal Reserve reports that less than 1% of student loan debt was at least 90 days [delinquent](https://www.investopedia.com/terms/d/delinquent.asp) or in [default](https://www.investopedia.com/terms/d/default2.asp) in the third quarter of 2023. But this figure likely understates borrowers’ true ability to pay back their loans. In response to the COVID-19 pandemic, student loan payments and interest were suspended, and collections on defaulted student loans also came to a halt. Those measures have now come to an end. Student loan interest resumed on Sept. 1, 2023, and the first student loan payments since the pandemic began were due on October 1. Though payments have resumed, delinquency rates are likely to remain unchanged, at least in the short term. The Biden administration instituted a one-year easing-in period starting from Oct. 1, 2023, to help financially vulnerable borrowers. If borrowers miss their monthly payment during this one-year period, they will not be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. Acting under the Higher Education Relief Opportunities for Students Act of 2003, the Biden administration had sought to provide direct relief to students, canceling up to $20,000 in debt for Pell Grant recipients and $10,000 in debt for other federal student loan borrowers. But the U.S. Supreme Court ruled on June 30, 2023, that the administration lacked the authority to do so. Two months later, the White House Biden responded by launching an income-driven assistance program, the [Saving on a Valuable Education (SAVE) plan](https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022). The plan cuts monthly student loan payments for undergraduate borrowers to 5% of discretionary income, changes the discretionary income formula so that an estimated 1 million low-income borrowers will see their monthly payments drop to $0, eliminates the [capitalization of unpaid interest](https://www.investopedia.com/ask/answers/040915/what-does-it-mean-capitalize-accrued-interest.asp) (so as long as borrowers keep current with their payments), and allows borrowers with balances of $12,000 or less to receive loan forgiveness after 10 years of payments. ## Economic Impact of Debt Cancellation The sheer size of student debt can be characterized as a [weight on the U.S. economy](https://www.investopedia.com/student-debt-affect-economy-8550501) as well as a burden on the millions of individuals who owe it. The federal government holds $1.6 trillion in student loans, compared with an estimated $130 billion held by [private lenders](https://www.investopedia.com/best-student-loans-4775346). ### After the Supreme Court rejected White House efforts to cancel a portion of federal student loan balances, the Biden administration announced the Saving on a Valuable Education (SAVE) plan, an income-driven repayment program that it says will lower monthly payments for 20 million borrowers. ### Pros and Cons of Debt Cancellation Research from the Center for American Progress suggested that [wiping out student debt](https://www.investopedia.com/cost-cancel-student-debt-8585118) would have minimal effects on inflation while helping workers "build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility." A 2018 study from the Levy Economics Institute at Bard College estimated that outright debt cancellation would boost [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) by $86 billion to $108 billion per year. But detractors warned of the risk of [moral hazard](https://www.investopedia.com/terms/m/moralhazard.asp) caused by implying that the cost of your decisions would be borne by someone else. This would lead to even higher student debt burdens as borrowers assume additional forgiveness would be forthcoming. The Committee for a Responsible Federal Budget argued that student loan forgiveness would have, at best, provided only a weak [stimulus to the economy](https://www.investopedia.com/terms/e/economic-stimulus.asp). The group believed that for every dollar of loan forgiveness, just 2 to 27 cents of economic activity would be generated. ## How Much of the U.S. Population Has Student Loan Debt? The U.S. Department of Education reports that 43.2 million borrowers had outstanding federal student loans as of the fourth quarter of 2023, representing $1.6 trillion in debt. That figure reflects the growing importance of a college degree to getting a well-paying job. It also reflects just how much college costs have increased. ## How Can I Get My Student Loans Forgiven? In addition to [state student loan forgiveness](https://www.investopedia.com/student-loan-debt-by-state-5198562) programs, there are several ways to qualify for forgiveness from the federal government. Teachers can receive up to $17,500 in debt forgiveness after teaching in low-income schools for five years. A similar debt forgiveness program provides relief for public service employees who work in government, for hospitals, or at approved nonprofits. If you become totally and permanently disabled, you may be eligible for a discharge of the debt. For other borrowers, income-driven repayment programs provide debt forgiveness after 20 to 25 years of making payments. If you haven’t paid off your student loans by then, the balance is wiped clean. Those interested in loan forgiveness programs should visit the Federal Student Aid website or contact their loan service provider. ## Is Student Debt Worth It? Whether or not student debt is worth it depends on a borrower's financial circumstances and if they graduate. Ideally, when a borrower takes out loans to pay for college, the degree they earn is able to help put them on the path to a high-paying career. Of course, not everyone is able to finish school or secure work after graduating, leaving them stuck with student debt and nothing to show for it. ## The Bottom Line Most students who attend college are hoping to earn a degree that will dramatically increase their earning power after graduation. But for many adults, much of those earnings will have to go toward paying back student loans. This is a heavy burden to carry, especially before someone has earned their first professional paycheck.	Obtaining a college degree requires a much bigger financial sacrifice today than it did a generation or two ago. The upshot is that more students and families are relying on loans to pursue higher education, and total student loan debt keeps growing. According to the College Board, families paid an average of $11,260 in 2023–2024 to send their children to a public four-year school. Sending a child to a private school costs an average of $41,540 in tuition and fees. Key Takeaways The total amount of outstanding student loan debt in the United States was $1.6 trillion as of Q4'23.Soaring college costs and pressure to compete in the job marketplace are big factors for student loan debt.Student loans are the most common form of educational debt, followed by credit cards and other types of credit.Borrowers who don't complete their degrees are more likely to default. What Is the Average Student Loan Debt? How big a role do student loans play in today's colleges and universities? Here's a snapshot of borrowing. Student Loans Snapshot $1.6 trillion Amount of student loan debt outstanding in the U.S. 43.2 million Number of borrowers with federal student loan debt. The total amount of outstanding student loans was $1.6 trillion in the fourth quarter of 2023, up from just over $1 trillion a decade ago. This equates to approximately $37,037.04 per borrower. Average Loan Balances According to the Federal Reserve’s 2021 and 2022 data, 30% of all U.S. adults took on some form of debt to go to college. Student loans were by far the most common borrowing option: 96% of those who hold education debt took out a student loan. But borrowers took on other forms of debt to finance their degrees, including credit card debt (19%), home equity lines of credit (4%), and other types of credit (11%). The issue of student loan debt cuts across generations. As of the fourth quarter of 2023, borrowers between the ages of 25 and 34 held $491 billion in federal student loan debt. Adults aged 35 to 49 carried even more debt, with balances totaling $624 billion. People ages 50 to 61 owe about $278 billion in student loan debt. Another $110 billion is held by those 62 and older. Those who get advanced degrees tend to accumulate more debt but are also less likely to fall behind on their student loan payments. Meanwhile, borrowers who obtain a technical degree or never graduate are more likely to have a harder time keeping current with their payments. A 2022 Federal Reserve survey of U.S. households found that 28% of respondents who took out student loans but completed less than an associate degree were behind on payments. The delinquency rate was 19% for those who had obtained an associate degree, 7% for those with a bachelor's degree, and 6% for those with a graduate degree. Overall, 8% of adults who took out student loans reported they were behind on their payments. Decline in Delinquencies The Federal Reserve reports that less than 1% of student loan debt was at least 90 days delinquent or in default in the third quarter of 2023. But this figure likely understates borrowers’ true ability to pay back their loans. In response to the COVID-19 pandemic, student loan payments and interest were suspended, and collections on defaulted student loans also came to a halt. Those measures have now come to an end. Student loan interest resumed on Sept. 1, 2023, and the first student loan payments since the pandemic began were due on October 1. Though payments have resumed, delinquency rates are likely to remain unchanged, at least in the short term. The Biden administration instituted a one-year easing-in period starting from Oct. 1, 2023, to help financially vulnerable borrowers. If borrowers miss their monthly payment during this one-year period, they will not be considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. Acting under the Higher Education Relief Opportunities for Students Act of 2003, the Biden administration had sought to provide direct relief to students, canceling up to $20,000 in debt for Pell Grant recipients and $10,000 in debt for other federal student loan borrowers. But the U.S. Supreme Court ruled on June 30, 2023, that the administration lacked the authority to do so. Two months later, the White House Biden responded by launching an income-driven assistance program, the Saving on a Valuable Education (SAVE) plan. The plan cuts monthly student loan payments for undergraduate borrowers to 5% of discretionary income, changes the discretionary income formula so that an estimated 1 million low-income borrowers will see their monthly payments drop to $0, eliminates the capitalization of unpaid interest (so as long as borrowers keep current with their payments), and allows borrowers with balances of $12,000 or less to receive loan forgiveness after 10 years of payments. Economic Impact of Debt Cancellation The sheer size of student debt can be characterized as a weight on the U.S. economy as well as a burden on the millions of individuals who owe it. The federal government holds $1.6 trillion in student loans, compared with an estimated $130 billion held by private lenders. After the Supreme Court rejected White House efforts to cancel a portion of federal student loan balances, the Biden administration announced the Saving on a Valuable Education (SAVE) plan, an income-driven repayment program that it says will lower monthly payments for 20 million borrowers. Pros and Cons of Debt Cancellation Research from the Center for American Progress suggested that wiping out student debt would have minimal effects on inflation while helping workers "build wealth, and reduce the racial wealth gap, immediately improving financial security and laying the foundation for faster upward economic mobility." A 2018 study from the Levy Economics Institute at Bard College estimated that outright debt cancellation would boost gross domestic product (GDP) by $86 billion to $108 billion per year. But detractors warned of the risk of moral hazard caused by implying that the cost of your decisions would be borne by someone else. This would lead to even higher student debt burdens as borrowers assume additional forgiveness would be forthcoming. The Committee for a Responsible Federal Budget argued that student loan forgiveness would have, at best, provided only a weak stimulus to the economy. The group believed that for every dollar of loan forgiveness, just 2 to 27 cents of economic activity would be generated. How Much of the U.S. Population Has Student Loan Debt? The U.S. Department of Education reports that 43.2 million borrowers had outstanding federal student loans as of the fourth quarter of 2023, representing $1.6 trillion in debt. That figure reflects the growing importance of a college degree to getting a well-paying job. It also reflects just how much college costs have increased. How Can I Get My Student Loans Forgiven? In addition to state student loan forgiveness programs, there are several ways to qualify for forgiveness from the federal government. Teachers can receive up to $17,500 in debt forgiveness after teaching in low-income schools for five years. A similar debt forgiveness program provides relief for public service employees who work in government, for hospitals, or at approved nonprofits. If you become totally and permanently disabled, you may be eligible for a discharge of the debt. For other borrowers, income-driven repayment programs provide debt forgiveness after 20 to 25 years of making payments. If you haven’t paid off your student loans by then, the balance is wiped clean. Those interested in loan forgiveness programs should visit the Federal Student Aid website or contact their loan service provider. Is Student Debt Worth It? Whether or not student debt is worth it depends on a borrower's financial circumstances and if they graduate. Ideally, when a borrower takes out loans to pay for college, the degree they earn is able to help put them on the path to a high-paying career. Of course, not everyone is able to finish school or secure work after graduating, leaving them stuck with student debt and nothing to show for it. The Bottom Line Most students who attend college are hoping to earn a degree that will dramatically increase their earning power after graduation. But for many adults, much of those earnings will have to go toward paying back student loans. This is a heavy burden to carry, especially before someone has earned their first professional paycheck.	[ [ "student loan debt", "https://www.investopedia.com/terms/s/student-debt.asp" ], [ "home equity lines of credit", "https://www.investopedia.com/mortgage/heloc/" ], [ "student loan debt cuts across generations", "https://www.investopedia.com/student-loan-debt-by-age-5200927" ], [ "keeping current with their payments", "https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp" ], [ "delinquent", "https://www.investopedia.com/terms/d/delinquent.asp" ], [ "default", "https://www.investopedia.com/terms/d/default2.asp" ], [ "Saving on a Valuable Education (SAVE) plan", "https://www.investopedia.com/saving-on-a-valuable-education-plan-7559022" ], [ "capitalization of unpaid interest", "https://www.investopedia.com/ask/answers/040915/what-does-it-mean-capitalize-accrued-interest.asp" ], [ "weight on the U.S. economy", "https://www.investopedia.com/student-debt-affect-economy-8550501" ], [ "private lenders", "https://www.investopedia.com/best-student-loans-4775346" ], [ "wiping out student debt", "https://www.investopedia.com/cost-cancel-student-debt-8585118" ], [ "gross domestic product (GDP)", "https://www.investopedia.com/terms/g/gdp.asp" ], [ "moral hazard", "https://www.investopedia.com/terms/m/moralhazard.asp" ], [ "stimulus to the economy", "https://www.investopedia.com/terms/e/economic-stimulus.asp" ], [ "state student loan forgiveness", "https://www.investopedia.com/student-loan-debt-by-state-5198562" ] ]
https://www.investopedia.com/fed-holds-interest-rate-steady-and-confirms-it-will-be-higher-for-longer-8641952	Fed Holds Interest Rate Steady To Fight Still-Too-High Inflation	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_1-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_2-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move. </li><li>The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished.<br/></li><li>Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year. </li><li>The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things.<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 cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation.<br/><br/>Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">run too high for comfort</a> in the first few months of 2024 and is still far from the central bank's target of a 2% annual rate.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy.<br><br>“In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March.<br/><br/>In response, the central bank is likely to keep the fed funds rate higher for longer than previously thought, Federal Reserve Chair Jerome Powell said at a press conference.<br/><br/>"We've stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," He said. "So far this year, the data have not given us that greater confidence ... It is likely that gaining such greater confidence will take longer than previously expected."<span class="ql-inline-citation" data-cite="2"></span> <br/> </br></br></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-data-is-driving-fed-to-hold-rates-for-longer"></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"> Data is Driving Fed to Hold Rates For Longer </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic. </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 annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer. </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"> Powell, however, dismissed the immediate need for another rate hike to tame stubborn inflation. </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"> "I think it's unlikely that the next policy rate move will be a hike,” Powell told reporters at Wednesday’s post-FOMC-statement press conference. </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"> Other reports have shown that almost any way you measure it, the economy is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-does-the-us-economy-keep-beating-expectations-8558180">running hot</a> despite interest rate hikes since March 2022 that were supposed to cool it down: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/wages-and-benefits-growth-deals-yet-another-blow-to-fed-in-inflation-fight-8641038">wage increases are accelerating</a>, home prices are hitting record highs, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280">jobs remain plentiful</a>—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession. </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 lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades.<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-fed-eases-quantitative-tightening"></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"> Fed Eases Quantitative Tightening </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> In another expected move, the central bank said it was slowing down the pace at which it was selling off securities from its balance sheet to $25 billion per month from $60 billion per month. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> This process, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-federal-reserve-could-ease-this-anti-inflation-policy-before-cutting-rates-8619154">known as "quantitative tightening</a>," removes money from financial markets. It is a reversal of the "quantitative easing" campaign it engaged in during the pandemic, when it did the opposite, buying assets such as mortgage-backed securities in order to stimulate markets, and the economy, with more money.<br/><br/>While this move was widely anticipated, some forecasters weren't expecting the Fed to back off its tightening campaign as much as it did, with many experts predicting it would slow down to $30 billion per month.<br/><br/>"The Fed turns down the dial on QT a bit more than expected, which, while not a rate cut, is a dovish move," Ernie Tedeschi, former chief economist at the White House Council of Economic Advisors posted on social media platform X.<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>	### * The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move. * The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished. * Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year. * The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things. The cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation. Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s [run too high for comfort](https://www.investopedia.com/inflation-heated-up-in-march-8629363) in the first few months of 2024 and is still far from the central bank's target of a 2% annual rate. In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy. “In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March. ## Data is Driving Fed to Hold Rates For Longer Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic. The annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer. Powell, however, dismissed the immediate need for another rate hike to tame stubborn inflation. "I think it's unlikely that the next policy rate move will be a hike,” Powell told reporters at Wednesday’s post-FOMC-statement press conference. Other reports have shown that almost any way you measure it, the economy is [running hot](https://www.investopedia.com/why-does-the-us-economy-keep-beating-expectations-8558180) despite interest rate hikes since March 2022 that were supposed to cool it down: [wage increases are accelerating](https://www.investopedia.com/wages-and-benefits-growth-deals-yet-another-blow-to-fed-in-inflation-fight-8641038), home prices are hitting record highs, and [jobs remain plentiful](https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280)—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession. A lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades. ## Fed Eases Quantitative Tightening In another expected move, the central bank said it was slowing down the pace at which it was selling off securities from its balance sheet to $25 billion per month from $60 billion per month. This process, [known as "quantitative tightening](https://www.investopedia.com/the-federal-reserve-could-ease-this-anti-inflation-policy-before-cutting-rates-8619154)," removes money from financial markets. It is a reversal of the "quantitative easing" campaign it engaged in during the pandemic, when it did the opposite, buying assets such as mortgage-backed securities in order to stimulate markets, and the economy, with more money. While this move was widely anticipated, some forecasters weren't expecting the Fed to back off its tightening campaign as much as it did, with many experts predicting it would slow down to $30 billion per month. "The Fed turns down the dial on QT a bit more than expected, which, while not a rate cut, is a dovish move," Ernie Tedeschi, former chief economist at the White House Council of Economic Advisors posted on social media platform X. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	The Federal Reserve is keeping its key interest rate at its highest since 2001 in an effort to push down inflation, in a widely anticipated move. The central bank indicated its willingness to keep interest rates higher for longer until high inflation is vanquished.Hopes the Fed would cut rates soon have dimmed as inflation has proven more stubborn than expected at the beginning of the year. The Fed funds rate staying high influences interest rates on all kinds of loans, and keeps upward pressure on borrowing costs for mortgages and credit cards among other things. The cost of living is still rising too fast for the Federal Reserve, and the Fed is keeping interest rates high to fight inflation.Members of the central bank’s policy committee voted unanimously Wednesday to keep the crucial fed funds rate in its current range of 5.25% to 5.50%. Officials held the rate at its highest since 2001 to fight inflation that’s run too high for comfort in the first few months of 2024 and is still far from the central bank's target of a 2% annual rate. In an official statement, Fed officials acknowledged that progress against inflation has stalled, necessitating keeping interest rates high to discourage borrowing and spending and cool down the economy.“In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective.” the Federal Open Market Committee said in a statement, adding language that was absent from the statement the group made when it previously met in March.In response, the central bank is likely to keep the fed funds rate higher for longer than previously thought, Federal Reserve Chair Jerome Powell said at a press conference."We've stated that we do not expect that it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%," He said. "So far this year, the data have not given us that greater confidence ... It is likely that gaining such greater confidence will take longer than previously expected." Data is Driving Fed to Hold Rates For Longer Fed officials have said data have driven their interest rate decisions, and the data has pushed policymakers in a more pessimistic direction as they assess their efforts to quell high inflation that flared up as the economy reopened from the pandemic. The annual inflation rate, as measured by the Consumer Price Index, had fallen to the 3% range at the outset of the year, down from its recent peak at 9.1% in June 2022. But the Fed’s goal of a 2% annual rate got farther away, as it rose to 3.5% as of March, dampening hopes that the Fed would be able to cut interest rates this summer. Powell, however, dismissed the immediate need for another rate hike to tame stubborn inflation. "I think it's unlikely that the next policy rate move will be a hike,” Powell told reporters at Wednesday’s post-FOMC-statement press conference. Other reports have shown that almost any way you measure it, the economy is running hot despite interest rate hikes since March 2022 that were supposed to cool it down: wage increases are accelerating, home prices are hitting record highs, and jobs remain plentiful—meaning there is little pressure on the Fed to cut interest rates to stimulate the economy and prevent a recession. A lower fed funds rates would reduce upward pressure on interest rates for mortgages, credit cards, business loans, and other types of credit that currently come with borrowing costs at or near their highest in decades. Fed Eases Quantitative Tightening In another expected move, the central bank said it was slowing down the pace at which it was selling off securities from its balance sheet to $25 billion per month from $60 billion per month. This process, known as "quantitative tightening," removes money from financial markets. It is a reversal of the "quantitative easing" campaign it engaged in during the pandemic, when it did the opposite, buying assets such as mortgage-backed securities in order to stimulate markets, and the economy, with more money.While this move was widely anticipated, some forecasters weren't expecting the Fed to back off its tightening campaign as much as it did, with many experts predicting it would slow down to $30 billion per month."The Fed turns down the dial on QT a bit more than expected, which, while not a rate cut, is a dovish move," Ernie Tedeschi, former chief economist at the White House Council of Economic Advisors posted on social media platform X. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "run too high for comfort", "https://www.investopedia.com/inflation-heated-up-in-march-8629363" ], [ "running hot", "https://www.investopedia.com/why-does-the-us-economy-keep-beating-expectations-8558180" ], [ "wage increases are accelerating", "https://www.investopedia.com/wages-and-benefits-growth-deals-yet-another-blow-to-fed-in-inflation-fight-8641038" ], [ "jobs remain plentiful", "https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280" ], [ "known as \"quantitative tightening", "https://www.investopedia.com/the-federal-reserve-could-ease-this-anti-inflation-policy-before-cutting-rates-8619154" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/articles/investing/040915/how-start-hedge-fund-uk.asp	How to Start a Hedge Fund in 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"><span class="heading-toc" id="toc-the-basics-of-hedge-funds"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> The Basics of Hedge Funds </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Hedge funds are pooled investments that involve aggressive trading strategies to generate very active returns for their investors. They've gained quite a big name because of these returns. But <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp">hedge funds</a> aren't an option for the average investor, mainly because initial investment requirements are usually fairly high and can only be fulfilled by <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accreditedinvestor.asp">accredited investors</a>, such as institutional investors and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hnwi.asp">high-net-worth individuals (HNWIs)</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Hedge funds are just 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> because both allow investors to purchase and sell shares. But because they involve aggressive investment strategies and vehicles, hedge funds come with more risk to the investor. Regulation of the hedge fund industry was fairly lax, but things changed after the financial crisis. </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"> These funds are a complicated beast, not only for investors but also for those who manage them. Establishing one comes with hurdles—many more in the United Kingdom than in the United States. The process, which can take at least three months to complete, often leads many new firms to hire an external company to establish and ensure the fund is fully compliant with all laws and regulations. </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"> Still interested in starting your own hedge fund? Keep reading to learn more about the basics of hedge funds and the steps you need to take to start your fund in the United Kingdom. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Starting a hedge fund in the United Kingdom is more complicated than it is in the U.S.</li><li>Hedge funds in the U.K. are highly regulated and transparent.</li><li>Founders must meet strict regulatory requirements, file the necessary documents, and seek approvals before they can begin operations.</li><li>Key elements of a hedge fund include the jurisdiction, structure, oversight and providers, and components.</li><li>Most hedge funds charge a two and twenty fee, which comprises 2% of the total assets and 20% of the profits.</li></ul></div></div></div> <span class="heading-toc" id="toc-regulations-and-approvals"></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"> Regulations and Approvals </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Hedge fund managers must get approval to start funds in the U.K. under the Financial Services and Markets Act 2000. The first and most fundamental step is learning how to navigate the governing body. Regulation and authorization approval falls under the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="http://www.fca.org.uk/">Financial Conduct Authority (FCA)</a>, formerly known as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-services-authority-fsa.asp">Financial Services Authority (FSA)</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_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Applications submitted to the Financial Conduct Authority can take up to six months to be approved.<span class="ql-inline-citation" data-cite="3"></span> Part of the approval process requires the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-manager.asp">investment manager</a> to demonstrate adequate financial resources and appropriate staff, systems, and controls to manage the fund. There are several prerequisites: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li>Establish financial resource requirements depending on whether the fund falls within the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mifid.asp">Markets in Financial Instruments Directive (MiFID)</a> of the European Community.<span class="ql-inline-citation" data-cite="10"></span></li> <li>Prove investment staff competency by passing an exam in full or part based on experience in management outside the U.K.<span class="ql-inline-citation" data-cite="11"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Hedge funds may be monitored for up to a year after approval. This oversight includes rules related to the conduct of business, financial records and reporting, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-to-get-a-job-compliance/">compliance</a>, and complaints. Fund marketing is governed by the Alternative Investment Fund Managers Directive (AIFMD).<span class="ql-inline-citation" data-cite="20"></span> Investment managers must receive approval from the regulator in their established country in order to market funds in a European Union (EU) country.<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_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">2,343</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>The number of active hedge funds in the U.K. in 2022, representing 8.6% of all global hedge funds.<span class="ql-inline-citation" data-cite="21"></span></p><p> </p></div></div></div> <span class="heading-toc" id="toc-key-elements"></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"> Key Elements </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Navigating the external regulations and authorizations is only one of the challenges hedge fund managers must consider. Before they begin operations, fund founders must also decide on the: </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>Jurisdiction</li><li>Structure</li><li>Oversight and providers</li><li>Components</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"> Let's take a look at each factor and how they relate to the hedge fund industry in the United Kingdom. </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"> Jurisdiction </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> This is the geographic location of the hedge fund's operations. The jurisdiction doesn't have to be in the same location as the fund's administrator. So why is it important? The fund's headquarters defines its tax structure or how it is taxed.<span class="ql-inline-citation" data-cite="13"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Many funds are based in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxhaven.asp">tax havens</a> <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/offshore.asp">offshore</a>. Countries like the Cayman Islands, Bermuda, Luxembourg, or Ireland are popular choices because they have very favorable corporate <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tax-laws-4689794">tax laws</a>. For instance, the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp">Cayman Islands</a> is one of the largest offshore financial centers in the world. Businesses set up in the region are not taxed.<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_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Hedge funds benefit from offshore jurisdictions because it's the investor, not the fund, who is taxed on the fund portfolio's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</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_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"> Fund Structure </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The structure of the fund is chosen based on the type of investors and their needs. This includes tax status, the ability to use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/leverage.asp">leverage</a>, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/votingright.asp">voting rights</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> The typical structures for hedge funds are: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <li><strong>Stand-alone:</strong> This is a single fund in which several investors purchase <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shares.asp">shares</a>.</li> <li><strong>Segregated portfolio companies:</strong> These are separate legal entities where each investor has a separate fund account with their own <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liability.asp">liabilities</a>.</li> <li><strong>Master/feeder and umbrella funds: </strong>These funds fall in the middle of the two extremes listed above. Firms use this structure to satisfy different investor requirements, such as tax status or leverage restrictions. Feeder accounts feed into the master fund, which then trades on behalf of the <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/feederfund.asp">feeder funds</a>.<span class="ql-inline-citation" data-cite="15"></span></li> </ul> <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"> Oversight and Providers </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> British law calls for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/hedge-funds-4689671">hedge funds</a> to have at least two independent directors, who, for tax purposes, must be based offshore. The Investment Manager Exemption (IME) allows a hedge fund to appoint a U.K.-based investment manager if they meet certain criteria.<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_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Many funds are set up as self-managed funds. In these cases, management teams represent the fund's appointed officers, saving both time and money. Other providers who want to start a hedge fund include administrators, independent <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/auditor.asp">auditors</a>, custodians and/or prime brokers, legal counsels, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxadvisor.asp">tax advisors</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> Regardless of how oversight and providers are set up, managers must act independently when they provide investment management services and all <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/transaction.asp">transactions</a> must be conducted in the ordinary course of business. Managers receive customary <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fee.asp">fees</a> in return for their services. But they cannot comprise more than 20% of the fund’s <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</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_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"> Fund Components </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Management needs to make certain decisions about the components of their fund before it can be established. Here are the components that must be taken into consideration. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> <li><strong>Share classes: </strong>Many hedge funds create different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/share_class.asp">share classes</a>, such as management and investment share classes. Management shares usually hold voting rights while investment shares are considered nonvoting. Separate share classes can also be established for any officers and employees of the investment manager, which allows them to avoid paying fees. There can also be a share class for U.K.-taxable investors.<span class="ql-inline-citation" data-cite="4"></span></li> <li><strong>Fees: </strong>Hedge fund fees come in many different forms. But they have traditionally followed one simple structure. The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/two_and_twenty.asp">two and twenty</a> fee structure pays a 2% management fee out of the <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> and a 20% performance fee of the appreciation or hurdle rate exceed.<span class="ql-inline-citation" data-cite="22"></span><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_55-0"></div> <span class="heading-toc" id="toc-withdrawal-restrictions"></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"> Withdrawal Restrictions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> One of the biggest components that management must determine is how withdrawals are treated and if there are any fees attached. </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"> One of the most common provisions is called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lockup-period.asp">lock-up period</a>. Investors aren't allowed to cash out their shares by selling or redeeming them during this time, usually one to two years. That's because the fund manager needs time give to rebalance their portfolio in certain circumstances.<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_60-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> Funds may charge fees if investors break the lock-up provision. They may also charge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/redemptionfee.asp">redemption fees</a> just like some mutual funds. </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 finance-sc-block-callout mntl-block" id="mntl-sc-block_63-0"><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_64-0"><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>Investors can file complaints directly with the Financial Conduct Authority when things go awry with their hedge fund investments.</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_65-0"> <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_66-0"> Fund managers need to consider establishing a track record and proving they have what it takes to succeed. The length of a fund's track record depends on any special conditions potential investors have as well as the manager’s pedigree or experience. Investors generally like to see an apples-to-apples comparison by comparing the manager's track record from another firm with the same strategy. </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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/seedcapital.asp">Seed capital</a> is also important, especially when it comes to regulatory requirements. It allows the fund to be set up with ease, ensuring that <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/operating-cost.asp">operating costs</a> do not negatively impact the fund's performance. Having the right structure in place means that costs are external to and do not supplant the fund's overall performance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <span class="heading-toc" id="toc-marketing-and-solicitation"></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"> Marketing and Solicitation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> As stated above, the AIFMD governs how hedge funds can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketing-plan.asp">market</a> and solicit their assets. The AIFMD has explicit rules on how firms can market their funds and solicit 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_72-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> As of 2018, U.K.-based hedge funds must adhere to the AIFMD. This wasn't always the case, though. Prior to 2018, these funds were able to simply adhere to <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateplacement.asp">private placement</a> rules without the need to follow the AIFMD as long they met the following criteria: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_74-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> <li>They only marketed their offerings in the U.K.</li><li>Marketed the fund outside the European Union</li><li>Relied on reverse solicitation where the investor approaches the hedge fund and not the over way around</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Managers who will solicit assets in the EU must comply with these rules to establish a marketing license.<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_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-how-much-do-you-need-to-invest-in-a-hedge-fund-in-the-uk"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Much Do You Need to Invest in a Hedge Fund in the UK?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You need to be an accredited investor with a net worth of £1 million (excluding property) or an annual income of £200,000 to invest in a hedge fund in the UK.<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> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-what-is-the-minimum-investment-in-a-hedge-fund-in-the-uk"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Minimum Investment in a Hedge Fund in the UK?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Hedge funds in the UK usually have a minimum investment requirement between £100,000 and £500,000.<span class="ql-inline-citation" data-cite="25"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_83-0"><span class="heading-toc" id="toc-what-are-some-examples-of-hegde-funds-in-the-uk"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Examples of Hegde Funds in the UK?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Capula Investment Management LLP, Two Sigma International Limited, and Brevan Howard Asset Management are some examples of investment management firms in the UK offering hedge fund services.<span class="ql-inline-citation" data-cite="23"></span></p><p><br/></p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Hedge funds in the U.K. are subject to more regulatory establishment criteria than funds in the United States. If you're looking to start your own fund, make sure you contact the proper governing bodies to ensure that you're in compliance with the stringent rules and regulations. </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"> Depending on the complexity of your planned hedge fund firm, you may choose to hire an outside company to help you wade through the process. Your understanding of and compliance with all requirements will help provide a strong backbone to the new hedge fund. </p></div>	## The Basics of Hedge Funds Hedge funds are pooled investments that involve aggressive trading strategies to generate very active returns for their investors. They've gained quite a big name because of these returns. But [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp) aren't an option for the average investor, mainly because initial investment requirements are usually fairly high and can only be fulfilled by [accredited investors](https://www.investopedia.com/terms/a/accreditedinvestor.asp), such as institutional investors and [high-net-worth individuals (HNWIs)](https://www.investopedia.com/terms/h/hnwi.asp). Hedge funds are just like [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) because both allow investors to purchase and sell shares. But because they involve aggressive investment strategies and vehicles, hedge funds come with more risk to the investor. Regulation of the hedge fund industry was fairly lax, but things changed after the financial crisis. These funds are a complicated beast, not only for investors but also for those who manage them. Establishing one comes with hurdles—many more in the United Kingdom than in the United States. The process, which can take at least three months to complete, often leads many new firms to hire an external company to establish and ensure the fund is fully compliant with all laws and regulations. Still interested in starting your own hedge fund? Keep reading to learn more about the basics of hedge funds and the steps you need to take to start your fund in the United Kingdom. ### Key Takeaways * Starting a hedge fund in the United Kingdom is more complicated than it is in the U.S. * Hedge funds in the U.K. are highly regulated and transparent. * Founders must meet strict regulatory requirements, file the necessary documents, and seek approvals before they can begin operations. * Key elements of a hedge fund include the jurisdiction, structure, oversight and providers, and components. * Most hedge funds charge a two and twenty fee, which comprises 2% of the total assets and 20% of the profits. ## Regulations and Approvals Hedge fund managers must get approval to start funds in the U.K. under the Financial Services and Markets Act 2000. The first and most fundamental step is learning how to navigate the governing body. Regulation and authorization approval falls under the [Financial Conduct Authority (FCA)](http://www.fca.org.uk/), formerly known as the [Financial Services Authority (FSA)](https://www.investopedia.com/terms/f/financial-services-authority-fsa.asp). Applications submitted to the Financial Conduct Authority can take up to six months to be approved. Part of the approval process requires the [investment manager](https://www.investopedia.com/terms/i/investment-manager.asp) to demonstrate adequate financial resources and appropriate staff, systems, and controls to manage the fund. There are several prerequisites: * Establish financial resource requirements depending on whether the fund falls within the [Markets in Financial Instruments Directive (MiFID)](https://www.investopedia.com/terms/m/mifid.asp) of the European Community. * Prove investment staff competency by passing an exam in full or part based on experience in management outside the U.K. Hedge funds may be monitored for up to a year after approval. This oversight includes rules related to the conduct of business, financial records and reporting, [compliance](https://www.investopedia.com/personal-finance/how-to-get-a-job-compliance/), and complaints. Fund marketing is governed by the Alternative Investment Fund Managers Directive (AIFMD). Investment managers must receive approval from the regulator in their established country in order to market funds in a European Union (EU) country. ### 2,343 The number of active hedge funds in the U.K. in 2022, representing 8.6% of all global hedge funds. ## Key Elements Navigating the external regulations and authorizations is only one of the challenges hedge fund managers must consider. Before they begin operations, fund founders must also decide on the: * Jurisdiction * Structure * Oversight and providers * Components Let's take a look at each factor and how they relate to the hedge fund industry in the United Kingdom. ### Jurisdiction This is the geographic location of the hedge fund's operations. The jurisdiction doesn't have to be in the same location as the fund's administrator. So why is it important? The fund's headquarters defines its tax structure or how it is taxed. Many funds are based in [tax havens](https://www.investopedia.com/terms/t/taxhaven.asp) [offshore](https://www.investopedia.com/terms/o/offshore.asp). Countries like the Cayman Islands, Bermuda, Luxembourg, or Ireland are popular choices because they have very favorable corporate [tax laws](https://www.investopedia.com/tax-laws-4689794). For instance, the [Cayman Islands](https://www.investopedia.com/ask/answers/100215/why-cayman-islands-considered-tax-haven.asp) is one of the largest offshore financial centers in the world. Businesses set up in the region are not taxed. Hedge funds benefit from offshore jurisdictions because it's the investor, not the fund, who is taxed on the fund portfolio's [appreciation](https://www.investopedia.com/terms/a/appreciation.asp). ### Fund Structure The structure of the fund is chosen based on the type of investors and their needs. This includes tax status, the ability to use [leverage](https://www.investopedia.com/terms/l/leverage.asp), and [voting rights](https://www.investopedia.com/terms/v/votingright.asp). The typical structures for hedge funds are: * Stand-alone: This is a single fund in which several investors purchase [shares](https://www.investopedia.com/terms/s/shares.asp). * Segregated portfolio companies: These are separate legal entities where each investor has a separate fund account with their own [assets](https://www.investopedia.com/terms/a/asset.asp) and [liabilities](https://www.investopedia.com/terms/l/liability.asp). * Master/feeder and umbrella funds: These funds fall in the middle of the two extremes listed above. Firms use this structure to satisfy different investor requirements, such as tax status or leverage restrictions. Feeder accounts feed into the master fund, which then trades on behalf of the [feeder funds](https://www.investopedia.com/terms/f/feederfund.asp). ### Oversight and Providers British law calls for [hedge funds](https://www.investopedia.com/hedge-funds-4689671) to have at least two independent directors, who, for tax purposes, must be based offshore. The Investment Manager Exemption (IME) allows a hedge fund to appoint a U.K.-based investment manager if they meet certain criteria. Many funds are set up as self-managed funds. In these cases, management teams represent the fund's appointed officers, saving both time and money. Other providers who want to start a hedge fund include administrators, independent [auditors](https://www.investopedia.com/terms/a/auditor.asp), custodians and/or prime brokers, legal counsels, and [tax advisors](https://www.investopedia.com/terms/t/taxadvisor.asp). Regardless of how oversight and providers are set up, managers must act independently when they provide investment management services and all [transactions](https://www.investopedia.com/terms/t/transaction.asp) must be conducted in the ordinary course of business. Managers receive customary [fees](https://www.investopedia.com/terms/f/fee.asp) in return for their services. But they cannot comprise more than 20% of the fund’s [assets](https://www.investopedia.com/terms/a/asset.asp). ### Fund Components Management needs to make certain decisions about the components of their fund before it can be established. Here are the components that must be taken into consideration. * Share classes: Many hedge funds create different [share classes](https://www.investopedia.com/terms/s/share_class.asp), such as management and investment share classes. Management shares usually hold voting rights while investment shares are considered nonvoting. Separate share classes can also be established for any officers and employees of the investment manager, which allows them to avoid paying fees. There can also be a share class for U.K.-taxable investors. * Fees: Hedge fund fees come in many different forms. But they have traditionally followed one simple structure. The [two and twenty](https://www.investopedia.com/terms/t/two_and_twenty.asp) fee structure pays a 2% management fee out of the [assets under management (AUM)](https://www.investopedia.com/terms/a/aum.asp) and a 20% performance fee of the appreciation or hurdle rate exceed. ## Withdrawal Restrictions One of the biggest components that management must determine is how withdrawals are treated and if there are any fees attached. One of the most common provisions is called the [lock-up period](https://www.investopedia.com/terms/l/lockup-period.asp). Investors aren't allowed to cash out their shares by selling or redeeming them during this time, usually one to two years. That's because the fund manager needs time give to rebalance their portfolio in certain circumstances. Funds may charge fees if investors break the lock-up provision. They may also charge [redemption fees](https://www.investopedia.com/terms/r/redemptionfee.asp) just like some mutual funds. ### Investors can file complaints directly with the Financial Conduct Authority when things go awry with their hedge fund investments. ## Special Considerations Fund managers need to consider establishing a track record and proving they have what it takes to succeed. The length of a fund's track record depends on any special conditions potential investors have as well as the manager’s pedigree or experience. Investors generally like to see an apples-to-apples comparison by comparing the manager's track record from another firm with the same strategy. [Seed capital](https://www.investopedia.com/terms/s/seedcapital.asp) is also important, especially when it comes to regulatory requirements. It allows the fund to be set up with ease, ensuring that [operating costs](https://www.investopedia.com/terms/o/operating-cost.asp) do not negatively impact the fund's performance. Having the right structure in place means that costs are external to and do not supplant the fund's overall performance. ## Marketing and Solicitation As stated above, the AIFMD governs how hedge funds can [market](https://www.investopedia.com/terms/m/marketing-plan.asp) and solicit their assets. The AIFMD has explicit rules on how firms can market their funds and solicit assets. As of 2018, U.K.-based hedge funds must adhere to the AIFMD. This wasn't always the case, though. Prior to 2018, these funds were able to simply adhere to [private placement](https://www.investopedia.com/terms/p/privateplacement.asp) rules without the need to follow the AIFMD as long they met the following criteria: * They only marketed their offerings in the U.K. * Marketed the fund outside the European Union * Relied on reverse solicitation where the investor approaches the hedge fund and not the over way around Managers who will solicit assets in the EU must comply with these rules to establish a marketing license. ## How Much Do You Need to Invest in a Hedge Fund in the UK? You need to be an accredited investor with a net worth of £1 million (excluding property) or an annual income of £200,000 to invest in a hedge fund in the UK. ## What Is the Minimum Investment in a Hedge Fund in the UK? Hedge funds in the UK usually have a minimum investment requirement between £100,000 and £500,000. ## What Are Some Examples of Hegde Funds in the UK? Capula Investment Management LLP, Two Sigma International Limited, and Brevan Howard Asset Management are some examples of investment management firms in the UK offering hedge fund services. ## The Bottom Line Hedge funds in the U.K. are subject to more regulatory establishment criteria than funds in the United States. If you're looking to start your own fund, make sure you contact the proper governing bodies to ensure that you're in compliance with the stringent rules and regulations. Depending on the complexity of your planned hedge fund firm, you may choose to hire an outside company to help you wade through the process. Your understanding of and compliance with all requirements will help provide a strong backbone to the new hedge fund.	The Basics of Hedge Funds Hedge funds are pooled investments that involve aggressive trading strategies to generate very active returns for their investors. They've gained quite a big name because of these returns. But hedge funds aren't an option for the average investor, mainly because initial investment requirements are usually fairly high and can only be fulfilled by accredited investors, such as institutional investors and high-net-worth individuals (HNWIs). Hedge funds are just like mutual funds because both allow investors to purchase and sell shares. But because they involve aggressive investment strategies and vehicles, hedge funds come with more risk to the investor. Regulation of the hedge fund industry was fairly lax, but things changed after the financial crisis. These funds are a complicated beast, not only for investors but also for those who manage them. Establishing one comes with hurdles—many more in the United Kingdom than in the United States. The process, which can take at least three months to complete, often leads many new firms to hire an external company to establish and ensure the fund is fully compliant with all laws and regulations. Still interested in starting your own hedge fund? Keep reading to learn more about the basics of hedge funds and the steps you need to take to start your fund in the United Kingdom. Key Takeaways Starting a hedge fund in the United Kingdom is more complicated than it is in the U.S.Hedge funds in the U.K. are highly regulated and transparent.Founders must meet strict regulatory requirements, file the necessary documents, and seek approvals before they can begin operations.Key elements of a hedge fund include the jurisdiction, structure, oversight and providers, and components.Most hedge funds charge a two and twenty fee, which comprises 2% of the total assets and 20% of the profits. Regulations and Approvals Hedge fund managers must get approval to start funds in the U.K. under the Financial Services and Markets Act 2000. The first and most fundamental step is learning how to navigate the governing body. Regulation and authorization approval falls under the Financial Conduct Authority (FCA), formerly known as the Financial Services Authority (FSA). Applications submitted to the Financial Conduct Authority can take up to six months to be approved. Part of the approval process requires the investment manager to demonstrate adequate financial resources and appropriate staff, systems, and controls to manage the fund. There are several prerequisites: Establish financial resource requirements depending on whether the fund falls within the Markets in Financial Instruments Directive (MiFID) of the European Community. Prove investment staff competency by passing an exam in full or part based on experience in management outside the U.K. Hedge funds may be monitored for up to a year after approval. This oversight includes rules related to the conduct of business, financial records and reporting, compliance, and complaints. Fund marketing is governed by the Alternative Investment Fund Managers Directive (AIFMD). Investment managers must receive approval from the regulator in their established country in order to market funds in a European Union (EU) country. 2,343 The number of active hedge funds in the U.K. in 2022, representing 8.6% of all global hedge funds. Key Elements Navigating the external regulations and authorizations is only one of the challenges hedge fund managers must consider. Before they begin operations, fund founders must also decide on the: JurisdictionStructureOversight and providersComponents Let's take a look at each factor and how they relate to the hedge fund industry in the United Kingdom. Jurisdiction This is the geographic location of the hedge fund's operations. The jurisdiction doesn't have to be in the same location as the fund's administrator. So why is it important? The fund's headquarters defines its tax structure or how it is taxed. Many funds are based in tax havens offshore. Countries like the Cayman Islands, Bermuda, Luxembourg, or Ireland are popular choices because they have very favorable corporate tax laws. For instance, the Cayman Islands is one of the largest offshore financial centers in the world. Businesses set up in the region are not taxed. Hedge funds benefit from offshore jurisdictions because it's the investor, not the fund, who is taxed on the fund portfolio's appreciation. Fund Structure The structure of the fund is chosen based on the type of investors and their needs. This includes tax status, the ability to use leverage, and voting rights. The typical structures for hedge funds are: Stand-alone: This is a single fund in which several investors purchase shares. Segregated portfolio companies: These are separate legal entities where each investor has a separate fund account with their own assets and liabilities. Master/feeder and umbrella funds: These funds fall in the middle of the two extremes listed above. Firms use this structure to satisfy different investor requirements, such as tax status or leverage restrictions. Feeder accounts feed into the master fund, which then trades on behalf of the feeder funds. Oversight and Providers British law calls for hedge funds to have at least two independent directors, who, for tax purposes, must be based offshore. The Investment Manager Exemption (IME) allows a hedge fund to appoint a U.K.-based investment manager if they meet certain criteria. Many funds are set up as self-managed funds. In these cases, management teams represent the fund's appointed officers, saving both time and money. Other providers who want to start a hedge fund include administrators, independent auditors, custodians and/or prime brokers, legal counsels, and tax advisors. Regardless of how oversight and providers are set up, managers must act independently when they provide investment management services and all transactions must be conducted in the ordinary course of business. Managers receive customary fees in return for their services. But they cannot comprise more than 20% of the fund’s assets. Fund Components Management needs to make certain decisions about the components of their fund before it can be established. Here are the components that must be taken into consideration. Share classes: Many hedge funds create different share classes, such as management and investment share classes. Management shares usually hold voting rights while investment shares are considered nonvoting. Separate share classes can also be established for any officers and employees of the investment manager, which allows them to avoid paying fees. There can also be a share class for U.K.-taxable investors. Fees: Hedge fund fees come in many different forms. But they have traditionally followed one simple structure. The two and twenty fee structure pays a 2% management fee out of the assets under management (AUM) and a 20% performance fee of the appreciation or hurdle rate exceed. Withdrawal Restrictions One of the biggest components that management must determine is how withdrawals are treated and if there are any fees attached. One of the most common provisions is called the lock-up period. Investors aren't allowed to cash out their shares by selling or redeeming them during this time, usually one to two years. That's because the fund manager needs time give to rebalance their portfolio in certain circumstances. Funds may charge fees if investors break the lock-up provision. They may also charge redemption fees just like some mutual funds. Investors can file complaints directly with the Financial Conduct Authority when things go awry with their hedge fund investments. Special Considerations Fund managers need to consider establishing a track record and proving they have what it takes to succeed. The length of a fund's track record depends on any special conditions potential investors have as well as the manager’s pedigree or experience. Investors generally like to see an apples-to-apples comparison by comparing the manager's track record from another firm with the same strategy. Seed capital is also important, especially when it comes to regulatory requirements. It allows the fund to be set up with ease, ensuring that operating costs do not negatively impact the fund's performance. Having the right structure in place means that costs are external to and do not supplant the fund's overall performance. Marketing and Solicitation As stated above, the AIFMD governs how hedge funds can market and solicit their assets. The AIFMD has explicit rules on how firms can market their funds and solicit assets. As of 2018, U.K.-based hedge funds must adhere to the AIFMD. This wasn't always the case, though. Prior to 2018, these funds were able to simply adhere to private placement rules without the need to follow the AIFMD as long they met the following criteria: They only marketed their offerings in the U.K.Marketed the fund outside the European UnionRelied on reverse solicitation where the investor approaches the hedge fund and not the over way around Managers who will solicit assets in the EU must comply with these rules to establish a marketing license. How Much Do You Need to Invest in a Hedge Fund in the UK? You need to be an accredited investor with a net worth of £1 million (excluding property) or an annual income of £200,000 to invest in a hedge fund in the UK. What Is the Minimum Investment in a Hedge Fund in the UK? Hedge funds in the UK usually have a minimum investment requirement between £100,000 and £500,000. What Are Some Examples of Hegde Funds in the UK? Capula Investment Management LLP, Two Sigma International Limited, and Brevan Howard Asset Management are some examples of investment management firms in the UK offering hedge fund services. The Bottom Line Hedge funds in the U.K. are subject to more regulatory establishment criteria than funds in the United States. If you're looking to start your own fund, make sure you contact the proper governing bodies to ensure that you're in compliance with the stringent rules and regulations. Depending on the complexity of your planned hedge fund firm, you may choose to hire an outside company to help you wade through the process. Your understanding of and compliance with all requirements will help provide a strong backbone to the new hedge fund.	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https://www.investopedia.com/terms/e/euroclear.asp	Euroclear: Definition, How It Works, Vs. Clearstream	<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-euroclear"></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 Euroclear? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Euroclear is one of two principal securities clearing houses in the Eurozone. Euroclear specializes in verifying information supplied by brokers involved in a securities transaction and the settlement of securities transacted on European exchanges.<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_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The other principal European clearing house is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearstreaminternational.asp">Clearstream</a>, formerly the Centrale de Livraison de Valeurs Mobilières (CEDEL).<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_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>Euroclear is a major clearinghouse that settles and clears securities trades executed on European exchanges.</li><li>Euroclear also functions as a central securities depository, where it is a custodian for major financial institutions involved in European markets.<span class="ql-inline-citation" data-cite="6"></span></li><li>In addition to stock trades, Euroclear also handles orders in fixed income securities and derivatives.<span class="ql-inline-citation" data-cite="6"></span></li></ul></div></div></div> <span class="heading-toc" id="toc-how-euroclear-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 Euroclear Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Euroclear is one the oldest settlement systems and was originally subsidized by Morgan Guaranty Trust Company of New York, which was a part of J.P. Morgan & Co. It was founded in 1968 to settle trades on the then-developing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eurobond.asp">Eurobond</a> market.<span class="ql-inline-citation" data-cite="5"></span> Its computerized settlement and deposit system helped ensure the safe delivery and payment of Eurobonds. In 2000, Morgan Guaranty Trust transferred these activities to Euroclear Bank.<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"> Euroclear is publicly owned and governed. Between 2001 and 2007, the firm acquired several central securities depositories (CSDs). These include:<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_12-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> <li>Sivocam, the CSD of France</li> <li>CIK and Necigef, the CSDs of Belgium and the Netherlands</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crest.asp">CrestCo</a>, the CSD for Irish equities and all U.K. securities</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"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearinghouse.asp">clearinghouse</a> is a financial institution that acts as an intermediary between buyers and sellers of financial instruments. They take the opposite position on each side of a trade, acting as the buyer to the seller and the seller to the buyer. </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, if Wendy and Nathan enter into a transaction in which Wendy agrees to sell 100 shares of AMZN to Nathan for $1,180 per share, Nathan will have to pay $1,180 x 100 shares = $118,000. The clearinghouse credits Nathan’s account with 100 AMZN shares and deposits $118,000 to Wendy’s account. Clearinghouses, thus, ensure that the financial markets operate smoothly and efficiently. One of the world’s largest clearinghouses is Euroclear. </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-understanding-euroclear"></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"> Understanding Euroclear </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Euroclear acts as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crd.asp">central securities depository</a> (CSD) for its clients, many of whom trade on European exchanges.<span class="ql-inline-citation" data-cite="6"></span> Most of its clients consist of banks, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker-dealer.asp">broker-dealers</a>, and other institutions professionally engaged in managing new issues of securities, market-making, trading, or holding a wide variety of securities. </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"> Euroclear settles domestic and international securities transactions, covering bonds, equities, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives</a>, and investment funds. Over 190,000 national and international securities are accepted in the Euroclear system, covering a broad range of internationally traded fixed and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/frn.asp">floating rate debt</a> instruments, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/convertibles.asp">convertibles</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/warrant.asp">warrants</a>, and equities.<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_23-0"></div> <span class="heading-toc" id="toc-csd-delivery-and-payment"></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"> CSD, Delivery, and Payment </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> In addition to its role as an International Central Securities Depository (ICSD), Euroclear also acts as the Central Securities Depository (CSD) for Belgian, Dutch, Finnish, French, Irish, Swedish, and UK securities.<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_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> A CSD is a financial institution that holds securities, such as bonds and shares, and provides for the safekeeping of these assets. A CSD also allows for the settlement of securities transactions. A transaction is settled once the buyer’s account has been credited with the purchased shares and debited the agreed cash amount, and the seller’s account has been debited the shares and credited the sales amount. The credit and debit movements occur simultaneously through a process known as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dvp.asp">delivery versus payment</a> (DVP). </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"> Transactions between Euroclear participants are settled in the manner described above on a DVP basis on the books of Euroclear. Securities and cash transfers between buyer and seller accounts are final and irrevocable upon settlement. Costs and risks involved in the settlement between Euroclear participants and local market participants are heavily influenced by local market practices. </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"> Trades settling through domestic market links settle on a DVP basis only if DVP is provided in the local market. In the same way, settlement in the Euroclear System becomes final and irrevocable in line with the rules of the domestic market. As a rule, Euroclear Bank credits securities to participants only if it has actually received the securities for the account of such participants.<span class="ql-inline-citation" data-cite="9"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> All securities accepted by Euroclear are eligible for securities lending and borrowing except those that are limited by liquidity, fiscal, or legal restrictions. Standard borrowings are allocated whenever a borrower has insufficient securities in its account to make a delivery, provided sufficient securities are available from lending.<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_34-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> Borrowings are reimbursed on the first overnight settlement process where securities are available in the borrower’s account. In the program, all securities made available by lenders are aggregated in a lending pool. Securities are then distributed to borrowers and loans are allocated among lenders according to standard procedures.<span class="ql-inline-citation" data-cite="9"></span> </p></div>	## What Is Euroclear? Euroclear is one of two principal securities clearing houses in the Eurozone. Euroclear specializes in verifying information supplied by brokers involved in a securities transaction and the settlement of securities transacted on European exchanges. The other principal European clearing house is [Clearstream](https://www.investopedia.com/terms/c/clearstreaminternational.asp), formerly the Centrale de Livraison de Valeurs Mobilières (CEDEL). ### Key Takeaways * Euroclear is a major clearinghouse that settles and clears securities trades executed on European exchanges. * Euroclear also functions as a central securities depository, where it is a custodian for major financial institutions involved in European markets. * In addition to stock trades, Euroclear also handles orders in fixed income securities and derivatives. ## How Euroclear Works Euroclear is one the oldest settlement systems and was originally subsidized by Morgan Guaranty Trust Company of New York, which was a part of J.P. Morgan & Co. It was founded in 1968 to settle trades on the then-developing [Eurobond](https://www.investopedia.com/terms/e/eurobond.asp) market. Its computerized settlement and deposit system helped ensure the safe delivery and payment of Eurobonds. In 2000, Morgan Guaranty Trust transferred these activities to Euroclear Bank. Euroclear is publicly owned and governed. Between 2001 and 2007, the firm acquired several central securities depositories (CSDs). These include: * Sivocam, the CSD of France * CIK and Necigef, the CSDs of Belgium and the Netherlands * [CrestCo](https://www.investopedia.com/terms/c/crest.asp), the CSD for Irish equities and all U.K. securities A [clearinghouse](https://www.investopedia.com/terms/c/clearinghouse.asp) is a financial institution that acts as an intermediary between buyers and sellers of financial instruments. They take the opposite position on each side of a trade, acting as the buyer to the seller and the seller to the buyer. For example, if Wendy and Nathan enter into a transaction in which Wendy agrees to sell 100 shares of AMZN to Nathan for $1,180 per share, Nathan will have to pay $1,180 x 100 shares = $118,000. The clearinghouse credits Nathan’s account with 100 AMZN shares and deposits $118,000 to Wendy’s account. Clearinghouses, thus, ensure that the financial markets operate smoothly and efficiently. One of the world’s largest clearinghouses is Euroclear. ## Understanding Euroclear Euroclear acts as a [central securities depository](https://www.investopedia.com/terms/c/crd.asp) (CSD) for its clients, many of whom trade on European exchanges. Most of its clients consist of banks, [broker-dealers](https://www.investopedia.com/terms/b/broker-dealer.asp), and other institutions professionally engaged in managing new issues of securities, market-making, trading, or holding a wide variety of securities. Euroclear settles domestic and international securities transactions, covering bonds, equities, [derivatives](https://www.investopedia.com/terms/d/derivative.asp), and investment funds. Over 190,000 national and international securities are accepted in the Euroclear system, covering a broad range of internationally traded fixed and [floating rate debt](https://www.investopedia.com/terms/f/frn.asp) instruments, [convertibles](https://www.investopedia.com/terms/c/convertibles.asp), [warrants](https://www.investopedia.com/terms/w/warrant.asp), and equities. ## CSD, Delivery, and Payment In addition to its role as an International Central Securities Depository (ICSD), Euroclear also acts as the Central Securities Depository (CSD) for Belgian, Dutch, Finnish, French, Irish, Swedish, and UK securities. A CSD is a financial institution that holds securities, such as bonds and shares, and provides for the safekeeping of these assets. A CSD also allows for the settlement of securities transactions. A transaction is settled once the buyer’s account has been credited with the purchased shares and debited the agreed cash amount, and the seller’s account has been debited the shares and credited the sales amount. The credit and debit movements occur simultaneously through a process known as [delivery versus payment](https://www.investopedia.com/terms/d/dvp.asp) (DVP). Transactions between Euroclear participants are settled in the manner described above on a DVP basis on the books of Euroclear. Securities and cash transfers between buyer and seller accounts are final and irrevocable upon settlement. Costs and risks involved in the settlement between Euroclear participants and local market participants are heavily influenced by local market practices. Trades settling through domestic market links settle on a DVP basis only if DVP is provided in the local market. In the same way, settlement in the Euroclear System becomes final and irrevocable in line with the rules of the domestic market. As a rule, Euroclear Bank credits securities to participants only if it has actually received the securities for the account of such participants. All securities accepted by Euroclear are eligible for securities lending and borrowing except those that are limited by liquidity, fiscal, or legal restrictions. Standard borrowings are allocated whenever a borrower has insufficient securities in its account to make a delivery, provided sufficient securities are available from lending. Borrowings are reimbursed on the first overnight settlement process where securities are available in the borrower’s account. In the program, all securities made available by lenders are aggregated in a lending pool. Securities are then distributed to borrowers and loans are allocated among lenders according to standard procedures.	What Is Euroclear? Euroclear is one of two principal securities clearing houses in the Eurozone. Euroclear specializes in verifying information supplied by brokers involved in a securities transaction and the settlement of securities transacted on European exchanges. The other principal European clearing house is Clearstream, formerly the Centrale de Livraison de Valeurs Mobilières (CEDEL). Key Takeaways Euroclear is a major clearinghouse that settles and clears securities trades executed on European exchanges.Euroclear also functions as a central securities depository, where it is a custodian for major financial institutions involved in European markets.In addition to stock trades, Euroclear also handles orders in fixed income securities and derivatives. How Euroclear Works Euroclear is one the oldest settlement systems and was originally subsidized by Morgan Guaranty Trust Company of New York, which was a part of J.P. Morgan & Co. It was founded in 1968 to settle trades on the then-developing Eurobond market. Its computerized settlement and deposit system helped ensure the safe delivery and payment of Eurobonds. In 2000, Morgan Guaranty Trust transferred these activities to Euroclear Bank. Euroclear is publicly owned and governed. Between 2001 and 2007, the firm acquired several central securities depositories (CSDs). These include: Sivocam, the CSD of France CIK and Necigef, the CSDs of Belgium and the Netherlands CrestCo, the CSD for Irish equities and all U.K. securities A clearinghouse is a financial institution that acts as an intermediary between buyers and sellers of financial instruments. They take the opposite position on each side of a trade, acting as the buyer to the seller and the seller to the buyer. For example, if Wendy and Nathan enter into a transaction in which Wendy agrees to sell 100 shares of AMZN to Nathan for $1,180 per share, Nathan will have to pay $1,180 x 100 shares = $118,000. The clearinghouse credits Nathan’s account with 100 AMZN shares and deposits $118,000 to Wendy’s account. Clearinghouses, thus, ensure that the financial markets operate smoothly and efficiently. One of the world’s largest clearinghouses is Euroclear. Understanding Euroclear Euroclear acts as a central securities depository (CSD) for its clients, many of whom trade on European exchanges. Most of its clients consist of banks, broker-dealers, and other institutions professionally engaged in managing new issues of securities, market-making, trading, or holding a wide variety of securities. Euroclear settles domestic and international securities transactions, covering bonds, equities, derivatives, and investment funds. Over 190,000 national and international securities are accepted in the Euroclear system, covering a broad range of internationally traded fixed and floating rate debt instruments, convertibles, warrants, and equities. CSD, Delivery, and Payment In addition to its role as an International Central Securities Depository (ICSD), Euroclear also acts as the Central Securities Depository (CSD) for Belgian, Dutch, Finnish, French, Irish, Swedish, and UK securities. A CSD is a financial institution that holds securities, such as bonds and shares, and provides for the safekeeping of these assets. A CSD also allows for the settlement of securities transactions. A transaction is settled once the buyer’s account has been credited with the purchased shares and debited the agreed cash amount, and the seller’s account has been debited the shares and credited the sales amount. The credit and debit movements occur simultaneously through a process known as delivery versus payment (DVP). Transactions between Euroclear participants are settled in the manner described above on a DVP basis on the books of Euroclear. Securities and cash transfers between buyer and seller accounts are final and irrevocable upon settlement. Costs and risks involved in the settlement between Euroclear participants and local market participants are heavily influenced by local market practices. Trades settling through domestic market links settle on a DVP basis only if DVP is provided in the local market. In the same way, settlement in the Euroclear System becomes final and irrevocable in line with the rules of the domestic market. As a rule, Euroclear Bank credits securities to participants only if it has actually received the securities for the account of such participants. All securities accepted by Euroclear are eligible for securities lending and borrowing except those that are limited by liquidity, fiscal, or legal restrictions. Standard borrowings are allocated whenever a borrower has insufficient securities in its account to make a delivery, provided sufficient securities are available from lending. Borrowings are reimbursed on the first overnight settlement process where securities are available in the borrower’s account. In the program, all securities made available by lenders are aggregated in a lending pool. Securities are then distributed to borrowers and loans are allocated among lenders according to standard procedures.	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https://www.investopedia.com/us-economy-news-today-may-14-8648056	US Economy News Today: Small Business Optimism Jumps for First Time in 2024	<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, wholesale prices gave insight into where inflation is headed and Federal Reserve Chair Jerome Powell reiterated his call for patience. </p></div> <div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-05-14t182641067z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Small Business Optimism Jumps for First Time in 2024</strong><br/></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">May 14, 2024 02:26 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-may-14-8648056#toc-2024-05-14t182641067z" 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"> Small business optimism grew for the first time this year but <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp">inflation</a> continues to be a top concern for business owners, data from the National Federation of Independent Business (NFIB) showed. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> The NFIB Small Business Optimism Index jumped by more than a point to hit 89.7 in April, though it <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sales-worries-drive-small-business-optimism-to-lowest-levels-since-2012-8629041">remained below</a> the 50-year average for the survey.<span class="ql-inline-citation" data-cite="2"></span> Inflation continues to be the biggest issue for business owners, though the 22% who cited inflation as their most important problem was three percentage points lower than last month. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> “Cost pressures remain the top issue for small business owners, including historically high levels of owners raising compensation to keep and attract employees,” said NFIB Chief Economist Bill Dunkelberg. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Fewer business owners said they raised prices in April, while the 26% who plan on making price hikes during the month dropped to the lowest reading in a year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> “Inflation is still a challenge, but a drop in the share of businesses raising prices is a welcome sign that price pressures for small firms are not intensifying,” wrote Wells Fargo economists Charlie Dougherty, Jackie Benson and Patrick Barley. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <em>-Terry Lane</em><br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-05-14t143527497z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p><strong>Powell Hammers Home ‘Patience’ Message On Rate Cuts</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">May 14, 2024 10:35 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-may-14-8648056#toc-2024-05-14t143527497z" id="mntl-blogpost__copylink_2-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> If the comments of Federal Reserve Chair Jerome Powell are anything to go by, the fed funds rate is likely to stay right where it is, no higher and no lower, for a good while. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> On Tuesday, Powell joined the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/fed-officials-in-wait-and-see-mode-on-rate-cuts-ahead-of-next-weeks-inflation-data-8646908">chorus of Fed officials</a> saying with inflation running <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/inflation-heated-up-in-march-8629363">hotter than expected at the outset of the year</a>, the central bank will have to hold its key policy rate higher for longer than officials had forecast a few months ago.<br/><br/>“We'll need to be patient and let restrictive policy do its work,” Powell said in a panel discussion at the Foreign Bankers Association in Amsterdam.<br/><br/>He also, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-may-1-8641676">not for the first time</a>, downplayed the possibility of hiking the interest rate higher than it is, saying that it’s already restrictive—meaning that high rates have made borrowing costly enough to be a drag on inflation and the economy in general. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> “I don't think that it's likely based on the data that we have that the next move that we make would be a rate hike,” Powell said. “I think it's more likely that we'll be at a place where we hold the policy rate where it is.”<br><br>Powell’s comments shed some light on how Fed officials are assessing their fight against inflation. </br></br></p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> After consumer prices started surging in late 2021 when the economy reopened from the pandemic, the Fed started ratcheting up its key interest rate starting in March 2022, eventually reaching its highest since 2001 in July 2023. Inflation has tumbled from its peak of a 9.1% annual rate in June 2022 as measured by the Consumer Price Index but has hovered around 3.5% at the outset of the year, still above the Fed’s 2% target. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Notably, Powell didn’t offer a timeline for when the central bank might cut the fed funds rate. Earlier in the year, when inflation seemed to be on a firmer downward trajectory, Powell had forecast a rate cut at some point in 2024.<br/><br/>Financial markets are awaiting the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157">next government report on inflation</a> on Wednesday, which will show whether the trend changed in April. </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-05-14t134245812z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p><strong>Wholesale Inflation Jumps Ahead of Tomorrow's Consumer Inflation Report</strong><br/></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">May 14, 2024 09:42 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-may-14-8648056#toc-2024-05-14t134245812z" id="mntl-blogpost__copylink_3-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Wholesale inflation jumped higher than expected in April, creating worries that consumer inflation data released this week will come in too hot. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> The Producer Price Index moved higher by 0.5% when compared with the prior month, the Bureau of Labor Statistics reported.<span class="ql-inline-citation" data-cite="1"></span> On a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/year-over-year.asp">year-over-year</a> basis, the PPI increased to 2.2%, the biggest jump in the annual reading in a year. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> “This week is important for markets because they are worried about inflation and this morning’s Producer Price Index (PPI) hasn’t done anything to assuage those fears,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> The measurement of price changes at the wholesaler level came in higher than anticipated, with economists surveyed by the <em>Wall Street Journal</em> and Dow Jones Newswire forecasting a more modest 0.3% monthly rise. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Fuel costs were one factor pushing wholesale prices higher, with nearly three-quarters of the rise in goods prices tied to a 5.4% increase in gas prices. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Economists also saw the PPI <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coreinflation.asp">core inflation</a> reading growing at a faster rate than it did in the prior month. Taking volatile food and fuel prices out of the measurement, PPI came in at 0.4% month-over-month growth. That was above the 0.2% increase that economists were looking to see and the 0.2% growth in the prior month. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The wholesale inflation report comes ahead of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157">tomorrow’s release of the Consumer Price Index</a>, a closely watched measurement of consumer price changes. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> “Today’s PPI is a bad omen for tomorrow’s CPI number—despite the relationship between the two being somewhat complicated—and if the market is spooked by today’s higher-than-expected PPI number, then it will be even more disturbed by a higher-than-expected CPI number tomorrow,” Zaccarelli said. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <em>-Terry Lane</em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div></div></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, wholesale prices gave insight into where inflation is headed and Federal Reserve Chair Jerome Powell reiterated his call for patience. ## Small Business Optimism Jumps for First Time in 2024 May 14, 2024 02:26 PM EDT Small business optimism grew for the first time this year but [inflation](https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp) continues to be a top concern for business owners, data from the National Federation of Independent Business (NFIB) showed. The NFIB Small Business Optimism Index jumped by more than a point to hit 89.7 in April, though it [remained below](https://www.investopedia.com/sales-worries-drive-small-business-optimism-to-lowest-levels-since-2012-8629041) the 50-year average for the survey. Inflation continues to be the biggest issue for business owners, though the 22% who cited inflation as their most important problem was three percentage points lower than last month. “Cost pressures remain the top issue for small business owners, including historically high levels of owners raising compensation to keep and attract employees,” said NFIB Chief Economist Bill Dunkelberg. Fewer business owners said they raised prices in April, while the 26% who plan on making price hikes during the month dropped to the lowest reading in a year. “Inflation is still a challenge, but a drop in the share of businesses raising prices is a welcome sign that price pressures for small firms are not intensifying,” wrote Wells Fargo economists Charlie Dougherty, Jackie Benson and Patrick Barley. -Terry Lane ## Powell Hammers Home ‘Patience’ Message On Rate Cuts May 14, 2024 10:35 AM EDT If the comments of Federal Reserve Chair Jerome Powell are anything to go by, the fed funds rate is likely to stay right where it is, no higher and no lower, for a good while. On Tuesday, Powell joined the [chorus of Fed officials](https://www.investopedia.com/fed-officials-in-wait-and-see-mode-on-rate-cuts-ahead-of-next-weeks-inflation-data-8646908) saying with inflation running [hotter than expected at the outset of the year](https://www.investopedia.com/inflation-heated-up-in-march-8629363), the central bank will have to hold its key policy rate higher for longer than officials had forecast a few months ago. “We'll need to be patient and let restrictive policy do its work,” Powell said in a panel discussion at the Foreign Bankers Association in Amsterdam. He also, [not for the first time](https://www.investopedia.com/us-economy-news-today-may-1-8641676), downplayed the possibility of hiking the interest rate higher than it is, saying that it’s already restrictive—meaning that high rates have made borrowing costly enough to be a drag on inflation and the economy in general. “I don't think that it's likely based on the data that we have that the next move that we make would be a rate hike,” Powell said. “I think it's more likely that we'll be at a place where we hold the policy rate where it is.” Powell’s comments shed some light on how Fed officials are assessing their fight against inflation. After consumer prices started surging in late 2021 when the economy reopened from the pandemic, the Fed started ratcheting up its key interest rate starting in March 2022, eventually reaching its highest since 2001 in July 2023. Inflation has tumbled from its peak of a 9.1% annual rate in June 2022 as measured by the Consumer Price Index but has hovered around 3.5% at the outset of the year, still above the Fed’s 2% target. Notably, Powell didn’t offer a timeline for when the central bank might cut the fed funds rate. Earlier in the year, when inflation seemed to be on a firmer downward trajectory, Powell had forecast a rate cut at some point in 2024. Financial markets are awaiting the [next government report on inflation](https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157) on Wednesday, which will show whether the trend changed in April. ## Wholesale Inflation Jumps Ahead of Tomorrow's Consumer Inflation Report May 14, 2024 09:42 AM EDT Wholesale inflation jumped higher than expected in April, creating worries that consumer inflation data released this week will come in too hot. The Producer Price Index moved higher by 0.5% when compared with the prior month, the Bureau of Labor Statistics reported. On a [year-over-year](https://www.investopedia.com/terms/y/year-over-year.asp) basis, the PPI increased to 2.2%, the biggest jump in the annual reading in a year. “This week is important for markets because they are worried about inflation and this morning’s Producer Price Index (PPI) hasn’t done anything to assuage those fears,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. The measurement of price changes at the wholesaler level came in higher than anticipated, with economists surveyed by the Wall Street Journal and Dow Jones Newswire forecasting a more modest 0.3% monthly rise. Fuel costs were one factor pushing wholesale prices higher, with nearly three-quarters of the rise in goods prices tied to a 5.4% increase in gas prices. Economists also saw the PPI [core inflation](https://www.investopedia.com/terms/c/coreinflation.asp) reading growing at a faster rate than it did in the prior month. Taking volatile food and fuel prices out of the measurement, PPI came in at 0.4% month-over-month growth. That was above the 0.2% increase that economists were looking to see and the 0.2% growth in the prior month. The wholesale inflation report comes ahead of [tomorrow’s release of the Consumer Price Index](https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157), a closely watched measurement of consumer price changes. “Today’s PPI is a bad omen for tomorrow’s CPI number—despite the relationship between the two being somewhat complicated—and if the market is spooked by today’s higher-than-expected PPI number, then it will be even more disturbed by a higher-than-expected CPI number tomorrow,” Zaccarelli said. -Terry Lane	Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, wholesale prices gave insight into where inflation is headed and Federal Reserve Chair Jerome Powell reiterated his call for patience. Small Business Optimism Jumps for First Time in 2024 May 14, 2024 02:26 PM EDT Small business optimism grew for the first time this year but inflation continues to be a top concern for business owners, data from the National Federation of Independent Business (NFIB) showed. The NFIB Small Business Optimism Index jumped by more than a point to hit 89.7 in April, though it remained below the 50-year average for the survey. Inflation continues to be the biggest issue for business owners, though the 22% who cited inflation as their most important problem was three percentage points lower than last month. “Cost pressures remain the top issue for small business owners, including historically high levels of owners raising compensation to keep and attract employees,” said NFIB Chief Economist Bill Dunkelberg. Fewer business owners said they raised prices in April, while the 26% who plan on making price hikes during the month dropped to the lowest reading in a year. “Inflation is still a challenge, but a drop in the share of businesses raising prices is a welcome sign that price pressures for small firms are not intensifying,” wrote Wells Fargo economists Charlie Dougherty, Jackie Benson and Patrick Barley. -Terry Lane Powell Hammers Home ‘Patience’ Message On Rate Cuts May 14, 2024 10:35 AM EDT If the comments of Federal Reserve Chair Jerome Powell are anything to go by, the fed funds rate is likely to stay right where it is, no higher and no lower, for a good while. On Tuesday, Powell joined the chorus of Fed officials saying with inflation running hotter than expected at the outset of the year, the central bank will have to hold its key policy rate higher for longer than officials had forecast a few months ago.“We'll need to be patient and let restrictive policy do its work,” Powell said in a panel discussion at the Foreign Bankers Association in Amsterdam.He also, not for the first time, downplayed the possibility of hiking the interest rate higher than it is, saying that it’s already restrictive—meaning that high rates have made borrowing costly enough to be a drag on inflation and the economy in general. “I don't think that it's likely based on the data that we have that the next move that we make would be a rate hike,” Powell said. “I think it's more likely that we'll be at a place where we hold the policy rate where it is.”Powell’s comments shed some light on how Fed officials are assessing their fight against inflation. After consumer prices started surging in late 2021 when the economy reopened from the pandemic, the Fed started ratcheting up its key interest rate starting in March 2022, eventually reaching its highest since 2001 in July 2023. Inflation has tumbled from its peak of a 9.1% annual rate in June 2022 as measured by the Consumer Price Index but has hovered around 3.5% at the outset of the year, still above the Fed’s 2% target. Notably, Powell didn’t offer a timeline for when the central bank might cut the fed funds rate. Earlier in the year, when inflation seemed to be on a firmer downward trajectory, Powell had forecast a rate cut at some point in 2024.Financial markets are awaiting the next government report on inflation on Wednesday, which will show whether the trend changed in April. Wholesale Inflation Jumps Ahead of Tomorrow's Consumer Inflation Report May 14, 2024 09:42 AM EDT Wholesale inflation jumped higher than expected in April, creating worries that consumer inflation data released this week will come in too hot. The Producer Price Index moved higher by 0.5% when compared with the prior month, the Bureau of Labor Statistics reported. On a year-over-year basis, the PPI increased to 2.2%, the biggest jump in the annual reading in a year. “This week is important for markets because they are worried about inflation and this morning’s Producer Price Index (PPI) hasn’t done anything to assuage those fears,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. The measurement of price changes at the wholesaler level came in higher than anticipated, with economists surveyed by the Wall Street Journal and Dow Jones Newswire forecasting a more modest 0.3% monthly rise. Fuel costs were one factor pushing wholesale prices higher, with nearly three-quarters of the rise in goods prices tied to a 5.4% increase in gas prices. Economists also saw the PPI core inflation reading growing at a faster rate than it did in the prior month. Taking volatile food and fuel prices out of the measurement, PPI came in at 0.4% month-over-month growth. That was above the 0.2% increase that economists were looking to see and the 0.2% growth in the prior month. The wholesale inflation report comes ahead of tomorrow’s release of the Consumer Price Index, a closely watched measurement of consumer price changes. “Today’s PPI is a bad omen for tomorrow’s CPI number—despite the relationship between the two being somewhat complicated—and if the market is spooked by today’s higher-than-expected PPI number, then it will be even more disturbed by a higher-than-expected CPI number tomorrow,” Zaccarelli said. -Terry Lane	[ [ "inflation", "https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does-anyone-gain-it.asp" ], [ "remained below", "https://www.investopedia.com/sales-worries-drive-small-business-optimism-to-lowest-levels-since-2012-8629041" ], [ "chorus of Fed officials", "https://www.investopedia.com/fed-officials-in-wait-and-see-mode-on-rate-cuts-ahead-of-next-weeks-inflation-data-8646908" ], [ "hotter than expected at the outset of the year", "https://www.investopedia.com/inflation-heated-up-in-march-8629363" ], [ "not for the first time", "https://www.investopedia.com/us-economy-news-today-may-1-8641676" ], [ "next government report on inflation", "https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157" ], [ "year-over-year", "https://www.investopedia.com/terms/y/year-over-year.asp" ], [ "core inflation", "https://www.investopedia.com/terms/c/coreinflation.asp" ], [ "tomorrow’s release of the Consumer Price Index", "https://www.investopedia.com/cpi-inflation-april-2024-preview-8646157" ] ]
https://www.investopedia.com/genuine-parts-surges-to-lead-s-and-p-500-gains-thursday-here-is-why-8635585	Genuine Parts Surges To Lead S&P 500 Gains Thursday—Here's Why	<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>Genuine Parts beat profit estimates and raised its outlook as acquisitions helped lift automotive parts sales.</li><li>The company behind the NAPA Auto Parts brand saw a decline in sales at its Industrial Parts Group.</li><li>CFO Will Stengel said Genuine Parts showed operating discipline as it faced slow sales growth.</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"> Genuine Parts (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPC">GPC</a>) was the best-performing stock in the S&P 500 in intraday trading Thursday as shares surged close to 11% after the automotive and industrial parts distributor beat profit estimates and raised its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/analyst/03/012903.asp">guidance</a> as it benefited from acquisitions. </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 owner of the NAPA Auto Parts brand posted first quarter <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 $1.78, exceeding forecasts. Revenue rose 0.3% from a year ago to $5.78 billion, short of expectations. </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 at the company's Global Automotive unit were up 1.9% to $3.57 billion, boosted by a 0.2% increase in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/comparable-store-sales.asp">comparable sales</a> and a 2.8% benefit from acquisitions. Industrial Parts Group sales declined 2.2% to $2.21 billion, dragged down by a 2.6% comparable sales drop.<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"> CFO Will Stengel said the firm showed “operating discipline that delivered improved overall earnings against a backdrop of low sales growth.” </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"> Genuine Parts now anticipates full-year EPS in a range of $9.80 to $9.95, up from the previous outlook of $9.70 to $9.90. </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"> Shares of Genuine Parts were up 10.9% at $159.86 as of 3:30 p.m. ET Thursday. With Thursday’s advance, shares of Genuine Parts have gained about 15% so far this year.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_15-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:69.8%;"> <img alt="GPC" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/U_SJsMyT4iDwMc-4XjuNuYkuJA4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/U_SJsMyT4iDwMc-4XjuNuYkuJA4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png" data-srcset="https://www.investopedia.com/thmb/nf778Pdk6oMe42t_pdd5_IVo0kk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png 750w" data-tracking-container="true" height="1098" id="mntl-sc-block-image_1-0" width="1572"/> <noscript> <img alt="GPC" class="img--noscript universal-image__image" height="1098" sizes="750px" src="https://www.investopedia.com/thmb/U_SJsMyT4iDwMc-4XjuNuYkuJA4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png" srcset="https://www.investopedia.com/thmb/nf778Pdk6oMe42t_pdd5_IVo0kk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png 750w" width="1572"/> </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 * Genuine Parts beat profit estimates and raised its outlook as acquisitions helped lift automotive parts sales. * The company behind the NAPA Auto Parts brand saw a decline in sales at its Industrial Parts Group. * CFO Will Stengel said Genuine Parts showed operating discipline as it faced slow sales growth. Genuine Parts ([GPC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPC)) was the best-performing stock in the S&P 500 in intraday trading Thursday as shares surged close to 11% after the automotive and industrial parts distributor beat profit estimates and raised its [guidance](https://www.investopedia.com/articles/analyst/03/012903.asp) as it benefited from acquisitions. The owner of the NAPA Auto Parts brand posted first quarter [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) of $1.78, exceeding forecasts. Revenue rose 0.3% from a year ago to $5.78 billion, short of expectations. Sales at the company's Global Automotive unit were up 1.9% to $3.57 billion, boosted by a 0.2% increase in [comparable sales](https://www.investopedia.com/terms/c/comparable-store-sales.asp) and a 2.8% benefit from acquisitions. Industrial Parts Group sales declined 2.2% to $2.21 billion, dragged down by a 2.6% comparable sales drop. CFO Will Stengel said the firm showed “operating discipline that delivered improved overall earnings against a backdrop of low sales growth.” Genuine Parts now anticipates full-year EPS in a range of $9.80 to $9.95, up from the previous outlook of $9.70 to $9.90. Shares of Genuine Parts were up 10.9% at $159.86 as of 3:30 p.m. ET Thursday. With Thursday’s advance, shares of Genuine Parts have gained about 15% so far this year. ![GPC]() ![GPC](https://www.investopedia.com/thmb/U_SJsMyT4iDwMc-4XjuNuYkuJA4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GPC_2024-04-18_15-28-37-e2f369cf1b7547799501820ef4a3159f.png) TradingView Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways Genuine Parts beat profit estimates and raised its outlook as acquisitions helped lift automotive parts sales.The company behind the NAPA Auto Parts brand saw a decline in sales at its Industrial Parts Group.CFO Will Stengel said Genuine Parts showed operating discipline as it faced slow sales growth. Genuine Parts (GPC) was the best-performing stock in the S&P 500 in intraday trading Thursday as shares surged close to 11% after the automotive and industrial parts distributor beat profit estimates and raised its guidance as it benefited from acquisitions. The owner of the NAPA Auto Parts brand posted first quarter earnings per share (EPS) of $1.78, exceeding forecasts. Revenue rose 0.3% from a year ago to $5.78 billion, short of expectations. Sales at the company's Global Automotive unit were up 1.9% to $3.57 billion, boosted by a 0.2% increase in comparable sales and a 2.8% benefit from acquisitions. Industrial Parts Group sales declined 2.2% to $2.21 billion, dragged down by a 2.6% comparable sales drop. CFO Will Stengel said the firm showed “operating discipline that delivered improved overall earnings against a backdrop of low sales growth.” Genuine Parts now anticipates full-year EPS in a range of $9.80 to $9.95, up from the previous outlook of $9.70 to $9.90. Shares of Genuine Parts were up 10.9% at $159.86 as of 3:30 p.m. ET Thursday. With Thursday’s advance, shares of Genuine Parts have gained about 15% so far this year. TradingView Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "GPC", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GPC" ], [ "guidance", "https://www.investopedia.com/articles/analyst/03/012903.asp" ], [ "earnings per share (EPS)", "https://www.investopedia.com/terms/e/eps.asp" ], [ "comparable sales", "https://www.investopedia.com/terms/c/comparable-store-sales.asp" ], [ "GPC", "https://www.investopedia.com/thmb/U_SJsMyT4iDwMc-4XjuNuYkuJA4=/1500x0/filters:no_upscale(" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/terms/p/pep.asp	Personal Equity Plan (PEP): What It Is and How It Works	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-was-a-personal-equity-plan-pep"></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 Was a Personal Equity Plan (PEP)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A personal equity plan (PEP) was an investment plan introduced in the United Kingdom that encouraged people over the age of 18 to invest in British companies. Participants could invest in shares, authorized <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>, or investment trusts and receive both income and <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> free of tax.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> PEPs were replaced with Individual Savings Accounts (ISA) in 1999.<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_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 personal equity plan (PEP) was a U.K.-based initiative designed to encourage domestic investment by individuals.</li><li>The PEP provided certain tax incentives to promote individual investment in stocks.</li><li>The PEP was replaced by Individual Savings Accounts (ISA) in 1999 and is no longer offered.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-personal-equity-plan-pep"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding a Personal Equity Plan (PEP) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The PEP was designed to encourage investment by individuals. Many plans required a minimum amount to be invested depending on the type of plan and the plan manager’s requirements. </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"> Among the incentives presented to the public to encourage their participation in a PEP was the prospect of income and capital growth at a greater rate than certain other investment vehicles, such as if they established a deposit account with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/building-society.asp">building society</a>. </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 income from a PEP was tax-free, so long as the invested funds remained in the plan. As with other types of equity investments, the value of the shares invested through a PEP could rise or decline with market fluctuations.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> It was believed that to see the best return on investment from a PEP, the funds should have remained in place for upwards of five to 10 years. Due to certain <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fees</a> and other charges that may have been applied, withdrawing funds early could have negated the gains they accrued. </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>PEP investments had to be made through an authorized plan manager, who was responsible for all of the plan's administration.<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_19-0"> In 1999, the PEP was discontinued in favor of ISAs, another tax-efficient wrapper that offered greater variety, including the option to park capital in a tax-free cash savings account. As PEPS were phased out, all remaining plans were converted by 2008 into ISAs.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <span class="heading-toc" id="toc-limits-and-regulations-on-peps"></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"> Limits and Regulations on PEPs </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> There was an annual contribution limit of £6,000 for general, self-select PEPs. Single-company PEPs, meanwhile, had a limit of £3,000 pounds in annual contributions. Under a single-company PEP, only one company could be invested in per tax year. With general self-select plans, individuals had a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/types-of-investments-in-the-uk-7546224">variety of options for their investments</a> such as shares, open-ended investment companies, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/corporatebond.asp">corporate bonds</a>, and investment trusts.<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_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The investments made under self-select plans were directed by the individual, though a manager or firm was still needed to facilitate the plan, making the plan owner responsible for deciding where their funds should be applied. Managed PEPs, on the other hand, were overseen by a professional manager who put together investment portfolios for the funds. Such ready-made plans allowed individuals without market expertise to invest through PEPs. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_26-0"><span class="heading-toc" id="toc-when-did-peps-end"></span> <h2 class="mntl-sc-block-questionandanswer__question">When Did PEPs End?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Personal equity plans (PEPs) in the U.K. ended in 1999 when they were replaced by Individual Savings Accounts (ISAs).<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_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-what-is-a-pep-uk-tax"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a PEP U.K. Tax?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A personal equity plan in the U.K. was not a tax but rather an investment plan for individuals that allowed investors to invest in the stock market without paying tax. Shares bought in a PEP were held on trust for investors. While they were held in the PEP, no income tax was payable on dividends or capital gains.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-can-a-us-citizen-have-an-isa-in-the-uk"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a U.S. Citizen Have an ISA in the U.K.?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, a U.S. citizen can have an ISA in the U.K. if they qualify; meaning they may be a dual citizen or have a green card in the U.S. The U.K. does not tax the ISA but the U.S. does. The ISA can be considered a Passive Foreign Investment Company (PFIC) by the IRS, which will require certain forms to be filled out and taxes paid.<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_31-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_32-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Personal equity plans (PEPs) were an investment plan in the U.K. introduced in the 1980s that encouraged people to invest in British companies, providing incentives such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/enterprise-investment-scheme-eis.asp">tax-free gains</a>. The plans were replaced by Individual Savings Accounts (ISAs) in 1999, with the same goal of encouraging people to save.<span class="ql-inline-citation" data-cite="1"></span><span class="ql-inline-citation" data-cite="3"></span> </p></div>	## What Was a Personal Equity Plan (PEP)? A personal equity plan (PEP) was an investment plan introduced in the United Kingdom that encouraged people over the age of 18 to invest in British companies. Participants could invest in shares, authorized [unit trusts](https://www.investopedia.com/terms/u/unittrust.asp), or investment trusts and receive both income and [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) free of tax. PEPs were replaced with Individual Savings Accounts (ISA) in 1999. ### Key Takeaways * The personal equity plan (PEP) was a U.K.-based initiative designed to encourage domestic investment by individuals. * The PEP provided certain tax incentives to promote individual investment in stocks. * The PEP was replaced by Individual Savings Accounts (ISA) in 1999 and is no longer offered. ## Understanding a Personal Equity Plan (PEP) The PEP was designed to encourage investment by individuals. Many plans required a minimum amount to be invested depending on the type of plan and the plan manager’s requirements. Among the incentives presented to the public to encourage their participation in a PEP was the prospect of income and capital growth at a greater rate than certain other investment vehicles, such as if they established a deposit account with a [building society](https://www.investopedia.com/terms/b/building-society.asp). The income from a PEP was tax-free, so long as the invested funds remained in the plan. As with other types of equity investments, the value of the shares invested through a PEP could rise or decline with market fluctuations. It was believed that to see the best return on investment from a PEP, the funds should have remained in place for upwards of five to 10 years. Due to certain [management fees](https://www.investopedia.com/terms/m/managementfee.asp) and other charges that may have been applied, withdrawing funds early could have negated the gains they accrued. ### PEP investments had to be made through an authorized plan manager, who was responsible for all of the plan's administration. In 1999, the PEP was discontinued in favor of ISAs, another tax-efficient wrapper that offered greater variety, including the option to park capital in a tax-free cash savings account. As PEPS were phased out, all remaining plans were converted by 2008 into ISAs. ## Limits and Regulations on PEPs There was an annual contribution limit of £6,000 for general, self-select PEPs. Single-company PEPs, meanwhile, had a limit of £3,000 pounds in annual contributions. Under a single-company PEP, only one company could be invested in per tax year. With general self-select plans, individuals had a [variety of options for their investments](https://www.investopedia.com/types-of-investments-in-the-uk-7546224) such as shares, open-ended investment companies, [corporate bonds](https://www.investopedia.com/terms/c/corporatebond.asp), and investment trusts. The investments made under self-select plans were directed by the individual, though a manager or firm was still needed to facilitate the plan, making the plan owner responsible for deciding where their funds should be applied. Managed PEPs, on the other hand, were overseen by a professional manager who put together investment portfolios for the funds. Such ready-made plans allowed individuals without market expertise to invest through PEPs. ## When Did PEPs End? Personal equity plans (PEPs) in the U.K. ended in 1999 when they were replaced by Individual Savings Accounts (ISAs). ## What Is a PEP U.K. Tax? A personal equity plan in the U.K. was not a tax but rather an investment plan for individuals that allowed investors to invest in the stock market without paying tax. Shares bought in a PEP were held on trust for investors. While they were held in the PEP, no income tax was payable on dividends or capital gains. ## Can a U.S. Citizen Have an ISA in the U.K.? Yes, a U.S. citizen can have an ISA in the U.K. if they qualify; meaning they may be a dual citizen or have a green card in the U.S. The U.K. does not tax the ISA but the U.S. does. The ISA can be considered a Passive Foreign Investment Company (PFIC) by the IRS, which will require certain forms to be filled out and taxes paid. ## The Bottom Line Personal equity plans (PEPs) were an investment plan in the U.K. introduced in the 1980s that encouraged people to invest in British companies, providing incentives such as [tax-free gains](https://www.investopedia.com/terms/e/enterprise-investment-scheme-eis.asp). The plans were replaced by Individual Savings Accounts (ISAs) in 1999, with the same goal of encouraging people to save.	What Was a Personal Equity Plan (PEP)? A personal equity plan (PEP) was an investment plan introduced in the United Kingdom that encouraged people over the age of 18 to invest in British companies. Participants could invest in shares, authorized unit trusts, or investment trusts and receive both income and capital gains free of tax. PEPs were replaced with Individual Savings Accounts (ISA) in 1999. Key Takeaways The personal equity plan (PEP) was a U.K.-based initiative designed to encourage domestic investment by individuals.The PEP provided certain tax incentives to promote individual investment in stocks.The PEP was replaced by Individual Savings Accounts (ISA) in 1999 and is no longer offered. Understanding a Personal Equity Plan (PEP) The PEP was designed to encourage investment by individuals. Many plans required a minimum amount to be invested depending on the type of plan and the plan manager’s requirements. Among the incentives presented to the public to encourage their participation in a PEP was the prospect of income and capital growth at a greater rate than certain other investment vehicles, such as if they established a deposit account with a building society. The income from a PEP was tax-free, so long as the invested funds remained in the plan. As with other types of equity investments, the value of the shares invested through a PEP could rise or decline with market fluctuations. It was believed that to see the best return on investment from a PEP, the funds should have remained in place for upwards of five to 10 years. Due to certain management fees and other charges that may have been applied, withdrawing funds early could have negated the gains they accrued. PEP investments had to be made through an authorized plan manager, who was responsible for all of the plan's administration. In 1999, the PEP was discontinued in favor of ISAs, another tax-efficient wrapper that offered greater variety, including the option to park capital in a tax-free cash savings account. As PEPS were phased out, all remaining plans were converted by 2008 into ISAs. Limits and Regulations on PEPs There was an annual contribution limit of £6,000 for general, self-select PEPs. Single-company PEPs, meanwhile, had a limit of £3,000 pounds in annual contributions. Under a single-company PEP, only one company could be invested in per tax year. With general self-select plans, individuals had a variety of options for their investments such as shares, open-ended investment companies, corporate bonds, and investment trusts. The investments made under self-select plans were directed by the individual, though a manager or firm was still needed to facilitate the plan, making the plan owner responsible for deciding where their funds should be applied. Managed PEPs, on the other hand, were overseen by a professional manager who put together investment portfolios for the funds. Such ready-made plans allowed individuals without market expertise to invest through PEPs. When Did PEPs End? Personal equity plans (PEPs) in the U.K. ended in 1999 when they were replaced by Individual Savings Accounts (ISAs). What Is a PEP U.K. Tax? A personal equity plan in the U.K. was not a tax but rather an investment plan for individuals that allowed investors to invest in the stock market without paying tax. Shares bought in a PEP were held on trust for investors. While they were held in the PEP, no income tax was payable on dividends or capital gains. Can a U.S. Citizen Have an ISA in the U.K.? Yes, a U.S. citizen can have an ISA in the U.K. if they qualify; meaning they may be a dual citizen or have a green card in the U.S. The U.K. does not tax the ISA but the U.S. does. The ISA can be considered a Passive Foreign Investment Company (PFIC) by the IRS, which will require certain forms to be filled out and taxes paid. The Bottom Line Personal equity plans (PEPs) were an investment plan in the U.K. introduced in the 1980s that encouraged people to invest in British companies, providing incentives such as tax-free gains. The plans were replaced by Individual Savings Accounts (ISAs) in 1999, with the same goal of encouraging people to save.	[ [ "unit trusts", "https://www.investopedia.com/terms/u/unittrust.asp" ], [ "capital gains", "https://www.investopedia.com/terms/c/capitalgain.asp" ], [ "building society", "https://www.investopedia.com/terms/b/building-society.asp" ], [ "management fees", "https://www.investopedia.com/terms/m/managementfee.asp" ], [ "variety of options for their investments", "https://www.investopedia.com/types-of-investments-in-the-uk-7546224" ], [ "corporate bonds", "https://www.investopedia.com/terms/c/corporatebond.asp" ], [ "tax-free gains", "https://www.investopedia.com/terms/e/enterprise-investment-scheme-eis.asp" ] ]
https://www.investopedia.com/terms/e/education-loan.asp	Education Loan: Definition, Types, Debt 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"><span class="heading-toc" id="toc-what-is-an-education-loan"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> What Is an Education Loan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. Payments are often deferred while students are in college and, depending on the lender, for an additional six-month period after earning a degree. This deferment period is also referred to as a "grace period." </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 education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses.</li><li>Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree.</li><li>Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree.</li><li>Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-an-education-loan-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 Education Loan Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Education loans are issued for the purpose of attending an accredited college or a university to pursue an academic degree. Education loans can be obtained from the government or through private-sector lending sources. Federal loans often offer lower interest rates, and some also offer subsidized interest (meaning the United States Department of Education pays the interest on the loan while a student is in college at least half-time).<span class="ql-inline-citation" data-cite="6"></span> Private-sector loans generally follow more of a traditional lending process for applications, with rates that are <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">typically higher</a> than federal government loans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-types-of-education-loans"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Types of Education Loans </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans. </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"> Federal student loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Most borrowers first seek <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/090815/quick-guide-how-fafsa-loans-work.asp">federal government financing</a> if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp">Free Application for Federal Student Aid</a> (FAFSA).<span class="ql-inline-citation" data-cite="2"></span> Depending on the applicant's status, particularly in regard to their parental dependency, additional information may be required to complete the application. A credit check is not generally required as part of the application process. The amount of principal on the loan or loans is primarily based on the cost of attendance at the school the student is planning on attending. Once a FAFSA form is completed, the schools listed on the FAFSA application work to identify the financial aid package that the student is eligible for.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Various types of federal student loans exist, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/">direct subsidized, direct unsubsidized</a>, and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree. If a student qualifies for subsidized loans, the borrower’s interest will be covered while they are in school. If a student qualifies for unsubsidized loans, the interest on their loans will be <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deferredinterest.asp">deferred</a> as long as they are enrolled in classes and remain in good academic standing.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <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"> Private student loans </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for additional funds through private lenders. Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools. These types of loans will generally follow a more standard application process (like what is typical of any private-sector loan). Applications for private student loans typically require a credit check. </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"> Borrowers can apply directly to individual private-sector lenders for funds. Similar to federal funds, the approved amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover any pending bills; the remaining amount is then sent directly to the borrower. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_22-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Accumulated debt from college can be an overwhelming burden after graduation. If a student has taken out numerous education loans, consolidating them can be a good option for more easily managing the debt load. Multiple federal education loans can be combined into a single <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/direct-consolidation-loan.asp">direct consolidation</a> loan.<span class="ql-inline-citation" data-cite="4"></span> Also, many private lenders now allow borrowers to combine both their federal and private loans into one loan. It's important to note that in this scenario, the new loan will be a private one because it will be issued by a private lender. Because the loan will be considered a private loan, the debt will <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp">no longer be eligible for certain federal programs</a> for <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/student-loan-forgiveness.asp">loan forgiveness</a> and repayment.<span class="ql-inline-citation" data-cite="5"></span> There is no option for borrowers to combine private and public loans into a new public loan. </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 number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs as a way of helping to increase the support available for managing student loan debt after college. </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"> Students and their families should consider all of their options before signing up for higher education loans that could become a crushing burden in the future. Some alternatives to—or ways to reduce the size of—loans include working part-time, accepting work-study offers, attending a less expensive school, finding a job that offers tuition reimbursement as a benefit, and applying for scholarships that help to cover the cost of tuition and room and board. When the student has graduated, it also helps to search for a job that offers help with student debt as a benefit. </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"> Sometimes, you may have <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">more funds from student loans</a> than you need to pay for your education. Perhaps a relative gifted money to your college account, or you received a scholarship that you hadn't planned to receive. It's tempting to use excess student loan funds for, well, fun, but the ethical and financially sound approach is to apply the funds back to your debt. Also, in the case of government-subsidized loans, you could face legal action if you misuse the funds. </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-what-type-of-debt-are-student-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">What type of debt are student loans?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Student loans are considered unsecured installment debts, meaning there isn't a physical asset tied to them, and they're paid back in a set number of installments over <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844">an agreed-upon period of time</a>.<span class="ql-inline-citation" data-cite="8"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-what-are-the-four-major-types-of-educational-loans"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are the four major types of educational loans?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are four types of federal student loans available as part of the William D. Ford Federal Direct Loan Program:<span class="ql-inline-citation" data-cite="7"></span></p><ul><li><strong>Direct Subsidized Loans:</strong> Loans made to eligible undergraduate students who demonstrate a clear financial need.<br/></li><li><strong>Direct Unsubsidized Loans: </strong>Loans made to eligible undergraduate, graduate, and professional students (eligibility isn't based on financial need).<br/></li><li><strong>Direct PLUS Loans:</strong> Loans made to graduate or professional students and parents of dependent undergraduate students to pay for education expenses not covered by other financial aid (eligibility isn't based on financial need, though a credit check is required). Borrowers with a poor credit history must meet additional requirements.<br/></li><li><strong>Direct Consolidation Loans:</strong> Loans that allow you to combine your eligible federal student loans into a single loan with one loan servicer.</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-what-are-three-effective-techniques-for-managing-student-loan-debt"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are three effective techniques for managing student loan debt?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp">several ways to better manage student debt</a>. Three particularly useful strategies include paying off loans with the highest interest rates first, paying down extra principal whenever possible, and exploring operations for debt forgiveness.</p></div> </div></div>	## What Is an Education Loan? An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. Payments are often deferred while students are in college and, depending on the lender, for an additional six-month period after earning a degree. This deferment period is also referred to as a "grace period." ### Key Takeaways * An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. * Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. * Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree. * Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans. ## How an Education Loan Works Education loans are issued for the purpose of attending an accredited college or a university to pursue an academic degree. Education loans can be obtained from the government or through private-sector lending sources. Federal loans often offer lower interest rates, and some also offer subsidized interest (meaning the United States Department of Education pays the interest on the loan while a student is in college at least half-time). Private-sector loans generally follow more of a traditional lending process for applications, with rates that are [typically higher](https://www.investopedia.com/articles/younginvestors/09/private-or-federal-student-loans.asp) than federal government loans. ## Types of Education Loans Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans. ### Federal student loans Most borrowers first seek [federal government financing](https://www.investopedia.com/articles/personal-finance/090815/quick-guide-how-fafsa-loans-work.asp) if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a [Free Application for Federal Student Aid](https://www.investopedia.com/terms/f/federal-application-of-student-aid-fafsa.asp) (FAFSA). Depending on the applicant's status, particularly in regard to their parental dependency, additional information may be required to complete the application. A credit check is not generally required as part of the application process. The amount of principal on the loan or loans is primarily based on the cost of attendance at the school the student is planning on attending. Once a FAFSA form is completed, the schools listed on the FAFSA application work to identify the financial aid package that the student is eligible for. Various types of federal student loans exist, including [direct subsidized, direct unsubsidized](https://www.investopedia.com/personal-finance/federal-direct-loans-subsidized-vs-unsubsidized/), and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree. If a student qualifies for subsidized loans, the borrower’s interest will be covered while they are in school. If a student qualifies for unsubsidized loans, the interest on their loans will be [deferred](https://www.investopedia.com/terms/d/deferredinterest.asp) as long as they are enrolled in classes and remain in good academic standing. ### Private student loans In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for additional funds through private lenders. Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools. These types of loans will generally follow a more standard application process (like what is typical of any private-sector loan). Applications for private student loans typically require a credit check. Borrowers can apply directly to individual private-sector lenders for funds. Similar to federal funds, the approved amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover any pending bills; the remaining amount is then sent directly to the borrower. ## Special Considerations Accumulated debt from college can be an overwhelming burden after graduation. If a student has taken out numerous education loans, consolidating them can be a good option for more easily managing the debt load. Multiple federal education loans can be combined into a single [direct consolidation](https://www.investopedia.com/terms/d/direct-consolidation-loan.asp) loan. Also, many private lenders now allow borrowers to combine both their federal and private loans into one loan. It's important to note that in this scenario, the new loan will be a private one because it will be issued by a private lender. Because the loan will be considered a private loan, the debt will [no longer be eligible for certain federal programs](https://www.investopedia.com/articles/personal-finance/011916/student-loan-refinancing-pros-and-cons.asp) for [loan forgiveness](https://www.investopedia.com/terms/s/student-loan-forgiveness.asp) and repayment. There is no option for borrowers to combine private and public loans into a new public loan. A number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs as a way of helping to increase the support available for managing student loan debt after college. Students and their families should consider all of their options before signing up for higher education loans that could become a crushing burden in the future. Some alternatives to—or ways to reduce the size of—loans include working part-time, accepting work-study offers, attending a less expensive school, finding a job that offers tuition reimbursement as a benefit, and applying for scholarships that help to cover the cost of tuition and room and board. When the student has graduated, it also helps to search for a job that offers help with student debt as a benefit. Sometimes, you may have [more funds from student loans](https://www.investopedia.com/ask/answers/100314/it-legal-invest-my-student-loan-money.asp) than you need to pay for your education. Perhaps a relative gifted money to your college account, or you received a scholarship that you hadn't planned to receive. It's tempting to use excess student loan funds for, well, fun, but the ethical and financially sound approach is to apply the funds back to your debt. Also, in the case of government-subsidized loans, you could face legal action if you misuse the funds. ## What type of debt are student loans? Student loans are considered unsecured installment debts, meaning there isn't a physical asset tied to them, and they're paid back in a set number of installments over [an agreed-upon period of time](https://www.investopedia.com/how-long-pay-off-student-loan-debt-8549844). ## What are the four major types of educational loans? There are four types of federal student loans available as part of the William D. Ford Federal Direct Loan Program: * Direct Subsidized Loans: Loans made to eligible undergraduate students who demonstrate a clear financial need. * Direct Unsubsidized Loans: Loans made to eligible undergraduate, graduate, and professional students (eligibility isn't based on financial need). * Direct PLUS Loans: Loans made to graduate or professional students and parents of dependent undergraduate students to pay for education expenses not covered by other financial aid (eligibility isn't based on financial need, though a credit check is required). Borrowers with a poor credit history must meet additional requirements. * Direct Consolidation Loans: Loans that allow you to combine your eligible federal student loans into a single loan with one loan servicer. ## What are three effective techniques for managing student loan debt? There are [several ways to better manage student debt](https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp). Three particularly useful strategies include paying off loans with the highest interest rates first, paying down extra principal whenever possible, and exploring operations for debt forgiveness.	What Is an Education Loan? An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. Payments are often deferred while students are in college and, depending on the lender, for an additional six-month period after earning a degree. This deferment period is also referred to as a "grace period." Key Takeaways An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses.Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree.Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree.Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans. How an Education Loan Works Education loans are issued for the purpose of attending an accredited college or a university to pursue an academic degree. Education loans can be obtained from the government or through private-sector lending sources. Federal loans often offer lower interest rates, and some also offer subsidized interest (meaning the United States Department of Education pays the interest on the loan while a student is in college at least half-time). Private-sector loans generally follow more of a traditional lending process for applications, with rates that are typically higher than federal government loans. Types of Education Loans Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans (sponsored by the federal government) and private loans. Federal student loans Most borrowers first seek federal government financing if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a Free Application for Federal Student Aid (FAFSA). Depending on the applicant's status, particularly in regard to their parental dependency, additional information may be required to complete the application. A credit check is not generally required as part of the application process. The amount of principal on the loan or loans is primarily based on the cost of attendance at the school the student is planning on attending. Once a FAFSA form is completed, the schools listed on the FAFSA application work to identify the financial aid package that the student is eligible for. Various types of federal student loans exist, including direct subsidized, direct unsubsidized, and direct consolidation loans. If offered and accepted, funds will be issued by the federal government to the specified university to cover the student's academic costs. If there are remaining funds available, they will be disbursed to the student. A student may use these funds to cover other expenses that they incur while pursuing a degree. If a student qualifies for subsidized loans, the borrower’s interest will be covered while they are in school. If a student qualifies for unsubsidized loans, the interest on their loans will be deferred as long as they are enrolled in classes and remain in good academic standing. Private student loans In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for additional funds through private lenders. Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools. These types of loans will generally follow a more standard application process (like what is typical of any private-sector loan). Applications for private student loans typically require a credit check. Borrowers can apply directly to individual private-sector lenders for funds. Similar to federal funds, the approved amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover any pending bills; the remaining amount is then sent directly to the borrower. Special Considerations Accumulated debt from college can be an overwhelming burden after graduation. If a student has taken out numerous education loans, consolidating them can be a good option for more easily managing the debt load. Multiple federal education loans can be combined into a single direct consolidation loan. Also, many private lenders now allow borrowers to combine both their federal and private loans into one loan. It's important to note that in this scenario, the new loan will be a private one because it will be issued by a private lender. Because the loan will be considered a private loan, the debt will no longer be eligible for certain federal programs for loan forgiveness and repayment. There is no option for borrowers to combine private and public loans into a new public loan. A number of employers are also beginning to integrate consolidation services and student loan payment benefits into their employee benefit programs as a way of helping to increase the support available for managing student loan debt after college. Students and their families should consider all of their options before signing up for higher education loans that could become a crushing burden in the future. Some alternatives to—or ways to reduce the size of—loans include working part-time, accepting work-study offers, attending a less expensive school, finding a job that offers tuition reimbursement as a benefit, and applying for scholarships that help to cover the cost of tuition and room and board. When the student has graduated, it also helps to search for a job that offers help with student debt as a benefit. Sometimes, you may have more funds from student loans than you need to pay for your education. Perhaps a relative gifted money to your college account, or you received a scholarship that you hadn't planned to receive. It's tempting to use excess student loan funds for, well, fun, but the ethical and financially sound approach is to apply the funds back to your debt. Also, in the case of government-subsidized loans, you could face legal action if you misuse the funds. What type of debt are student loans? Student loans are considered unsecured installment debts, meaning there isn't a physical asset tied to them, and they're paid back in a set number of installments over an agreed-upon period of time. What are the four major types of educational loans? There are four types of federal student loans available as part of the William D. Ford Federal Direct Loan Program:Direct Subsidized Loans: Loans made to eligible undergraduate students who demonstrate a clear financial need.Direct Unsubsidized Loans: Loans made to eligible undergraduate, graduate, and professional students (eligibility isn't based on financial need).Direct PLUS Loans: Loans made to graduate or professional students and parents of dependent undergraduate students to pay for education expenses not covered by other financial aid (eligibility isn't based on financial need, though a credit check is required). Borrowers with a poor credit history must meet additional requirements.Direct Consolidation Loans: Loans that allow you to combine your eligible federal student loans into a single loan with one loan servicer. What are three effective techniques for managing student loan debt? There are several ways to better manage student debt. Three particularly useful strategies include paying off loans with the highest interest rates first, paying down extra principal whenever possible, and exploring operations for debt forgiveness.	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https://www.investopedia.com/terms/l/liquiditypreference.asp	Theory of Liquidity Preference Definition: History, Example, and How It Works	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Liquidity preference theory argues that people prefer to keep assets in a liquid form, such as cash, over less liquid assets like bonds, stocks, or real estate. The upshot is that investors expect a greater premium, all else being equal, for taking on a longer-term loss of liquidity.<span class="ql-inline-citation" data-cite="8"></span> This inclination is primarily due to the uncertainty of the future.<span class="ql-inline-citation" data-cite="8"></span> By holding liquid assets, individuals, businesses, and investors can better navigate unforeseen financial and economic changes, especially during crises. </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>Liquidity preference theory describes the supply and demand for money as measured through liquidity.</li><li>John Maynard Keynes mentioned the concept in his book <em>The General Theory of Employment, Interest, and Money</em> (1936) concerning the connection between interest rates and the supply and demand for money.</li><li>In real-world terms, the more quickly an asset can be converted into currency, the more liquid it becomes.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_5-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Theory of Liquidity Preference" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/N6RuZP6mQJS15vCiRwtmMSbdtN8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/N6RuZP6mQJS15vCiRwtmMSbdtN8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg" data-srcset="https://www.investopedia.com/thmb/5qsl3VbV9WM9upDeWMi2hPDctyk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Theory of Liquidity Preference" class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/N6RuZP6mQJS15vCiRwtmMSbdtN8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg" srcset="https://www.investopedia.com/thmb/5qsl3VbV9WM9upDeWMi2hPDctyk=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jake Shi</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> However, there is a tradeoff between holding cash, which offers liquidity but no returns, versus bonds, which provide interest or returns but are less liquid. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/082113/understanding-interest-rates-nominal-real-and-effective.asp">interest rate</a> is, effectively, the reward investors demand to part with liquidity and hold less liquid assets like bonds. </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"> Liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets. The more people prefer liquidity, the higher interest rates must rise to make them willing to hold bonds. Thus, the theory views interest rates as a payment for parting with <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquidity</a>. </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-how-does-liquidity-preference-theory-work"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> How Does Liquidity Preference Theory Work? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Liquidity preference theory, developed by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/john_maynard_keynes.asp">John Maynard Keynes</a>, aims to explain how interest rates are determined.<span class="ql-inline-citation" data-cite="7"></span> The key premise is that people naturally prefer holding assets in liquid form—that is, in a manner that it can be quickly converted into cash at little cost. The most liquid asset is money. </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>Economic conditions like recessions that create uncertainty raise liquidity preference as people wish to remain more liquid. This requires higher interest rates to induce a shift to illiquid assets. The liquidity preference theory thus views interest rates as emerging from people's desire for liquidity versus illiquid, interest-earning assets. The more liquidity is preferred, the higher the rate required to overcome that preference.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> According to the theory, interest rates provide an incentive for people to overcome their liquidity preference and hold less liquid assets like bonds.<span class="ql-inline-citation" data-cite="7"></span> Bonds provide interest income but are less liquid than cash since they cannot be immediately converted to money. Thus, the more illiquid a bond, the more incentive people will need in terms of its interest rate.<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_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> For this reason, the theory holds that interest rates are determined by the supply and demand for money, which depends in part on this preference. When liquidity preference is high, people want to hold more cash, decreasing the money supply and reducing bond prices. To match this preference, interest rates have to rise as an incentive for giving up this liquidity. Conversely, a lower liquidity preference means people are willing to hold more bonds, increasing the money supply and lowering interest rates.<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_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"> Three Motives of Liquidity Preference </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Keynes argued that the desire for liquidity springs from three motives: the transactions, precautionary, and speculative motives. </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>Transactions motive</strong>: the need to hold cash for day-to-day transactions like buying goods and services. This demand for liquidity is fairly predictable and correlates with the income and expenses of individuals and firms: the demand for liquidity increases with income. The transaction motive is fundamental and exists regardless of the level of interest rates, emphasizing the essential role of money as a medium of exchange in daily economic activities.</li><li><strong>Precautionary motive</strong>: the urge to hold onto cash as a buffer against unexpected expenses or emergencies. Individuals might hold onto money or easily accessible funds to cover unexpected medical costs, car repairs, or other financial demands. Similarly, businesses may maintain a liquidity cushion to weather unexpected operational or market challenges. The precautionary motive underlines how money is a store of value that provides a sense of security in the face of uncertainty.</li><li><strong>Speculative motive</strong>: holding onto cash to take advantage of future investment opportunities not yet available. The speculative motive tends to be more pronounced among investors and financial institutions, and its intensity can vary with the expectations regarding the future trajectory of interest rates, economic growth, and market conditions. When the nominal interest rate is low, people hold onto money, even if it provides no interest income. But this changes as the interest rate ticks upward.</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-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block with-title" id="mntl-sc-block-callout-heading_3-0">Who Was John Maynard Keynes?</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>John Maynard Keynes was an influential 20th-century British economist. His groundbreaking work, “The General Theory of Employment, Interest, and Money” (1936), challenged conventional economic wisdom and laid the foundation for modern macroeconomic theory.</p> <p>His economic theories, collectively termed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/k/keynesianeconomics.asp">Keynesian economics</a>, fundamentally changed how governments and financial institutions perceive and respond to economic crises and helped shape postwar economic thinking. He championed the idea that government intervention is crucial to stabilizing economies during financial downturns. Though challenged often by neoclassical economists, monetarist theorists, and others over the years, his work became the cornerstone of modern macroeconomic theory, with liquidity preference theory being one of his notable contributions.</p></div></div></div> <span class="heading-toc" id="toc-liquidity-preference-and-the-yield-curve"></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"> Liquidity Preference and the Yield Curve </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Liquidity preference theory has important implications for the shape and movement of the yield curve. 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> plots interest rates across different maturities for bonds of the same credit quality. </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"> Normally, the yield curve slopes upward, meaning long-term interest rates are higher than short-term rates. Imagine a line graph where the vertical axis is for interest rates and the horizontal axis extends out time for the duration of investments. The yield curve indicates what interest rates you can earn for different lengths of time. Under normal circumstances, the graph slopes upward, meaning you'll see higher interest rates as you invest your money for longer periods. This upward slope reveals that people expect higher returns for locking away their money in long-term investments like bonds. </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"> This fits with what liquidity preference theory would suggest: individuals prefer liquidity, all else being equal, leading them to favor short-term securities over long-term ones. Short-term securities provide more liquidity since they mature faster, enabling reinvestment or cashing out sooner. This higher demand for short-term bonds leads to lower short-term interest rates (as bond prices are bid higher, their interest rates decline). However, to entice investors toward long-term securities, these bonds must offer higher interest rates to compensate for the decrease in liquidity. This dynamic naturally steepens the yield curve. </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"> Changes in liquidity preference can also shift the position and shape of the yield curve. If liquidity preferences rise due to uncertainty or a recession, the demand for short-term bonds will increase as investors flock to quality, liquid assets. This raises short-term rates relative to long-term rates, flattening or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp">inverting</a> the yield curve. If liquidity preferences decline during economic stability, the yield curve steepens as investors become more willing to invest in higher-yielding long-term bonds. </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_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>A steeper yield curve implies a higher liquidity premium, as investors demand more for holding long-term bonds. Conversely, a flatter or inverted yield curve could indicate lower liquidity premiums or other market dynamics at play.</p></div></div></div> <span class="heading-toc" id="toc-liquidity-preference-theory-and-investing"></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"> Liquidity Preference Theory and Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Liquidity preference theory provides a useful framework for investors to consider when making <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> and risk-management decisions. Investors can apply their understanding of liquidity preference to choose assets and strategies that align with their liquidity needs and risk tolerance. </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"> During periods of high liquidity preference, such as recessions, investors may increase allocations to safe and liquid assets like cash and short-term government bonds. Holding highly liquid assets provides protection and the flexibility to shift into other investments when the market changes. When that occurs, you may take on more risk and illiquidity through investments like stocks, real estate, or high-yield bonds. </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"> The theory also highlights the value of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/laddering.asp">laddering</a> strategies (planning investments to provide a steady cash flow) to balance liquidity. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bondladdering.asp">Bond ladders</a> with staggered maturities can provide stable cash inflows to cover liquidity needs. Cash reserve buffers also help manage liquidity risk. Investors should hold higher cash reserves when liquidity preferences rise to avoid being forced to sell illiquid assets at unfavorable prices. </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"> Overall, liquidity preference theory does not give you an ideal set of assets to buy but provides a framework for adapting to economic conditions and your liquidity needs. Investors can apply the theory to build portfolios resilient across the liquidity preference cycle, combining liquid low-risk assets with higher-return illiquid assets in appropriate proportions.<br/> </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-criticisms-of-liquidity-preference-theory"></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"> Criticisms of Liquidity Preference Theory </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> While influential, liquidity preference theory has been critiqued by some economists. One common objection is that many complex factors, not just liquidity preference, determine interest rates. The approach is also said to simplify changes in interest rates to just the demand and supply of money. However, factors like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a>, default risk, credit risk, and the range of investment opportunities, among others, also do so.<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_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The theory has also been criticized as too passive: it sees interest rates adapting to changing liquidity preferences rather than vice versa. But <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetarypolicy.asp">monetary policy</a> can actively affect interest rates, affecting investment and consumption behavior beyond just passively responding to liquidity demand.<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Further, the empirical evidence for the impact of liquidity preference on interest rates is mixed. Some economists argue other factors like inflation expectations play a bigger role in shaping rate changes.<span class="ql-inline-citation" data-cite="3"></span> Measuring liquidity preference quantitatively is also difficult. Moreover, the theory may not work well in today's globalized economy. Capital mobility allows liquidity to flow internationally to where rates are highest. So, national interest rates would reflect global liquidity preferences, not just domestic factors.<span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <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-does-liquidity-preference-theory-help-understand-financial-crises"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Liquidity Preference Theory Help Understand Financial Crises?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Liquidity preference theory can shed light on liquidity dynamics and its effect on financial stability. During financial crises, the heightened preference for liquidity can exacerbate market conditions. For instance, a sudden rush for liquidity can lead to fire sales of assets, plummeting asset prices, and a tightening of financial conditions. By understanding the principles of liquidity preference, policymakers, and financial institutions can better anticipate and mitigate the adverse effects of financial crises and devise strategies to enhance financial stability.<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-do-other-economic-theories-build-on-or-challenge-liquidity-preference-theory"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do Other Economic Theories Build on or Challenge Liquidity Preference Theory?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, several contemporary economic theories challenge or build upon liquidity preferences. For instance, rational expectations and market efficiency theories often posit that markets adjust quickly to new information, which might undercut the speculative motive for liquidity preference. In addition, developing new financial instruments and technologies that enhance liquidity and manage liquidity risk can also lead to rethinking liquidity preference. However, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/modern-monetary-theory-mmt-4588060">modern monetary theory</a> and post-Keynesian economics build upon or extend Keynesian ideas, including liquidity preference theory, to explain modern economic phenomena.</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-how-does-fiscal-policy-influence-liquidity-preferences"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Fiscal Policy Influence Liquidity Preferences?</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/f/fiscalpolicy.asp">Fiscal policy</a> uses government spending and tax policies to influence economic conditions. Expansionary fiscal policy, which increases government spending or cuts taxes, can lower liquidity preference by stimulating economic growth and confidence, leading to lower interest rates. Contractionary fiscal policies often raise liquidity preference because of heightened uncertainty, putting upward pressure on rates.</p></div> </div> <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"> The Bottom Line </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> Liquidity preference theory attempts to explain the relationship between liquidity, interest rates, and economic stability, highlighting how individual and institutional behaviors around liquidity occur within financial markets. Originating in the work of Keynes, liquidity preference theory continues to serve as a pivotal lens through which to consider monetary economics phenomena. For investors, a grasp of liquidity preference is productive in making better asset allocation and risk-management decisions. At the same time, for policymakers, it sheds light on how monetary policies might sway interest rates and market stability. </p></div>	Liquidity preference theory argues that people prefer to keep assets in a liquid form, such as cash, over less liquid assets like bonds, stocks, or real estate. The upshot is that investors expect a greater premium, all else being equal, for taking on a longer-term loss of liquidity. This inclination is primarily due to the uncertainty of the future. By holding liquid assets, individuals, businesses, and investors can better navigate unforeseen financial and economic changes, especially during crises. ### Key Takeaways * Liquidity preference theory describes the supply and demand for money as measured through liquidity. * John Maynard Keynes mentioned the concept in his book The General Theory of Employment, Interest, and Money (1936) concerning the connection between interest rates and the supply and demand for money. * In real-world terms, the more quickly an asset can be converted into currency, the more liquid it becomes. ![Theory of Liquidity Preference]() ![Theory of Liquidity Preference](https://www.investopedia.com/thmb/N6RuZP6mQJS15vCiRwtmMSbdtN8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/liquiditypreference.asp-final-61b55e392c86409fb0b4cf0e2315bd40.jpg) Investopedia / Jake Shi However, there is a tradeoff between holding cash, which offers liquidity but no returns, versus bonds, which provide interest or returns but are less liquid. The [interest rate](https://www.investopedia.com/articles/investing/082113/understanding-interest-rates-nominal-real-and-effective.asp) is, effectively, the reward investors demand to part with liquidity and hold less liquid assets like bonds. Liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets. The more people prefer liquidity, the higher interest rates must rise to make them willing to hold bonds. Thus, the theory views interest rates as a payment for parting with [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). ## How Does Liquidity Preference Theory Work? Liquidity preference theory, developed by [John Maynard Keynes](https://www.investopedia.com/terms/j/john_maynard_keynes.asp), aims to explain how interest rates are determined. The key premise is that people naturally prefer holding assets in liquid form—that is, in a manner that it can be quickly converted into cash at little cost. The most liquid asset is money. ### Economic conditions like recessions that create uncertainty raise liquidity preference as people wish to remain more liquid. This requires higher interest rates to induce a shift to illiquid assets. The liquidity preference theory thus views interest rates as emerging from people's desire for liquidity versus illiquid, interest-earning assets. The more liquidity is preferred, the higher the rate required to overcome that preference. According to the theory, interest rates provide an incentive for people to overcome their liquidity preference and hold less liquid assets like bonds. Bonds provide interest income but are less liquid than cash since they cannot be immediately converted to money. Thus, the more illiquid a bond, the more incentive people will need in terms of its interest rate. For this reason, the theory holds that interest rates are determined by the supply and demand for money, which depends in part on this preference. When liquidity preference is high, people want to hold more cash, decreasing the money supply and reducing bond prices. To match this preference, interest rates have to rise as an incentive for giving up this liquidity. Conversely, a lower liquidity preference means people are willing to hold more bonds, increasing the money supply and lowering interest rates. ### Three Motives of Liquidity Preference Keynes argued that the desire for liquidity springs from three motives: the transactions, precautionary, and speculative motives. * Transactions motive: the need to hold cash for day-to-day transactions like buying goods and services. This demand for liquidity is fairly predictable and correlates with the income and expenses of individuals and firms: the demand for liquidity increases with income. The transaction motive is fundamental and exists regardless of the level of interest rates, emphasizing the essential role of money as a medium of exchange in daily economic activities. * Precautionary motive: the urge to hold onto cash as a buffer against unexpected expenses or emergencies. Individuals might hold onto money or easily accessible funds to cover unexpected medical costs, car repairs, or other financial demands. Similarly, businesses may maintain a liquidity cushion to weather unexpected operational or market challenges. The precautionary motive underlines how money is a store of value that provides a sense of security in the face of uncertainty. * Speculative motive: holding onto cash to take advantage of future investment opportunities not yet available. The speculative motive tends to be more pronounced among investors and financial institutions, and its intensity can vary with the expectations regarding the future trajectory of interest rates, economic growth, and market conditions. When the nominal interest rate is low, people hold onto money, even if it provides no interest income. But this changes as the interest rate ticks upward. ### Who Was John Maynard Keynes? John Maynard Keynes was an influential 20th-century British economist. His groundbreaking work, “The General Theory of Employment, Interest, and Money” (1936), challenged conventional economic wisdom and laid the foundation for modern macroeconomic theory. His economic theories, collectively termed [Keynesian economics](https://www.investopedia.com/terms/k/keynesianeconomics.asp), fundamentally changed how governments and financial institutions perceive and respond to economic crises and helped shape postwar economic thinking. He championed the idea that government intervention is crucial to stabilizing economies during financial downturns. Though challenged often by neoclassical economists, monetarist theorists, and others over the years, his work became the cornerstone of modern macroeconomic theory, with liquidity preference theory being one of his notable contributions. ## Liquidity Preference and the Yield Curve Liquidity preference theory has important implications for the shape and movement of the yield curve. The [yield curve](https://www.investopedia.com/terms/y/yieldcurve.asp) plots interest rates across different maturities for bonds of the same credit quality. Normally, the yield curve slopes upward, meaning long-term interest rates are higher than short-term rates. Imagine a line graph where the vertical axis is for interest rates and the horizontal axis extends out time for the duration of investments. The yield curve indicates what interest rates you can earn for different lengths of time. Under normal circumstances, the graph slopes upward, meaning you'll see higher interest rates as you invest your money for longer periods. This upward slope reveals that people expect higher returns for locking away their money in long-term investments like bonds. This fits with what liquidity preference theory would suggest: individuals prefer liquidity, all else being equal, leading them to favor short-term securities over long-term ones. Short-term securities provide more liquidity since they mature faster, enabling reinvestment or cashing out sooner. This higher demand for short-term bonds leads to lower short-term interest rates (as bond prices are bid higher, their interest rates decline). However, to entice investors toward long-term securities, these bonds must offer higher interest rates to compensate for the decrease in liquidity. This dynamic naturally steepens the yield curve. Changes in liquidity preference can also shift the position and shape of the yield curve. If liquidity preferences rise due to uncertainty or a recession, the demand for short-term bonds will increase as investors flock to quality, liquid assets. This raises short-term rates relative to long-term rates, flattening or [inverting](https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp) the yield curve. If liquidity preferences decline during economic stability, the yield curve steepens as investors become more willing to invest in higher-yielding long-term bonds. ### A steeper yield curve implies a higher liquidity premium, as investors demand more for holding long-term bonds. Conversely, a flatter or inverted yield curve could indicate lower liquidity premiums or other market dynamics at play. ## Liquidity Preference Theory and Investing Liquidity preference theory provides a useful framework for investors to consider when making [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp) and risk-management decisions. Investors can apply their understanding of liquidity preference to choose assets and strategies that align with their liquidity needs and risk tolerance. During periods of high liquidity preference, such as recessions, investors may increase allocations to safe and liquid assets like cash and short-term government bonds. Holding highly liquid assets provides protection and the flexibility to shift into other investments when the market changes. When that occurs, you may take on more risk and illiquidity through investments like stocks, real estate, or high-yield bonds. The theory also highlights the value of [laddering](https://www.investopedia.com/terms/l/laddering.asp) strategies (planning investments to provide a steady cash flow) to balance liquidity. [Bond ladders](https://www.investopedia.com/terms/b/bondladdering.asp) with staggered maturities can provide stable cash inflows to cover liquidity needs. Cash reserve buffers also help manage liquidity risk. Investors should hold higher cash reserves when liquidity preferences rise to avoid being forced to sell illiquid assets at unfavorable prices. Overall, liquidity preference theory does not give you an ideal set of assets to buy but provides a framework for adapting to economic conditions and your liquidity needs. Investors can apply the theory to build portfolios resilient across the liquidity preference cycle, combining liquid low-risk assets with higher-return illiquid assets in appropriate proportions. ## Criticisms of Liquidity Preference Theory While influential, liquidity preference theory has been critiqued by some economists. One common objection is that many complex factors, not just liquidity preference, determine interest rates. The approach is also said to simplify changes in interest rates to just the demand and supply of money. However, factors like [inflation](https://www.investopedia.com/terms/i/inflation.asp), default risk, credit risk, and the range of investment opportunities, among others, also do so. The theory has also been criticized as too passive: it sees interest rates adapting to changing liquidity preferences rather than vice versa. But [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp) can actively affect interest rates, affecting investment and consumption behavior beyond just passively responding to liquidity demand. Further, the empirical evidence for the impact of liquidity preference on interest rates is mixed. Some economists argue other factors like inflation expectations play a bigger role in shaping rate changes. Measuring liquidity preference quantitatively is also difficult. Moreover, the theory may not work well in today's globalized economy. Capital mobility allows liquidity to flow internationally to where rates are highest. So, national interest rates would reflect global liquidity preferences, not just domestic factors. ## How Does Liquidity Preference Theory Help Understand Financial Crises? Liquidity preference theory can shed light on liquidity dynamics and its effect on financial stability. During financial crises, the heightened preference for liquidity can exacerbate market conditions. For instance, a sudden rush for liquidity can lead to fire sales of assets, plummeting asset prices, and a tightening of financial conditions. By understanding the principles of liquidity preference, policymakers, and financial institutions can better anticipate and mitigate the adverse effects of financial crises and devise strategies to enhance financial stability. ## Do Other Economic Theories Build on or Challenge Liquidity Preference Theory? Yes, several contemporary economic theories challenge or build upon liquidity preferences. For instance, rational expectations and market efficiency theories often posit that markets adjust quickly to new information, which might undercut the speculative motive for liquidity preference. In addition, developing new financial instruments and technologies that enhance liquidity and manage liquidity risk can also lead to rethinking liquidity preference. However, [modern monetary theory](https://www.investopedia.com/modern-monetary-theory-mmt-4588060) and post-Keynesian economics build upon or extend Keynesian ideas, including liquidity preference theory, to explain modern economic phenomena. ## How Does Fiscal Policy Influence Liquidity Preferences? [Fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp) uses government spending and tax policies to influence economic conditions. Expansionary fiscal policy, which increases government spending or cuts taxes, can lower liquidity preference by stimulating economic growth and confidence, leading to lower interest rates. Contractionary fiscal policies often raise liquidity preference because of heightened uncertainty, putting upward pressure on rates. ### The Bottom Line Liquidity preference theory attempts to explain the relationship between liquidity, interest rates, and economic stability, highlighting how individual and institutional behaviors around liquidity occur within financial markets. Originating in the work of Keynes, liquidity preference theory continues to serve as a pivotal lens through which to consider monetary economics phenomena. For investors, a grasp of liquidity preference is productive in making better asset allocation and risk-management decisions. At the same time, for policymakers, it sheds light on how monetary policies might sway interest rates and market stability.	Liquidity preference theory argues that people prefer to keep assets in a liquid form, such as cash, over less liquid assets like bonds, stocks, or real estate. The upshot is that investors expect a greater premium, all else being equal, for taking on a longer-term loss of liquidity. This inclination is primarily due to the uncertainty of the future. By holding liquid assets, individuals, businesses, and investors can better navigate unforeseen financial and economic changes, especially during crises. Key Takeaways Liquidity preference theory describes the supply and demand for money as measured through liquidity.John Maynard Keynes mentioned the concept in his book The General Theory of Employment, Interest, and Money (1936) concerning the connection between interest rates and the supply and demand for money.In real-world terms, the more quickly an asset can be converted into currency, the more liquid it becomes. Investopedia / Jake Shi However, there is a tradeoff between holding cash, which offers liquidity but no returns, versus bonds, which provide interest or returns but are less liquid. The interest rate is, effectively, the reward investors demand to part with liquidity and hold less liquid assets like bonds. Liquidity preference theory says that interest rates adjust to balance the desire to hold cash against less liquid assets. The more people prefer liquidity, the higher interest rates must rise to make them willing to hold bonds. Thus, the theory views interest rates as a payment for parting with liquidity. How Does Liquidity Preference Theory Work? Liquidity preference theory, developed by John Maynard Keynes, aims to explain how interest rates are determined. The key premise is that people naturally prefer holding assets in liquid form—that is, in a manner that it can be quickly converted into cash at little cost. The most liquid asset is money. Economic conditions like recessions that create uncertainty raise liquidity preference as people wish to remain more liquid. This requires higher interest rates to induce a shift to illiquid assets. The liquidity preference theory thus views interest rates as emerging from people's desire for liquidity versus illiquid, interest-earning assets. The more liquidity is preferred, the higher the rate required to overcome that preference. According to the theory, interest rates provide an incentive for people to overcome their liquidity preference and hold less liquid assets like bonds. Bonds provide interest income but are less liquid than cash since they cannot be immediately converted to money. Thus, the more illiquid a bond, the more incentive people will need in terms of its interest rate. For this reason, the theory holds that interest rates are determined by the supply and demand for money, which depends in part on this preference. When liquidity preference is high, people want to hold more cash, decreasing the money supply and reducing bond prices. To match this preference, interest rates have to rise as an incentive for giving up this liquidity. Conversely, a lower liquidity preference means people are willing to hold more bonds, increasing the money supply and lowering interest rates. Three Motives of Liquidity Preference Keynes argued that the desire for liquidity springs from three motives: the transactions, precautionary, and speculative motives. Transactions motive: the need to hold cash for day-to-day transactions like buying goods and services. This demand for liquidity is fairly predictable and correlates with the income and expenses of individuals and firms: the demand for liquidity increases with income. The transaction motive is fundamental and exists regardless of the level of interest rates, emphasizing the essential role of money as a medium of exchange in daily economic activities.Precautionary motive: the urge to hold onto cash as a buffer against unexpected expenses or emergencies. Individuals might hold onto money or easily accessible funds to cover unexpected medical costs, car repairs, or other financial demands. Similarly, businesses may maintain a liquidity cushion to weather unexpected operational or market challenges. The precautionary motive underlines how money is a store of value that provides a sense of security in the face of uncertainty.Speculative motive: holding onto cash to take advantage of future investment opportunities not yet available. The speculative motive tends to be more pronounced among investors and financial institutions, and its intensity can vary with the expectations regarding the future trajectory of interest rates, economic growth, and market conditions. When the nominal interest rate is low, people hold onto money, even if it provides no interest income. But this changes as the interest rate ticks upward. Who Was John Maynard Keynes? John Maynard Keynes was an influential 20th-century British economist. His groundbreaking work, “The General Theory of Employment, Interest, and Money” (1936), challenged conventional economic wisdom and laid the foundation for modern macroeconomic theory. His economic theories, collectively termed Keynesian economics, fundamentally changed how governments and financial institutions perceive and respond to economic crises and helped shape postwar economic thinking. He championed the idea that government intervention is crucial to stabilizing economies during financial downturns. Though challenged often by neoclassical economists, monetarist theorists, and others over the years, his work became the cornerstone of modern macroeconomic theory, with liquidity preference theory being one of his notable contributions. Liquidity Preference and the Yield Curve Liquidity preference theory has important implications for the shape and movement of the yield curve. The yield curve plots interest rates across different maturities for bonds of the same credit quality. Normally, the yield curve slopes upward, meaning long-term interest rates are higher than short-term rates. Imagine a line graph where the vertical axis is for interest rates and the horizontal axis extends out time for the duration of investments. The yield curve indicates what interest rates you can earn for different lengths of time. Under normal circumstances, the graph slopes upward, meaning you'll see higher interest rates as you invest your money for longer periods. This upward slope reveals that people expect higher returns for locking away their money in long-term investments like bonds. This fits with what liquidity preference theory would suggest: individuals prefer liquidity, all else being equal, leading them to favor short-term securities over long-term ones. Short-term securities provide more liquidity since they mature faster, enabling reinvestment or cashing out sooner. This higher demand for short-term bonds leads to lower short-term interest rates (as bond prices are bid higher, their interest rates decline). However, to entice investors toward long-term securities, these bonds must offer higher interest rates to compensate for the decrease in liquidity. This dynamic naturally steepens the yield curve. Changes in liquidity preference can also shift the position and shape of the yield curve. If liquidity preferences rise due to uncertainty or a recession, the demand for short-term bonds will increase as investors flock to quality, liquid assets. This raises short-term rates relative to long-term rates, flattening or inverting the yield curve. If liquidity preferences decline during economic stability, the yield curve steepens as investors become more willing to invest in higher-yielding long-term bonds. A steeper yield curve implies a higher liquidity premium, as investors demand more for holding long-term bonds. Conversely, a flatter or inverted yield curve could indicate lower liquidity premiums or other market dynamics at play. Liquidity Preference Theory and Investing Liquidity preference theory provides a useful framework for investors to consider when making asset allocation and risk-management decisions. Investors can apply their understanding of liquidity preference to choose assets and strategies that align with their liquidity needs and risk tolerance. During periods of high liquidity preference, such as recessions, investors may increase allocations to safe and liquid assets like cash and short-term government bonds. Holding highly liquid assets provides protection and the flexibility to shift into other investments when the market changes. When that occurs, you may take on more risk and illiquidity through investments like stocks, real estate, or high-yield bonds. The theory also highlights the value of laddering strategies (planning investments to provide a steady cash flow) to balance liquidity. Bond ladders with staggered maturities can provide stable cash inflows to cover liquidity needs. Cash reserve buffers also help manage liquidity risk. Investors should hold higher cash reserves when liquidity preferences rise to avoid being forced to sell illiquid assets at unfavorable prices. Overall, liquidity preference theory does not give you an ideal set of assets to buy but provides a framework for adapting to economic conditions and your liquidity needs. Investors can apply the theory to build portfolios resilient across the liquidity preference cycle, combining liquid low-risk assets with higher-return illiquid assets in appropriate proportions. Criticisms of Liquidity Preference Theory While influential, liquidity preference theory has been critiqued by some economists. One common objection is that many complex factors, not just liquidity preference, determine interest rates. The approach is also said to simplify changes in interest rates to just the demand and supply of money. However, factors like inflation, default risk, credit risk, and the range of investment opportunities, among others, also do so. The theory has also been criticized as too passive: it sees interest rates adapting to changing liquidity preferences rather than vice versa. But monetary policy can actively affect interest rates, affecting investment and consumption behavior beyond just passively responding to liquidity demand. Further, the empirical evidence for the impact of liquidity preference on interest rates is mixed. Some economists argue other factors like inflation expectations play a bigger role in shaping rate changes. Measuring liquidity preference quantitatively is also difficult. Moreover, the theory may not work well in today's globalized economy. Capital mobility allows liquidity to flow internationally to where rates are highest. So, national interest rates would reflect global liquidity preferences, not just domestic factors. How Does Liquidity Preference Theory Help Understand Financial Crises? Liquidity preference theory can shed light on liquidity dynamics and its effect on financial stability. During financial crises, the heightened preference for liquidity can exacerbate market conditions. For instance, a sudden rush for liquidity can lead to fire sales of assets, plummeting asset prices, and a tightening of financial conditions. By understanding the principles of liquidity preference, policymakers, and financial institutions can better anticipate and mitigate the adverse effects of financial crises and devise strategies to enhance financial stability. Do Other Economic Theories Build on or Challenge Liquidity Preference Theory? Yes, several contemporary economic theories challenge or build upon liquidity preferences. For instance, rational expectations and market efficiency theories often posit that markets adjust quickly to new information, which might undercut the speculative motive for liquidity preference. In addition, developing new financial instruments and technologies that enhance liquidity and manage liquidity risk can also lead to rethinking liquidity preference. However, modern monetary theory and post-Keynesian economics build upon or extend Keynesian ideas, including liquidity preference theory, to explain modern economic phenomena. How Does Fiscal Policy Influence Liquidity Preferences? Fiscal policy uses government spending and tax policies to influence economic conditions. Expansionary fiscal policy, which increases government spending or cuts taxes, can lower liquidity preference by stimulating economic growth and confidence, leading to lower interest rates. Contractionary fiscal policies often raise liquidity preference because of heightened uncertainty, putting upward pressure on rates. The Bottom Line Liquidity preference theory attempts to explain the relationship between liquidity, interest rates, and economic stability, highlighting how individual and institutional behaviors around liquidity occur within financial markets. Originating in the work of Keynes, liquidity preference theory continues to serve as a pivotal lens through which to consider monetary economics phenomena. For investors, a grasp of liquidity preference is productive in making better asset allocation and risk-management decisions. At the same time, for policymakers, it sheds light on how monetary policies might sway interest rates and market stability.	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https://www.investopedia.com/best-roth-ira-real-estate-investments-5223342	Best Roth IRA Real Estate Investments	<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"> Having a <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> with balanced <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetclasses.asp">asset classes</a> in your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRA</a> can be simple if your idea of diversity only includes equities and bonds. Historically, diversifying into real estate within your Roth IRA was reserved for the ultra-savvy and ultra wealthy. With <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts (REITs)</a> gaining popularity, new <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790">crowdfunding platforms</a>, and information widely available on opening a <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/self-directed-ira.asp">self-directed IRA (SDIRA)</a>, investing in real estate with your Roth IRA has never been easier. </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>Investing in real estate in a Roth IRA is easiest through a REIT. </li><li>You can invest in individual real estate by opening a self-directed Roth IRA, but there are fees, rules, and more risks. </li><li>Investing in real estate through a self-directed Roth IRA by using a crowdfunding platform can mitigate risks and complies with regulations more easily but includes even more fees.</li></ul></div></div></div> <span class="heading-toc" id="toc-using-a-reit-in-your-roth-ira"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> Using a REIT in Your Roth IRA </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> If you’re looking to invest in real estate using your Roth IRA, the simplest, easiest way possible is to use a real estate investment trust (REIT). A REIT is a pooled investment resource that buys, manages, and finances income-producing properties. There are REITs that specialize in residential, industrial, commercial, and agricultural real estate of varying densities. A REIT allows investors to diversify into real estate without taking on the individual risks and tasks associated with buying and managing property as a landlord. </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"> REITs primarily pay through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> and generally don’t appreciate in value significantly. Because of their high dividend yield, holding a REIT in your Roth IRA or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp">health savings account</a> is generally the most tax-efficient strategy. </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">90%</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>REITs are required to pay out 90% of their income to investors in the form of dividends yearly.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> The best REIT for your Roth IRA will depend on what type of real estate you want to invest in and what is available through your brokerage. Investopedia keeps a rolling list of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-reits-june-2023-7510762">top performing REITs for each month</a>. Large brokerages like Vanguard, Fidelity, and Schwab have their own proprietary REITs in addition to allowing investors to buy into others that are publicly traded.<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> </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-opening-a-self-directed-roth-ira-for-real-estate-investing"></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"> Opening a Self-Directed Roth IRA for Real Estate Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/self-directed-ira.asp">self-directed IRA (SDIRA)</a> can be opened as a Roth IRA or a traditional IRA.<span class="ql-inline-citation" data-cite="7"></span> Both options require you to open the account through a custodian, which limits you to where you can open your account. If you’re opening a self-directed IRA specifically to<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/real-estate-investing-vs-roth-ira-5224015"> invest in real estate</a> make sure that the custodian you use allows investing in real estate. SDIRAs usually have higher management fees, so keep those in mind. </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-individual-real-estate-investing-in-a-sdira"></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"> Individual Real Estate Investing in a SDIRA </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The Internal Revenue Service has very specific rules on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/111615/using-your-ira-buy-investment-property.asp">investing in individual real estate in an IRA</a>. Namely that the property must be purely used as an investment and not used by you or someone close to you.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> In addition to IRS rules and regulations, investing in individual real estate within your Roth IRA can be difficult. Acquiring the necessary capital to purchase real estate can take years, and individual real estate investing carries significant risks. Individual properties can become undesirable as a result of natural disasters, businesses closing down, school districts underperforming, and a number of other factors outside of your individual control. </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"> Your property may need repairs you can’t cover, you may have long periods of vacancy, or you may have tenants who don’t pay. During the coronavirus pandemic there were <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/centers-for-disease-control-stops-evictions-until-dec-31-2020-5076595">eviction bans</a> that, while saving thousands from becoming homeless, did leave some property owners without income for over a year in some cases. </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"> If you will need steady reliable income in old age, individual real estate investing in a SDIRA may carry more risk than you’re comfortable with.<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-crowdfunded-real-estate-investing-in-a-sdira"></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"> Crowdfunded Real Estate Investing in a SDIRA </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790">Crowdfunded real estate investing platforms</a> allow individual investors to pool their money into real estate investments. By pooling assets, the barrier to entry for investing in real estate is much lower. Some platforms have a minimum investment buy-in as low as $10. </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"> Investing in real estate this way in your Roth IRA also takes out a lot of the individual hassle of real estate investing: finding deals, negotiating them, and managing the properties. Crowdfunding can also mitigate individual risks by allowing you to buy a fractional share of multiple properties instead of a large share of one on your own. This option for real estate investing will have the highest fees as you will be paying fees to the custodian of your self-directed IRA in addition to fees to the crowd-funding platform. </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-should-you-hold-real-estate-investments-in-your-roth-ira"></span> <h2 class="mntl-sc-block-questionandanswer__question">Should You Hold Real Estate Investments in Your Roth IRA?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Deciding whether or not to hold a real estate investment depends on your own personal <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 desire to invest in real estate. If you hold REITs in your portfolio, keeping them in your Roth IRA is a better place to keep them for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp">tax optimization</a>. In general, REITs tend to pay out high <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividend.asp">dividends</a> which are taxed heavily, so keeping them in the account you’ll never have to pay taxes on is smart.<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_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-how-do-i-pick-a-reit"></span> <h2 class="mntl-sc-block-questionandanswer__question">How do I Pick a REIT?</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/03/013103.asp">Picking a REIT</a> is similar to picking a stock. You research historical returns, read up on the management team, and read the prospectus. One nice thing about REITs is they are very liquid. Unlike a rental home, you can sell and buy another REIT on the same day if you decide you don’t like the one you picked.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-is-real-estate-a-safer-investment-than-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Real Estate a Safer Investment Than Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The common phrase when comparing real estate to stocks is: the value of a house can’t go to zero, but a stock can. Real estate usually retains at least some value, even when the real estate market has had a significant downturn. Keep in mind, though, that a stock can’t be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosed</a> on because you failed to pay property taxes. Owning a stock won’t get you sued by a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hoa.asp">homeowner association</a> because your tenant parked an RV at your property for a month. While investing in a REIT does take away some of these risks associated with individual real estate investing, all investments do carry risk. Consider your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risktolerance.asp">risk tolerance</a> before investing in real estate, just as you would before investing in anything else.</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"> Investing in real estate is an excellent way to diversify your portfolio. REITs are a great asset class to hold if you want the stability of real estate without the work and risks involved in buying and managing it yourself. If you’re going to have REITs in your portfolio, having them in a tax advantaged account like a Roth IRA is best. If you want a more hands-on option you can opt for a self-directed IRA. If you’re comfortable with risks, restrictions, and extra work you can invest in individual real estate in your self-directed Roth IRA. If you prefer a more hands-off approach but want more individual control than you can get with a REIT, investing in a crowdfunded real estate investing platform through your self-directed Roth IRA is the choice for you. </p></div>	Having a [diversified portfolio](https://www.investopedia.com/terms/d/diversification.asp) with balanced [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp) in your [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) can be simple if your idea of diversity only includes equities and bonds. Historically, diversifying into real estate within your Roth IRA was reserved for the ultra-savvy and ultra wealthy. With [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp) gaining popularity, new [crowdfunding platforms](https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790), and information widely available on opening a [self-directed IRA (SDIRA)](https://www.investopedia.com/terms/s/self-directed-ira.asp), investing in real estate with your Roth IRA has never been easier. ### Key Takeaways * Investing in real estate in a Roth IRA is easiest through a REIT. * You can invest in individual real estate by opening a self-directed Roth IRA, but there are fees, rules, and more risks. * Investing in real estate through a self-directed Roth IRA by using a crowdfunding platform can mitigate risks and complies with regulations more easily but includes even more fees. ## Using a REIT in Your Roth IRA If you’re looking to invest in real estate using your Roth IRA, the simplest, easiest way possible is to use a real estate investment trust (REIT). A REIT is a pooled investment resource that buys, manages, and finances income-producing properties. There are REITs that specialize in residential, industrial, commercial, and agricultural real estate of varying densities. A REIT allows investors to diversify into real estate without taking on the individual risks and tasks associated with buying and managing property as a landlord. REITs primarily pay through [dividends](https://www.investopedia.com/terms/d/dividend.asp) and generally don’t appreciate in value significantly. Because of their high dividend yield, holding a REIT in your Roth IRA or [health savings account](https://www.investopedia.com/terms/h/hsa.asp) is generally the most tax-efficient strategy. ### 90% REITs are required to pay out 90% of their income to investors in the form of dividends yearly. The best REIT for your Roth IRA will depend on what type of real estate you want to invest in and what is available through your brokerage. Investopedia keeps a rolling list of the [top performing REITs for each month](https://www.investopedia.com/top-reits-june-2023-7510762). Large brokerages like Vanguard, Fidelity, and Schwab have their own proprietary REITs in addition to allowing investors to buy into others that are publicly traded. ## Opening a Self-Directed Roth IRA for Real Estate Investing A [self-directed IRA (SDIRA)](https://www.investopedia.com/terms/s/self-directed-ira.asp) can be opened as a Roth IRA or a traditional IRA. Both options require you to open the account through a custodian, which limits you to where you can open your account. If you’re opening a self-directed IRA specifically to [invest in real estate](https://www.investopedia.com/real-estate-investing-vs-roth-ira-5224015) make sure that the custodian you use allows investing in real estate. SDIRAs usually have higher management fees, so keep those in mind. ## Individual Real Estate Investing in a SDIRA The Internal Revenue Service has very specific rules on [investing in individual real estate in an IRA](https://www.investopedia.com/articles/personal-finance/111615/using-your-ira-buy-investment-property.asp). Namely that the property must be purely used as an investment and not used by you or someone close to you. In addition to IRS rules and regulations, investing in individual real estate within your Roth IRA can be difficult. Acquiring the necessary capital to purchase real estate can take years, and individual real estate investing carries significant risks. Individual properties can become undesirable as a result of natural disasters, businesses closing down, school districts underperforming, and a number of other factors outside of your individual control. Your property may need repairs you can’t cover, you may have long periods of vacancy, or you may have tenants who don’t pay. During the coronavirus pandemic there were [eviction bans](https://www.investopedia.com/centers-for-disease-control-stops-evictions-until-dec-31-2020-5076595) that, while saving thousands from becoming homeless, did leave some property owners without income for over a year in some cases. If you will need steady reliable income in old age, individual real estate investing in a SDIRA may carry more risk than you’re comfortable with. ## Crowdfunded Real Estate Investing in a SDIRA [Crowdfunded real estate investing platforms](https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790) allow individual investors to pool their money into real estate investments. By pooling assets, the barrier to entry for investing in real estate is much lower. Some platforms have a minimum investment buy-in as low as $10. Investing in real estate this way in your Roth IRA also takes out a lot of the individual hassle of real estate investing: finding deals, negotiating them, and managing the properties. Crowdfunding can also mitigate individual risks by allowing you to buy a fractional share of multiple properties instead of a large share of one on your own. This option for real estate investing will have the highest fees as you will be paying fees to the custodian of your self-directed IRA in addition to fees to the crowd-funding platform. ## Should You Hold Real Estate Investments in Your Roth IRA? Deciding whether or not to hold a real estate investment depends on your own personal [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) and desire to invest in real estate. If you hold REITs in your portfolio, keeping them in your Roth IRA is a better place to keep them for [tax optimization](https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp). In general, REITs tend to pay out high [dividends](https://www.investopedia.com/terms/d/dividend.asp) which are taxed heavily, so keeping them in the account you’ll never have to pay taxes on is smart. ## How do I Pick a REIT? [Picking a REIT](https://www.investopedia.com/articles/03/013103.asp) is similar to picking a stock. You research historical returns, read up on the management team, and read the prospectus. One nice thing about REITs is they are very liquid. Unlike a rental home, you can sell and buy another REIT on the same day if you decide you don’t like the one you picked. ## Is Real Estate a Safer Investment Than Stocks? The common phrase when comparing real estate to stocks is: the value of a house can’t go to zero, but a stock can. Real estate usually retains at least some value, even when the real estate market has had a significant downturn. Keep in mind, though, that a stock can’t be [foreclosed](https://www.investopedia.com/terms/f/foreclosure.asp) on because you failed to pay property taxes. Owning a stock won’t get you sued by a [homeowner association](https://www.investopedia.com/terms/h/hoa.asp) because your tenant parked an RV at your property for a month. While investing in a REIT does take away some of these risks associated with individual real estate investing, all investments do carry risk. Consider your [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) before investing in real estate, just as you would before investing in anything else. ## The Bottom Line Investing in real estate is an excellent way to diversify your portfolio. REITs are a great asset class to hold if you want the stability of real estate without the work and risks involved in buying and managing it yourself. If you’re going to have REITs in your portfolio, having them in a tax advantaged account like a Roth IRA is best. If you want a more hands-on option you can opt for a self-directed IRA. If you’re comfortable with risks, restrictions, and extra work you can invest in individual real estate in your self-directed Roth IRA. If you prefer a more hands-off approach but want more individual control than you can get with a REIT, investing in a crowdfunded real estate investing platform through your self-directed Roth IRA is the choice for you.	Having a diversified portfolio with balanced asset classes in your Roth IRA can be simple if your idea of diversity only includes equities and bonds. Historically, diversifying into real estate within your Roth IRA was reserved for the ultra-savvy and ultra wealthy. With real estate investment trusts (REITs) gaining popularity, new crowdfunding platforms, and information widely available on opening a self-directed IRA (SDIRA), investing in real estate with your Roth IRA has never been easier. Key Takeaways Investing in real estate in a Roth IRA is easiest through a REIT. You can invest in individual real estate by opening a self-directed Roth IRA, but there are fees, rules, and more risks. Investing in real estate through a self-directed Roth IRA by using a crowdfunding platform can mitigate risks and complies with regulations more easily but includes even more fees. Using a REIT in Your Roth IRA If you’re looking to invest in real estate using your Roth IRA, the simplest, easiest way possible is to use a real estate investment trust (REIT). A REIT is a pooled investment resource that buys, manages, and finances income-producing properties. There are REITs that specialize in residential, industrial, commercial, and agricultural real estate of varying densities. A REIT allows investors to diversify into real estate without taking on the individual risks and tasks associated with buying and managing property as a landlord. REITs primarily pay through dividends and generally don’t appreciate in value significantly. Because of their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy. 90% REITs are required to pay out 90% of their income to investors in the form of dividends yearly. The best REIT for your Roth IRA will depend on what type of real estate you want to invest in and what is available through your brokerage. Investopedia keeps a rolling list of the top performing REITs for each month. Large brokerages like Vanguard, Fidelity, and Schwab have their own proprietary REITs in addition to allowing investors to buy into others that are publicly traded. Opening a Self-Directed Roth IRA for Real Estate Investing A self-directed IRA (SDIRA) can be opened as a Roth IRA or a traditional IRA. Both options require you to open the account through a custodian, which limits you to where you can open your account. If you’re opening a self-directed IRA specifically to invest in real estate make sure that the custodian you use allows investing in real estate. SDIRAs usually have higher management fees, so keep those in mind. Individual Real Estate Investing in a SDIRA The Internal Revenue Service has very specific rules on investing in individual real estate in an IRA. Namely that the property must be purely used as an investment and not used by you or someone close to you. In addition to IRS rules and regulations, investing in individual real estate within your Roth IRA can be difficult. Acquiring the necessary capital to purchase real estate can take years, and individual real estate investing carries significant risks. Individual properties can become undesirable as a result of natural disasters, businesses closing down, school districts underperforming, and a number of other factors outside of your individual control. Your property may need repairs you can’t cover, you may have long periods of vacancy, or you may have tenants who don’t pay. During the coronavirus pandemic there were eviction bans that, while saving thousands from becoming homeless, did leave some property owners without income for over a year in some cases. If you will need steady reliable income in old age, individual real estate investing in a SDIRA may carry more risk than you’re comfortable with. Crowdfunded Real Estate Investing in a SDIRA Crowdfunded real estate investing platforms allow individual investors to pool their money into real estate investments. By pooling assets, the barrier to entry for investing in real estate is much lower. Some platforms have a minimum investment buy-in as low as $10. Investing in real estate this way in your Roth IRA also takes out a lot of the individual hassle of real estate investing: finding deals, negotiating them, and managing the properties. Crowdfunding can also mitigate individual risks by allowing you to buy a fractional share of multiple properties instead of a large share of one on your own. This option for real estate investing will have the highest fees as you will be paying fees to the custodian of your self-directed IRA in addition to fees to the crowd-funding platform. Should You Hold Real Estate Investments in Your Roth IRA? Deciding whether or not to hold a real estate investment depends on your own personal risk tolerance and desire to invest in real estate. If you hold REITs in your portfolio, keeping them in your Roth IRA is a better place to keep them for tax optimization. In general, REITs tend to pay out high dividends which are taxed heavily, so keeping them in the account you’ll never have to pay taxes on is smart. How do I Pick a REIT? Picking a REIT is similar to picking a stock. You research historical returns, read up on the management team, and read the prospectus. One nice thing about REITs is they are very liquid. Unlike a rental home, you can sell and buy another REIT on the same day if you decide you don’t like the one you picked. Is Real Estate a Safer Investment Than Stocks? The common phrase when comparing real estate to stocks is: the value of a house can’t go to zero, but a stock can. Real estate usually retains at least some value, even when the real estate market has had a significant downturn. Keep in mind, though, that a stock can’t be foreclosed on because you failed to pay property taxes. Owning a stock won’t get you sued by a homeowner association because your tenant parked an RV at your property for a month. While investing in a REIT does take away some of these risks associated with individual real estate investing, all investments do carry risk. Consider your risk tolerance before investing in real estate, just as you would before investing in anything else. The Bottom Line Investing in real estate is an excellent way to diversify your portfolio. REITs are a great asset class to hold if you want the stability of real estate without the work and risks involved in buying and managing it yourself. If you’re going to have REITs in your portfolio, having them in a tax advantaged account like a Roth IRA is best. If you want a more hands-on option you can opt for a self-directed IRA. If you’re comfortable with risks, restrictions, and extra work you can invest in individual real estate in your self-directed Roth IRA. If you prefer a more hands-off approach but want more individual control than you can get with a REIT, investing in a crowdfunded real estate investing platform through your self-directed Roth IRA is the choice for you.	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https://www.investopedia.com/crocs-stock-jumps-on-record-revenue-as-demand-for-its-footwear-kicks-up-sales-8644769	Crocs Stock Jumps on Record Revenue as Demand for Its Footwear Kicks Up Sales	<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>Crocs posted record revenue for the first quarter and raised its guidance on soaring demand for its eponymous shoe brand.</li><li>Crocs brand sales rose 14.6% in the latest quarter, but they slid 17.2% for the company's Heydude brand.</li><li>Crocs raised its 2024 outlook for earnings per share, while lowering its expectations for Heydude brand revenue.</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"> Crocs (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=CROX">CROX</a>) shares gained more than 7% Tuesday as the footwear maker posted record sales and boosted its guidance on “robust consumer demand" for its eponymous shoe brand. </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-record-revenue"></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"> Record Revenue </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The company reported first-quarter diluted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/032515/what-difference-between-earnings-share-and-dividends-share.asp">earnings per share (EPS)</a> of $2.50, up 4.6% from the year-ago period, with revenue up 6.2% to $939 million. Both were well above analyst estimates compiled by Visible Alpha. Direct-to-consumer (DTC) revenue increased 11.8%. The company's <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/grossmargin.asp">gross margin</a> rose to 55.6% from 53.9%.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> North American sales were 9% higher at $383 million, while international sales soared 21.3% to $361 million. </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-crocs-brand-sales-surged-but-heydude-sales-dropped"></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"> Crocs Brand Sales Surged, But Heydude Sales Dropped </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Sales for the Crocs brand gained 14.6% to $744 million. However, the company reported its Heydude brand sales dropped 17.2% to $195 million, and CEO Andrew Rees said that because of that, the company was reducing the brand’s revenue expectations for the rest of the year. It now expects Heydude sales to decline 8% to 10%. In February, the company had predicted they would be flat to slightly up.<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"> Despite that change, the company now sees full-year adjusted EPS in the range of $12.25 to $12.73, compared with the previous outlook of $12.05 to $12.50. </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-susan-healy-to-become-cfo"></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"> Susan Healy To Become CFO </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Crocs also announced Susan Healy would become its new CFO beginning June 3. She’ll replace Anne Mehlman, who was recently appointed president of the Crocs brand. Healy previously served as CFO at auto auction site Insurance Auto Auctions (IAA).<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_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Crocs shares finished 7.8% higher at $136.49 Tuesday, and have added about 46% for 2024 so far. </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 * Crocs posted record revenue for the first quarter and raised its guidance on soaring demand for its eponymous shoe brand. * Crocs brand sales rose 14.6% in the latest quarter, but they slid 17.2% for the company's Heydude brand. * Crocs raised its 2024 outlook for earnings per share, while lowering its expectations for Heydude brand revenue. Crocs ([CROX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=CROX)) shares gained more than 7% Tuesday as the footwear maker posted record sales and boosted its guidance on “robust consumer demand" for its eponymous shoe brand. ## Record Revenue The company reported first-quarter diluted [earnings per share (EPS)](https://www.investopedia.com/ask/answers/032515/what-difference-between-earnings-share-and-dividends-share.asp) of $2.50, up 4.6% from the year-ago period, with revenue up 6.2% to $939 million. Both were well above analyst estimates compiled by Visible Alpha. Direct-to-consumer (DTC) revenue increased 11.8%. The company's [gross margin](https://www.investopedia.com/terms/g/grossmargin.asp) rose to 55.6% from 53.9%. North American sales were 9% higher at $383 million, while international sales soared 21.3% to $361 million. ## Crocs Brand Sales Surged, But Heydude Sales Dropped Sales for the Crocs brand gained 14.6% to $744 million. However, the company reported its Heydude brand sales dropped 17.2% to $195 million, and CEO Andrew Rees said that because of that, the company was reducing the brand’s revenue expectations for the rest of the year. It now expects Heydude sales to decline 8% to 10%. In February, the company had predicted they would be flat to slightly up. Despite that change, the company now sees full-year adjusted EPS in the range of $12.25 to $12.73, compared with the previous outlook of $12.05 to $12.50. ## Susan Healy To Become CFO Crocs also announced Susan Healy would become its new CFO beginning June 3. She’ll replace Anne Mehlman, who was recently appointed president of the Crocs brand. Healy previously served as CFO at auto auction site Insurance Auto Auctions (IAA). Crocs shares finished 7.8% higher at $136.49 Tuesday, and have added about 46% for 2024 so far. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways Crocs posted record revenue for the first quarter and raised its guidance on soaring demand for its eponymous shoe brand.Crocs brand sales rose 14.6% in the latest quarter, but they slid 17.2% for the company's Heydude brand.Crocs raised its 2024 outlook for earnings per share, while lowering its expectations for Heydude brand revenue. Crocs (CROX) shares gained more than 7% Tuesday as the footwear maker posted record sales and boosted its guidance on “robust consumer demand" for its eponymous shoe brand. Record Revenue The company reported first-quarter diluted earnings per share (EPS) of $2.50, up 4.6% from the year-ago period, with revenue up 6.2% to $939 million. Both were well above analyst estimates compiled by Visible Alpha. Direct-to-consumer (DTC) revenue increased 11.8%. The company's gross margin rose to 55.6% from 53.9%. North American sales were 9% higher at $383 million, while international sales soared 21.3% to $361 million. Crocs Brand Sales Surged, But Heydude Sales Dropped Sales for the Crocs brand gained 14.6% to $744 million. However, the company reported its Heydude brand sales dropped 17.2% to $195 million, and CEO Andrew Rees said that because of that, the company was reducing the brand’s revenue expectations for the rest of the year. It now expects Heydude sales to decline 8% to 10%. In February, the company had predicted they would be flat to slightly up. Despite that change, the company now sees full-year adjusted EPS in the range of $12.25 to $12.73, compared with the previous outlook of $12.05 to $12.50. Susan Healy To Become CFO Crocs also announced Susan Healy would become its new CFO beginning June 3. She’ll replace Anne Mehlman, who was recently appointed president of the Crocs brand. Healy previously served as CFO at auto auction site Insurance Auto Auctions (IAA). Crocs shares finished 7.8% higher at $136.49 Tuesday, and have added about 46% for 2024 so far. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "CROX", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=CROX" ], [ "earnings per share (EPS)", "https://www.investopedia.com/ask/answers/032515/what-difference-between-earnings-share-and-dividends-share.asp" ], [ "gross margin", "https://www.investopedia.com/terms/g/grossmargin.asp" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/what-is-inland-marine-insurance-7643848	What Is Inland Marine Insurance?	<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"> Inland marine insurance protects your business from loss or damage to equipment, machinery, products, or other property transported over land. It covers property you use at a job site, store at a warehouse, or move from place to place by train or truck. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-inland-marine-insurance-5070362">Inland marine</a> is an offshoot of ocean marine insurance, which covers property transported by sea. </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"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Inland marine insurance covers equipment, tools, and other property you use at a job site, store at a warehouse, or move over land. </li><li>Each type of inland marine insurance is designed to cover a specific type of property.</li><li>Property inland marine insurance can include property such as construction machinery or computer equipment.</li><li>Inland marine insurance is an offshoot of ocean marine insurance, which covers property transported by sea.</li><li>You should consider buying inland marine insurance if you ship or use property away from your premises or own valuable items that aren’t adequately covered by your property policy.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-does-inland-marine-insurance-cover"></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 Does Inland Marine Insurance Cover? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Inland marine insurance covers damage by a covered peril to movable property like tools, equipment, and building materials. It also covers high-value items that aren’t adequately insured (or aren’t covered at all) under your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commercial-property-insurance.asp">commercial property</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/business-owners-policy.asp">business owners policy.</a> An example is a bulldozer valued at $150,000 that your business uses at construction sites. </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"> Inland marine insurance may cover “all-risks” or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/named_perils.asp">named perils</a>. An <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/all-risks.asp">all-risk policy</a> covers damage caused by any peril not specifically excluded. It’s broader than a named perils policy, which covers only the perils listed in the policy. </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"> Inland marine policies also vary in how they value damaged or destroyed property. Some policies pay losses based on the replacement value of the property at current prices without considering depreciation. Others base the payment on the property’s actual cash value, which includes a deduction for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/depreciation.asp">depreciation</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_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 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>Commercial property policies mainly cover property at your business premises. Most provide little or no coverage for property at other locations, such as job sites.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-what-inland-marine-insurance-doesnt-cover"></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 Inland Marine Insurance Doesn't Cover </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> While inland marine policies vary, many exclude damage caused by insects, wear and tear, mold, floods, and earthquake. Many also exclude vehicles, stationary property that remains at your business premises (like desks and cabinets), property shipped by sea or air, and property damage that occurs before an item is shipped.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <span class="heading-toc" id="toc-special-types-of-inland-marine-insurance"></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"> Special Types of Inland Marine Insurance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> There are many kinds of inland marine insurance, each designed to cover a specific type of property. Here are some examples. </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>Contractor’s equipment floater</strong>:<strong> </strong>Covers loss, damage, or theft of a contractor’s equipment or tools wherever the loss occurs, including at the contractor’s business premises, at a job site, or while in transit.<span class="ql-inline-citation" data-cite="4"></span></li> <li><strong>Electronic data processing (EDP) insurance</strong>: Protects businesses against loss or damage to desktop computers, mainframes, laptops, tablets, and other equipment used to process or store data. Policies cover damage caused by a range of perils, including fire, floods, theft, and electrical disturbances.<span class="ql-inline-citation" data-cite="5"></span></li> <li><strong>Bailee insurance</strong>: Covers your business’ liability for damage to customers’ property in your care for service, repair, storage. The term “<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bailee.asp">bailee</a>” means custodian. Businesses that need this coverage include dry cleaners, computer repair services, and pet boarding operators.<span class="ql-inline-citation" data-cite="6"></span> </li> <li><strong>Accounts receivable insurance</strong>:<strong> </strong>Protects your business from financial losses caused by damage or destruction of your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/accountsreceivable.asp">accounts receivable</a> records by a covered peril or your customers’ failure to pay invoices.<span class="ql-inline-citation" data-cite="7"></span></li> <li><strong>Installation floater</strong>: Protects contractors against theft, damage, or destruction by a covered peril of equipment, materials, or supplies while in transit or awaiting installation at a job site.<span class="ql-inline-citation" data-cite="8"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_22-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_23-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Because inland marine insurance covers property that moves from place to place, it’s often called a floater policy. Coverage goes wherever the insured property is.</p></div></div></div> <span class="heading-toc" id="toc-limits-and-deductible"></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"> Limits and Deductible </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> An inland marine policy may include scheduled limits, blanket limits, or a combination of the two. A scheduled limit applies to a single item while a blanket limit applies to a group of items. When you buy inland marine insurance, you might choose specific limits for your most valuable items and a blanket limit for your remaining property.<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"> For instance, you might select a $150,000 specific limit for your new bulldozer and a $35,000 blanket limit for your tools and other property. When a loss occurs, the most your insurer will pay is the limit (scheduled or blanket) that applies to the damaged property. </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">Note</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Most inland marine policies include a deductible, such as $1,000 or $2,500. The deductible is your out-of-pocket cost for each claim.</p></div></div></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_31-0"><span class="heading-toc" id="toc-does-my-business-need-inland-marine-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Does My Business Need Inland Marine Insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Your business may need inland marine insurance if you ship property over land by train or truck or if you transport equipment to jobs sites. You also may need inland marine insurance to cover property that isn’t adequately covered (or not covered at all) under your commercial property policy. </p><p>For instance, while many commercial property policies cover computers, they exclude damage caused by power failures and equipment breakdown.<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_32-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_33-0"><span class="heading-toc" id="toc-why-is-it-called-inland-marine-insurance"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Is It Called "Inland Marine" Insurance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Inland marine insurance gets its name from ocean marine insurance, from which it’s derived. While ocean marine insurance covers <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/york-antwerp-rules.asp">goods transported by sea</a>, inland marine insurance covers goods transported by truck or train.<span class="ql-inline-citation" data-cite="11"></span> Inland marine insurance protects businesses from loss or damage to property as it travels over land from its place of origin to its final destination.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_34-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_35-0"><span class="heading-toc" id="toc-what-are-examples-of-inland-marine-claims"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Examples of Inland Marine Claims?</h2> <div class="mntl-sc-block-questionandanswer__answer"><ul><li>A landscaping company files a claim under its contractor’s equipment insurance for damage to a backhoe caused by a fire at a construction site.</li><li>A clothing manufacturer files a claim with its accounts receivable insurer because it’s unable to collect on a $25,000 invoice from a customer who has declared bankruptcy.</li><li>A solar contractor files a claim under their installation floater for the loss of solar panels stolen from a construction site while the contractor was on a lunch break.</li></ul></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-is-inland-marine-the-same-as-general-liability"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Inland Marine the Same as General Liability?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, inland marine and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-general-liability-insurance-for-small-business-7151705">general liability insurance</a> aren’t the same thing. Inland marine is a type of property insurance. It protects your business from financial losses caused by physical damage to equipment, tools, and other movable property. General liability insurance covers claims by your customers or other third parties for bodily injury or property damage arising from accidents caused by your negligence.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Inland marine insurance covers materials, equipment, products, and other property transported over land. It evolved from ocean marine insurance, which covers property transported by sea. </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"> There are many types of inland marine insurance, and the kind you need depends on the property you want to insure. For instance, you’ll need a contractor’s equipment floater to insure a bulldozer and accounts receivable insurance to cover your accounts receivable records. </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"> Most commercial property policies provide little or no coverage for movable property. If you transport property away from your business premises, you should consider buying inland marine insurance.<br/> </p></div>	Inland marine insurance protects your business from loss or damage to equipment, machinery, products, or other property transported over land. It covers property you use at a job site, store at a warehouse, or move from place to place by train or truck. [Inland marine](https://www.investopedia.com/best-inland-marine-insurance-5070362) is an offshoot of ocean marine insurance, which covers property transported by sea. ### * Inland marine insurance covers equipment, tools, and other property you use at a job site, store at a warehouse, or move over land. * Each type of inland marine insurance is designed to cover a specific type of property. * Property inland marine insurance can include property such as construction machinery or computer equipment. * Inland marine insurance is an offshoot of ocean marine insurance, which covers property transported by sea. * You should consider buying inland marine insurance if you ship or use property away from your premises or own valuable items that aren’t adequately covered by your property policy. ## What Does Inland Marine Insurance Cover? Inland marine insurance covers damage by a covered peril to movable property like tools, equipment, and building materials. It also covers high-value items that aren’t adequately insured (or aren’t covered at all) under your [commercial property](https://www.investopedia.com/terms/c/commercial-property-insurance.asp) or [business owners policy.](https://www.investopedia.com/terms/business-owners-policy.asp) An example is a bulldozer valued at $150,000 that your business uses at construction sites. Inland marine insurance may cover “all-risks” or [named perils](https://www.investopedia.com/terms/n/named_perils.asp). An [all-risk policy](https://www.investopedia.com/terms/a/all-risks.asp) covers damage caused by any peril not specifically excluded. It’s broader than a named perils policy, which covers only the perils listed in the policy. Inland marine policies also vary in how they value damaged or destroyed property. Some policies pay losses based on the replacement value of the property at current prices without considering depreciation. Others base the payment on the property’s actual cash value, which includes a deduction for [depreciation](https://www.investopedia.com/terms/d/depreciation.asp). ### Note Commercial property policies mainly cover property at your business premises. Most provide little or no coverage for property at other locations, such as job sites. ## What Inland Marine Insurance Doesn't Cover While inland marine policies vary, many exclude damage caused by insects, wear and tear, mold, floods, and earthquake. Many also exclude vehicles, stationary property that remains at your business premises (like desks and cabinets), property shipped by sea or air, and property damage that occurs before an item is shipped. ## Special Types of Inland Marine Insurance There are many kinds of inland marine insurance, each designed to cover a specific type of property. Here are some examples. * Contractor’s equipment floater:Covers loss, damage, or theft of a contractor’s equipment or tools wherever the loss occurs, including at the contractor’s business premises, at a job site, or while in transit. * Electronic data processing (EDP) insurance: Protects businesses against loss or damage to desktop computers, mainframes, laptops, tablets, and other equipment used to process or store data. Policies cover damage caused by a range of perils, including fire, floods, theft, and electrical disturbances. * Bailee insurance: Covers your business’ liability for damage to customers’ property in your care for service, repair, storage. The term “[bailee](https://www.investopedia.com/terms/b/bailee.asp)” means custodian. Businesses that need this coverage include dry cleaners, computer repair services, and pet boarding operators. * Accounts receivable insurance:Protects your business from financial losses caused by damage or destruction of your [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp) records by a covered peril or your customers’ failure to pay invoices. * Installation floater: Protects contractors against theft, damage, or destruction by a covered peril of equipment, materials, or supplies while in transit or awaiting installation at a job site. ### Because inland marine insurance covers property that moves from place to place, it’s often called a floater policy. Coverage goes wherever the insured property is. ## Limits and Deductible An inland marine policy may include scheduled limits, blanket limits, or a combination of the two. A scheduled limit applies to a single item while a blanket limit applies to a group of items. When you buy inland marine insurance, you might choose specific limits for your most valuable items and a blanket limit for your remaining property. For instance, you might select a $150,000 specific limit for your new bulldozer and a $35,000 blanket limit for your tools and other property. When a loss occurs, the most your insurer will pay is the limit (scheduled or blanket) that applies to the damaged property. ### Note Most inland marine policies include a deductible, such as $1,000 or $2,500. The deductible is your out-of-pocket cost for each claim. ## Does My Business Need Inland Marine Insurance? Your business may need inland marine insurance if you ship property over land by train or truck or if you transport equipment to jobs sites. You also may need inland marine insurance to cover property that isn’t adequately covered (or not covered at all) under your commercial property policy. For instance, while many commercial property policies cover computers, they exclude damage caused by power failures and equipment breakdown. ## Why Is It Called "Inland Marine" Insurance? Inland marine insurance gets its name from ocean marine insurance, from which it’s derived. While ocean marine insurance covers [goods transported by sea](https://www.investopedia.com/terms/y/york-antwerp-rules.asp), inland marine insurance covers goods transported by truck or train. Inland marine insurance protects businesses from loss or damage to property as it travels over land from its place of origin to its final destination. ## What Are Examples of Inland Marine Claims? * A landscaping company files a claim under its contractor’s equipment insurance for damage to a backhoe caused by a fire at a construction site. * A clothing manufacturer files a claim with its accounts receivable insurer because it’s unable to collect on a $25,000 invoice from a customer who has declared bankruptcy. * A solar contractor files a claim under their installation floater for the loss of solar panels stolen from a construction site while the contractor was on a lunch break. ## Is Inland Marine the Same as General Liability? No, inland marine and [general liability insurance](https://www.investopedia.com/best-general-liability-insurance-for-small-business-7151705) aren’t the same thing. Inland marine is a type of property insurance. It protects your business from financial losses caused by physical damage to equipment, tools, and other movable property. General liability insurance covers claims by your customers or other third parties for bodily injury or property damage arising from accidents caused by your negligence. ## The Bottom Line Inland marine insurance covers materials, equipment, products, and other property transported over land. It evolved from ocean marine insurance, which covers property transported by sea. There are many types of inland marine insurance, and the kind you need depends on the property you want to insure. For instance, you’ll need a contractor’s equipment floater to insure a bulldozer and accounts receivable insurance to cover your accounts receivable records. Most commercial property policies provide little or no coverage for movable property. If you transport property away from your business premises, you should consider buying inland marine insurance.	Inland marine insurance protects your business from loss or damage to equipment, machinery, products, or other property transported over land. It covers property you use at a job site, store at a warehouse, or move from place to place by train or truck. Inland marine is an offshoot of ocean marine insurance, which covers property transported by sea. Inland marine insurance covers equipment, tools, and other property you use at a job site, store at a warehouse, or move over land. Each type of inland marine insurance is designed to cover a specific type of property.Property inland marine insurance can include property such as construction machinery or computer equipment.Inland marine insurance is an offshoot of ocean marine insurance, which covers property transported by sea.You should consider buying inland marine insurance if you ship or use property away from your premises or own valuable items that aren’t adequately covered by your property policy. What Does Inland Marine Insurance Cover? Inland marine insurance covers damage by a covered peril to movable property like tools, equipment, and building materials. It also covers high-value items that aren’t adequately insured (or aren’t covered at all) under your commercial property or business owners policy. An example is a bulldozer valued at $150,000 that your business uses at construction sites. Inland marine insurance may cover “all-risks” or named perils. An all-risk policy covers damage caused by any peril not specifically excluded. It’s broader than a named perils policy, which covers only the perils listed in the policy. Inland marine policies also vary in how they value damaged or destroyed property. Some policies pay losses based on the replacement value of the property at current prices without considering depreciation. Others base the payment on the property’s actual cash value, which includes a deduction for depreciation. Note Commercial property policies mainly cover property at your business premises. Most provide little or no coverage for property at other locations, such as job sites. What Inland Marine Insurance Doesn't Cover While inland marine policies vary, many exclude damage caused by insects, wear and tear, mold, floods, and earthquake. Many also exclude vehicles, stationary property that remains at your business premises (like desks and cabinets), property shipped by sea or air, and property damage that occurs before an item is shipped. Special Types of Inland Marine Insurance There are many kinds of inland marine insurance, each designed to cover a specific type of property. Here are some examples. Contractor’s equipment floater: Covers loss, damage, or theft of a contractor’s equipment or tools wherever the loss occurs, including at the contractor’s business premises, at a job site, or while in transit. Electronic data processing (EDP) insurance: Protects businesses against loss or damage to desktop computers, mainframes, laptops, tablets, and other equipment used to process or store data. Policies cover damage caused by a range of perils, including fire, floods, theft, and electrical disturbances. Bailee insurance: Covers your business’ liability for damage to customers’ property in your care for service, repair, storage. The term “bailee” means custodian. Businesses that need this coverage include dry cleaners, computer repair services, and pet boarding operators. Accounts receivable insurance: Protects your business from financial losses caused by damage or destruction of your accounts receivable records by a covered peril or your customers’ failure to pay invoices. Installation floater: Protects contractors against theft, damage, or destruction by a covered peril of equipment, materials, or supplies while in transit or awaiting installation at a job site. Because inland marine insurance covers property that moves from place to place, it’s often called a floater policy. Coverage goes wherever the insured property is. Limits and Deductible An inland marine policy may include scheduled limits, blanket limits, or a combination of the two. A scheduled limit applies to a single item while a blanket limit applies to a group of items. When you buy inland marine insurance, you might choose specific limits for your most valuable items and a blanket limit for your remaining property. For instance, you might select a $150,000 specific limit for your new bulldozer and a $35,000 blanket limit for your tools and other property. When a loss occurs, the most your insurer will pay is the limit (scheduled or blanket) that applies to the damaged property. Note Most inland marine policies include a deductible, such as $1,000 or $2,500. The deductible is your out-of-pocket cost for each claim. Does My Business Need Inland Marine Insurance? Your business may need inland marine insurance if you ship property over land by train or truck or if you transport equipment to jobs sites. You also may need inland marine insurance to cover property that isn’t adequately covered (or not covered at all) under your commercial property policy. For instance, while many commercial property policies cover computers, they exclude damage caused by power failures and equipment breakdown. Why Is It Called "Inland Marine" Insurance? Inland marine insurance gets its name from ocean marine insurance, from which it’s derived. While ocean marine insurance covers goods transported by sea, inland marine insurance covers goods transported by truck or train. Inland marine insurance protects businesses from loss or damage to property as it travels over land from its place of origin to its final destination. What Are Examples of Inland Marine Claims? A landscaping company files a claim under its contractor’s equipment insurance for damage to a backhoe caused by a fire at a construction site.A clothing manufacturer files a claim with its accounts receivable insurer because it’s unable to collect on a $25,000 invoice from a customer who has declared bankruptcy.A solar contractor files a claim under their installation floater for the loss of solar panels stolen from a construction site while the contractor was on a lunch break. Is Inland Marine the Same as General Liability? No, inland marine and general liability insurance aren’t the same thing. Inland marine is a type of property insurance. It protects your business from financial losses caused by physical damage to equipment, tools, and other movable property. General liability insurance covers claims by your customers or other third parties for bodily injury or property damage arising from accidents caused by your negligence. The Bottom Line Inland marine insurance covers materials, equipment, products, and other property transported over land. It evolved from ocean marine insurance, which covers property transported by sea. There are many types of inland marine insurance, and the kind you need depends on the property you want to insure. For instance, you’ll need a contractor’s equipment floater to insure a bulldozer and accounts receivable insurance to cover your accounts receivable records. Most commercial property policies provide little or no coverage for movable property. If you transport property away from your business premises, you should consider buying inland marine insurance.	[ [ "Inland marine", "https://www.investopedia.com/best-inland-marine-insurance-5070362" ], [ "commercial property", "https://www.investopedia.com/terms/c/commercial-property-insurance.asp" ], [ "business owners policy.", "https://www.investopedia.com/terms/business-owners-policy.asp" ], [ "named perils", "https://www.investopedia.com/terms/n/named_perils.asp" ], [ "all-risk policy", "https://www.investopedia.com/terms/a/all-risks.asp" ], [ "depreciation", "https://www.investopedia.com/terms/d/depreciation.asp" ], [ "bailee", "https://www.investopedia.com/terms/b/bailee.asp" ], [ "accounts receivable", "https://www.investopedia.com/terms/a/accountsreceivable.asp" ], [ "goods transported by sea", "https://www.investopedia.com/terms/y/york-antwerp-rules.asp" ], [ "general liability insurance", "https://www.investopedia.com/best-general-liability-insurance-for-small-business-7151705" ] ]
https://www.investopedia.com/top-stock-movers-now-micron-apple-darden-restaurants-and-more-8612694	Top Stock Movers Now: Micron, Apple, Darden Restaurants, and 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>The Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, March 21, 2024 amid optimism about Fed rate cuts this year.</li><li>Semiconductor stocks surged after Micron Technology posted better-than-expected results and gave strong guidance on AI demand.</li><li>Apple was sued by federal and state officials who accused the iPhone maker of antitrust violations in the smartphone market.</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 Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, amid enthusiasm about Fed rate cuts after the Fed <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">maintained its projection for three rate cuts</a> this year. </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 gains were led by semiconductor firms after Micron Technology (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MU">MU</a>) <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/micron-stock-jumps-after-strong-earnings-upbeat-guidance-8612484">beat expectations</a> for earnings, revenue, and guidance as it benefited from demand for <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>. Semiconductor companies dominated the list of stocks leading gains in the S&P 500. </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"> Shares of Carmax (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=KMX">KMX</a>) rose after Needham upgraded the stock on optimism of a multi-year recovery in the used car market. Goldman Sachs (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GS">GS</a>) shares also advanced after the investment bank said it raised $700 million for a new co-investment fund. </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"> Shares of Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>) tumbled as the Department of Justice and 16 state and district attorneys general <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/why-the-department-of-justice-is-suing-apple-8612745">sued the iPhone maker</a> for violating antitrust laws and stifling competition in the smartphone market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Accenture (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ACN">ACN</a>) shares fell as the provider of tech and consulting services for businesses <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/accenture-lowers-guidance-as-it-faces-an-uncertain-macro-environment-8612646">missed sales estimates</a> and reduced its outlook, blaming a tough macro 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"> Also citing a difficult operating environment was Darden Restaurants (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=DRI">DRI</a>), and the restaurant chain's shares dropped as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/darden-restaurants-stock-sinks-as-sales-hurt-by-tougher-operating-environment-8612608">revenue missed forecasts</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/samestoresales.asp">same-store</a> sales declined. </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"> Oil futures slipped. Gold prices gained. The yield on the 10-year Treasury note was up. The U.S. dollar was higher versus the euro, pound, and yen. Most major cryptocurrencies traded in the green.<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:71.8%;"> <img alt="SOX" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/97pEGHzMvtEOpWb3AZRWLmAXpEM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/97pEGHzMvtEOpWb3AZRWLmAXpEM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png" data-srcset="https://www.investopedia.com/thmb/BI2pP0ZCMScJ4EqMsBa0F5l3WS8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png 750w" data-tracking-container="true" height="1108" id="mntl-sc-block-image_1-0" width="1542"/> <noscript> <img alt="SOX" class="img--noscript universal-image__image" height="1108" sizes="750px" src="https://www.investopedia.com/thmb/97pEGHzMvtEOpWb3AZRWLmAXpEM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png" srcset="https://www.investopedia.com/thmb/BI2pP0ZCMScJ4EqMsBa0F5l3WS8=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png 750w" width="1542"/> </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>	### Key Takeaways * The Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, March 21, 2024 amid optimism about Fed rate cuts this year. * Semiconductor stocks surged after Micron Technology posted better-than-expected results and gave strong guidance on AI demand. * Apple was sued by federal and state officials who accused the iPhone maker of antitrust violations in the smartphone market. The Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, amid enthusiasm about Fed rate cuts after the Fed [maintained its projection for three rate cuts](https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723) this year. The gains were led by semiconductor firms after Micron Technology ([MU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MU)) [beat expectations](https://www.investopedia.com/micron-stock-jumps-after-strong-earnings-upbeat-guidance-8612484) for earnings, revenue, and guidance as it benefited from demand for [artificial intelligence (AI)](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp). Semiconductor companies dominated the list of stocks leading gains in the S&P 500. Shares of Carmax ([KMX](https://www.investopedia.com/markets/quote?tvwidgetsymbol=KMX)) rose after Needham upgraded the stock on optimism of a multi-year recovery in the used car market. Goldman Sachs ([GS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GS)) shares also advanced after the investment bank said it raised $700 million for a new co-investment fund. Shares of Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) tumbled as the Department of Justice and 16 state and district attorneys general [sued the iPhone maker](https://www.investopedia.com/why-the-department-of-justice-is-suing-apple-8612745) for violating antitrust laws and stifling competition in the smartphone market. Accenture ([ACN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ACN)) shares fell as the provider of tech and consulting services for businesses [missed sales estimates](https://www.investopedia.com/accenture-lowers-guidance-as-it-faces-an-uncertain-macro-environment-8612646) and reduced its outlook, blaming a tough macro environment. Also citing a difficult operating environment was Darden Restaurants ([DRI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DRI)), and the restaurant chain's shares dropped as [revenue missed forecasts](https://www.investopedia.com/darden-restaurants-stock-sinks-as-sales-hurt-by-tougher-operating-environment-8612608) and [same-store](https://www.investopedia.com/terms/s/samestoresales.asp) sales declined. Oil futures slipped. Gold prices gained. The yield on the 10-year Treasury note was up. The U.S. dollar was higher versus the euro, pound, and yen. Most major cryptocurrencies traded in the green. ![SOX]() ![SOX](https://www.investopedia.com/thmb/97pEGHzMvtEOpWb3AZRWLmAXpEM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/SOX_2024-03-21_14-19-27-89cca620584644488e365ea7c0839635.png) TradingView	Key Takeaways The Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, March 21, 2024 amid optimism about Fed rate cuts this year.Semiconductor stocks surged after Micron Technology posted better-than-expected results and gave strong guidance on AI demand.Apple was sued by federal and state officials who accused the iPhone maker of antitrust violations in the smartphone market. The Dow, S&P 500, and Nasdaq added to record highs at midday Thursday, amid enthusiasm about Fed rate cuts after the Fed maintained its projection for three rate cuts this year. The gains were led by semiconductor firms after Micron Technology (MU) beat expectations for earnings, revenue, and guidance as it benefited from demand for artificial intelligence (AI). Semiconductor companies dominated the list of stocks leading gains in the S&P 500. Shares of Carmax (KMX) rose after Needham upgraded the stock on optimism of a multi-year recovery in the used car market. Goldman Sachs (GS) shares also advanced after the investment bank said it raised $700 million for a new co-investment fund. Shares of Apple (AAPL) tumbled as the Department of Justice and 16 state and district attorneys general sued the iPhone maker for violating antitrust laws and stifling competition in the smartphone market. Accenture (ACN) shares fell as the provider of tech and consulting services for businesses missed sales estimates and reduced its outlook, blaming a tough macro environment. Also citing a difficult operating environment was Darden Restaurants (DRI), and the restaurant chain's shares dropped as revenue missed forecasts and same-store sales declined. Oil futures slipped. Gold prices gained. The yield on the 10-year Treasury note was up. The U.S. dollar was higher versus the euro, pound, and yen. Most major cryptocurrencies traded in the green. TradingView	[ [ "maintained its projection for three rate cuts", "https://www.investopedia.com/federal-reserve-fomc-meeting-march-2024-8611723" ], [ "MU", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=MU" ], [ "beat expectations", "https://www.investopedia.com/micron-stock-jumps-after-strong-earnings-upbeat-guidance-8612484" ], [ "artificial intelligence (AI)", "https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp" ], [ "KMX", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=KMX" ], [ "GS", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GS" ], [ "AAPL", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL" ], [ "sued the iPhone maker", "https://www.investopedia.com/why-the-department-of-justice-is-suing-apple-8612745" ], [ "ACN", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=ACN" ], [ "missed sales estimates", "https://www.investopedia.com/accenture-lowers-guidance-as-it-faces-an-uncertain-macro-environment-8612646" ], [ "DRI", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=DRI" ], [ "revenue missed forecasts", "https://www.investopedia.com/darden-restaurants-stock-sinks-as-sales-hurt-by-tougher-operating-environment-8612608" ], [ "same-store", "https://www.investopedia.com/terms/s/samestoresales.asp" ], [ "SOX", "https://www.investopedia.com/thmb/97pEGHzMvtEOpWb3AZRWLmAXpEM=/1500x0/filters:no_upscale(" ] ]
https://www.investopedia.com/terms/p/principal-exchange-rate-linked-security-perl.asp	Principal Exchange Rate Linked Security (PERL)	<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-principal-exchange-rate-linked-security-perl"></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 Principal Exchange Rate Linked Security (PERL)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A principal exchange rate linked security (PERL) is a type of investment in debt that pays interest semiannually and has a yield that is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/linked-exchangerate-system.asp" rel="noopener noreferrer">linked</a> to foreign exchange rates. That is, the principal repayment amount is determined by the exchange rate of a certain currency in comparison with the U.S. dollar at the time the repayment is due. </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 buyers of PERLs are companies that see this type of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtsecurity.asp" rel="noopener noreferrer">debt security</a> as a means of hedging against fluctuations in foreign exchange rates. They also may be purchased by speculators who think they know which way a particular foreign currency is going to move in price. </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 PERL is a type of bond that is bought in U.S. dollars and pays interest in U.S. dollars but the final repayment amount is determined in a second currency.</li><li>The yield on the PERL will decrease if the U.S. dollar appreciates against the other currency.</li><li>There also is a reverse PERL which increases in yield if the U.S. dollar appreciates against the other currency.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-principal-exchange-rate-linked-securities-perls"></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 Principal Exchange Rate Linked Securities (PERLs) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> PERLs are debt securities or debt instruments that are bought and sold between two parties. They pay the buyer semi-annually in amounts that are determined by the exchange rate of a specific currency against a base currency, usually the U.S. dollar. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> That makes a PERL a type of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dual-currency-bond.asp" rel="noopener noreferrer">dual currency bond</a> which pays the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/coupon.asp" rel="noopener noreferrer">coupon</a> and the principal in the base currency while having the principal payment vary according to a set redemption formula. By this formula, the variable is linked to the movement of the selected currency in comparison to a base currency, the U.S. dollar. </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"> PERLs are typically denominated in U.S. dollars, and their interest is paid in U.S. dollars, but their repayment value is determined by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/exchangerate.asp" rel="noopener noreferrer">exchange rate</a> between the dollar and a specific foreign currency within a certain time frame. </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 principal payments increase as the foreign currency appreciates relative to the U.S. dollar. The payments decrease as the foreign currency declines against the dollar. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> A company that wishes to do global business can do it more safely by purchasing PERLs, which allow for the currency to retain a link to the dollar. </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"> The Reverse PERL </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> There is also a reverse PERL. This is denominated in one currency but pays interest in another. </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"> With a reverse PERL, the principal payments increase as the base currency appreciates relative to the foreign currency, and the payments decrease with the depreciation of the base currency. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> An example of a reverse PERL is a yen-denominated bond that pays interest in dollars. An investor’s <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/y/yield.asp" rel="noopener noreferrer">yield</a> would increase if the dollar appreciates against the yen, but the yield would decrease if the dollar falls in value. </p></div>	## What Is a Principal Exchange Rate Linked Security (PERL)? A principal exchange rate linked security (PERL) is a type of investment in debt that pays interest semiannually and has a yield that is [linked](https://www.investopedia.com/terms/l/linked-exchangerate-system.asp) to foreign exchange rates. That is, the principal repayment amount is determined by the exchange rate of a certain currency in comparison with the U.S. dollar at the time the repayment is due. Many buyers of PERLs are companies that see this type of [debt security](https://www.investopedia.com/terms/d/debtsecurity.asp) as a means of hedging against fluctuations in foreign exchange rates. They also may be purchased by speculators who think they know which way a particular foreign currency is going to move in price. ### Key Takeaways * A PERL is a type of bond that is bought in U.S. dollars and pays interest in U.S. dollars but the final repayment amount is determined in a second currency. * The yield on the PERL will decrease if the U.S. dollar appreciates against the other currency. * There also is a reverse PERL which increases in yield if the U.S. dollar appreciates against the other currency. ## Understanding Principal Exchange Rate Linked Securities (PERLs) PERLs are debt securities or debt instruments that are bought and sold between two parties. They pay the buyer semi-annually in amounts that are determined by the exchange rate of a specific currency against a base currency, usually the U.S. dollar. That makes a PERL a type of [dual currency bond](https://www.investopedia.com/terms/d/dual-currency-bond.asp) which pays the [coupon](https://www.investopedia.com/terms/c/coupon.asp) and the principal in the base currency while having the principal payment vary according to a set redemption formula. By this formula, the variable is linked to the movement of the selected currency in comparison to a base currency, the U.S. dollar. PERLs are typically denominated in U.S. dollars, and their interest is paid in U.S. dollars, but their repayment value is determined by the [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp) between the dollar and a specific foreign currency within a certain time frame. The principal payments increase as the foreign currency appreciates relative to the U.S. dollar. The payments decrease as the foreign currency declines against the dollar. A company that wishes to do global business can do it more safely by purchasing PERLs, which allow for the currency to retain a link to the dollar. ### The Reverse PERL There is also a reverse PERL. This is denominated in one currency but pays interest in another. With a reverse PERL, the principal payments increase as the base currency appreciates relative to the foreign currency, and the payments decrease with the depreciation of the base currency. An example of a reverse PERL is a yen-denominated bond that pays interest in dollars. An investor’s [yield](https://www.investopedia.com/terms/y/yield.asp) would increase if the dollar appreciates against the yen, but the yield would decrease if the dollar falls in value.	What Is a Principal Exchange Rate Linked Security (PERL)? A principal exchange rate linked security (PERL) is a type of investment in debt that pays interest semiannually and has a yield that is linked to foreign exchange rates. That is, the principal repayment amount is determined by the exchange rate of a certain currency in comparison with the U.S. dollar at the time the repayment is due. Many buyers of PERLs are companies that see this type of debt security as a means of hedging against fluctuations in foreign exchange rates. They also may be purchased by speculators who think they know which way a particular foreign currency is going to move in price. Key Takeaways A PERL is a type of bond that is bought in U.S. dollars and pays interest in U.S. dollars but the final repayment amount is determined in a second currency.The yield on the PERL will decrease if the U.S. dollar appreciates against the other currency.There also is a reverse PERL which increases in yield if the U.S. dollar appreciates against the other currency. Understanding Principal Exchange Rate Linked Securities (PERLs) PERLs are debt securities or debt instruments that are bought and sold between two parties. They pay the buyer semi-annually in amounts that are determined by the exchange rate of a specific currency against a base currency, usually the U.S. dollar. That makes a PERL a type of dual currency bond which pays the coupon and the principal in the base currency while having the principal payment vary according to a set redemption formula. By this formula, the variable is linked to the movement of the selected currency in comparison to a base currency, the U.S. dollar. PERLs are typically denominated in U.S. dollars, and their interest is paid in U.S. dollars, but their repayment value is determined by the exchange rate between the dollar and a specific foreign currency within a certain time frame. The principal payments increase as the foreign currency appreciates relative to the U.S. dollar. The payments decrease as the foreign currency declines against the dollar. A company that wishes to do global business can do it more safely by purchasing PERLs, which allow for the currency to retain a link to the dollar. The Reverse PERL There is also a reverse PERL. This is denominated in one currency but pays interest in another. With a reverse PERL, the principal payments increase as the base currency appreciates relative to the foreign currency, and the payments decrease with the depreciation of the base currency. An example of a reverse PERL is a yen-denominated bond that pays interest in dollars. An investor’s yield would increase if the dollar appreciates against the yen, but the yield would decrease if the dollar falls in value.	[ [ "linked", "https://www.investopedia.com/terms/l/linked-exchangerate-system.asp" ], [ "debt security", "https://www.investopedia.com/terms/d/debtsecurity.asp" ], [ "dual currency bond", "https://www.investopedia.com/terms/d/dual-currency-bond.asp" ], [ "coupon", "https://www.investopedia.com/terms/c/coupon.asp" ], [ "exchange rate", "https://www.investopedia.com/terms/e/exchangerate.asp" ], [ "yield", "https://www.investopedia.com/terms/y/yield.asp" ] ]
https://www.investopedia.com/terms/a/aum.asp	Assets Under Management (AUM): Definition, Calculation, 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-are-assets-under-management-aum"></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 Assets Under Management (AUM)? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Assets under management (AUM) is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketvalue.asp">market value</a> of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> When calculating AUM, some financial institutions include bank deposits, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/062113/mutual-funds-management-fees-vs-mer.asp">mutual funds</a>, and cash, while others limit it to funds under discretionary management from individual investors. </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>Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.</li><li>AUM fluctuates to reflect the flow of money in and out of a fund and the price performance of the assets.</li><li>A fund's management fees and expenses are often calculated as a percentage of AUM.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-assets-under-management-aum"></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 Assets Under Management (AUM) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, a brokerage company, or an individual registered as an investment advisor or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfoliomanager.asp">portfolio manager</a>. When an investor has $50,000 in a mutual fund, those funds are part of the total AUM of the pool of funds. The fund manager can buy and sell shares according to the investment objective using all invested funds without obtaining special permissions. </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"> AUM includes the capital the manager can use to make transactions for one or all clients. An investor may need a minimum amount of personal AUM to qualify for a type of investment, such as a hedge fund, to ensure the client can withstand adverse markets. An investor’s AUM may coincide with their <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 may determine the type of services received from a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisor</a> or brokerage company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_13-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_14-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Investors often consider higher investment inflows and higher AUM of a financial institution as positive indicators of quality and management experience.</p></div></div></div> <span class="heading-toc" id="toc-calculating-aum"></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"> Calculating AUM </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Calculating assets under management varies among companies and depends on the flow of investor money in and out of a fund. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetperformance.asp">Asset performance</a>, capital appreciation, and reinvested dividends increase the AUM of a fund. Assets under management also increase when new customers and their assets are acquired. A decrease in AUM occurs following losses in the market value or performance of assets, fund closures, and decreased investor in-flows. </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 <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">U.S. Securities and Exchange Commission (SEC)</a> requires firms to register with the SEC with AUM ranging between $25 million to $110 million, depending on several factors, including the size and location of the firm. The SEC regulates the financial markets to ensure that it functions properly.<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> <span class="heading-toc" id="toc-aum-and-fees"></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"> AUM and Fees </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> AUM is a consideration when calculating fees. Many investment products charge <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/managementfee.asp">management fees</a> as a fixed percentage of AUM. Financial advisors and personal money managers charge clients a fee as a percentage of personal assets under management. Fees commonly decrease as AUM increases, and financial professionals can attract high-wealth investors. </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-aum-examples"></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"> AUM Examples </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"> SPY </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/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp">SPDR S&P 500 ETF (SPY)</a> is an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded fund</a>. An ETF is a fund that contains several stocks or securities that match or mirror an index, such as the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a>. The SPY has all 500 of the stocks in the S&P 500 index. As of June 14, 2023, the SPY had assets under management of $412.25 billion.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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"> EDOW </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/djia.asp">Dow Jones Industrial Average (DJIA)</a>. As of June 14, 2023, the EDOW had assets under management of $189.58 million.<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> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-how-is-aum-used-as-a-tool-by-investment-companies"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is AUM Used as a Tool by Investment Companies?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Investment companies use assets under management as a marketing tool to attract new investors. AUM helps investors determine the size of a company's operations relative to its competitors.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-what-does-aum-tell-potential-investors"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does AUM Tell Potential Investors?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>When evaluating a specific fund, investors often look at its AUM as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liquidity.asp">liquid</a>, meaning investors can buy and sell the fund easily.</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-benefit-of-a-fund-with-a-large-aum"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Benefit of a Fund With a Large AUM?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Funds with large AUMs have sufficient holdings to meet any redemption pressure. If a few large investors leave the fund, it would not likely impact it.</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"> Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM can reveal the management performance and experience when investors evaluate a company or investment. The SEC regulates firms with large AUMs to protect investors.<br/> </p></div>	## What Are Assets Under Management (AUM)? Assets under management (AUM) is the [market value](https://www.investopedia.com/terms/m/marketvalue.asp) of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company. When calculating AUM, some financial institutions include bank deposits, [mutual funds](https://www.investopedia.com/articles/investing/062113/mutual-funds-management-fees-vs-mer.asp), and cash, while others limit it to funds under discretionary management from individual investors. ### Key Takeaways * Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors. * AUM fluctuates to reflect the flow of money in and out of a fund and the price performance of the assets. * A fund's management fees and expenses are often calculated as a percentage of AUM. ## Understanding Assets Under Management (AUM) AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, a brokerage company, or an individual registered as an investment advisor or [portfolio manager](https://www.investopedia.com/terms/p/portfoliomanager.asp). When an investor has $50,000 in a mutual fund, those funds are part of the total AUM of the pool of funds. The fund manager can buy and sell shares according to the investment objective using all invested funds without obtaining special permissions. AUM includes the capital the manager can use to make transactions for one or all clients. An investor may need a minimum amount of personal AUM to qualify for a type of investment, such as a hedge fund, to ensure the client can withstand adverse markets. An investor’s AUM may coincide with their [net worth](https://www.investopedia.com/terms/n/networth.asp) and may determine the type of services received from a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) or brokerage company. ### Investors often consider higher investment inflows and higher AUM of a financial institution as positive indicators of quality and management experience. ## Calculating AUM Calculating assets under management varies among companies and depends on the flow of investor money in and out of a fund. [Asset performance](https://www.investopedia.com/terms/a/assetperformance.asp), capital appreciation, and reinvested dividends increase the AUM of a fund. Assets under management also increase when new customers and their assets are acquired. A decrease in AUM occurs following losses in the market value or performance of assets, fund closures, and decreased investor in-flows. The [U.S. Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) requires firms to register with the SEC with AUM ranging between $25 million to $110 million, depending on several factors, including the size and location of the firm. The SEC regulates the financial markets to ensure that it functions properly. ## AUM and Fees AUM is a consideration when calculating fees. Many investment products charge [management fees](https://www.investopedia.com/terms/m/managementfee.asp) as a fixed percentage of AUM. Financial advisors and personal money managers charge clients a fee as a percentage of personal assets under management. Fees commonly decrease as AUM increases, and financial professionals can attract high-wealth investors. ## AUM Examples ### SPY The [SPDR S&P 500 ETF (SPY)](https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp) is an [exchange-traded fund](https://www.investopedia.com/terms/e/etf.asp). An ETF is a fund that contains several stocks or securities that match or mirror an index, such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp). The SPY has all 500 of the stocks in the S&P 500 index. As of June 14, 2023, the SPY had assets under management of $412.25 billion. ### EDOW The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks in the [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp). As of June 14, 2023, the EDOW had assets under management of $189.58 million. ## How Is AUM Used as a Tool by Investment Companies? Investment companies use assets under management as a marketing tool to attract new investors. AUM helps investors determine the size of a company's operations relative to its competitors. ## What Does AUM Tell Potential Investors? When evaluating a specific fund, investors often look at its AUM as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more [liquid](https://www.investopedia.com/terms/l/liquidity.asp), meaning investors can buy and sell the fund easily. ## What Is the Benefit of a Fund With a Large AUM? Funds with large AUMs have sufficient holdings to meet any redemption pressure. If a few large investors leave the fund, it would not likely impact it. ## The Bottom Line Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM can reveal the management performance and experience when investors evaluate a company or investment. The SEC regulates firms with large AUMs to protect investors.	What Are Assets Under Management (AUM)? Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM is used in conjunction with management performance and management experience when evaluating a company. When calculating AUM, some financial institutions include bank deposits, mutual funds, and cash, while others limit it to funds under discretionary management from individual investors. Key Takeaways Assets under management (AUM) is the total market value of the investments managed by a person or entity on behalf of investors.AUM fluctuates to reflect the flow of money in and out of a fund and the price performance of the assets.A fund's management fees and expenses are often calculated as a percentage of AUM. Understanding Assets Under Management (AUM) AUM is the sum of the market value for all of the investments managed by a fund or family of funds, a venture capital firm, a brokerage company, or an individual registered as an investment advisor or portfolio manager. When an investor has $50,000 in a mutual fund, those funds are part of the total AUM of the pool of funds. The fund manager can buy and sell shares according to the investment objective using all invested funds without obtaining special permissions. AUM includes the capital the manager can use to make transactions for one or all clients. An investor may need a minimum amount of personal AUM to qualify for a type of investment, such as a hedge fund, to ensure the client can withstand adverse markets. An investor’s AUM may coincide with their net worth and may determine the type of services received from a financial advisor or brokerage company. Investors often consider higher investment inflows and higher AUM of a financial institution as positive indicators of quality and management experience. Calculating AUM Calculating assets under management varies among companies and depends on the flow of investor money in and out of a fund. Asset performance, capital appreciation, and reinvested dividends increase the AUM of a fund. Assets under management also increase when new customers and their assets are acquired. A decrease in AUM occurs following losses in the market value or performance of assets, fund closures, and decreased investor in-flows. The U.S. Securities and Exchange Commission (SEC) requires firms to register with the SEC with AUM ranging between $25 million to $110 million, depending on several factors, including the size and location of the firm. The SEC regulates the financial markets to ensure that it functions properly. AUM and Fees AUM is a consideration when calculating fees. Many investment products charge management fees as a fixed percentage of AUM. Financial advisors and personal money managers charge clients a fee as a percentage of personal assets under management. Fees commonly decrease as AUM increases, and financial professionals can attract high-wealth investors. AUM Examples SPY The SPDR S&P 500 ETF (SPY) is an exchange-traded fund. An ETF is a fund that contains several stocks or securities that match or mirror an index, such as the S&P 500. The SPY has all 500 of the stocks in the S&P 500 index. As of June 14, 2023, the SPY had assets under management of $412.25 billion. EDOW The First Trust Dow 30 Equal Weight ETF (EDOW) tracks the 30 stocks in the Dow Jones Industrial Average (DJIA). As of June 14, 2023, the EDOW had assets under management of $189.58 million. How Is AUM Used as a Tool by Investment Companies? Investment companies use assets under management as a marketing tool to attract new investors. AUM helps investors determine the size of a company's operations relative to its competitors. What Does AUM Tell Potential Investors? When evaluating a specific fund, investors often look at its AUM as an indication of the size of the fund. Typically, investment products with high AUMs have higher market trading volumes making them more liquid, meaning investors can buy and sell the fund easily. What Is the Benefit of a Fund With a Large AUM? Funds with large AUMs have sufficient holdings to meet any redemption pressure. If a few large investors leave the fund, it would not likely impact it. The Bottom Line Assets under management (AUM) is the market value of the investments managed by a person or entity on behalf of clients. AUM can reveal the management performance and experience when investors evaluate a company or investment. The SEC regulates firms with large AUMs to protect investors.	[ [ "market value", "https://www.investopedia.com/terms/m/marketvalue.asp" ], [ "mutual funds", "https://www.investopedia.com/articles/investing/062113/mutual-funds-management-fees-vs-mer.asp" ], [ "portfolio manager", "https://www.investopedia.com/terms/p/portfoliomanager.asp" ], [ "net worth", "https://www.investopedia.com/terms/n/networth.asp" ], [ "financial advisor", "https://www.investopedia.com/terms/f/financial-advisor.asp" ], [ "Asset performance", "https://www.investopedia.com/terms/a/assetperformance.asp" ], [ "U.S. Securities and Exchange Commission (SEC)", "https://www.investopedia.com/terms/s/sec.asp" ], [ "management fees", "https://www.investopedia.com/terms/m/managementfee.asp" ], [ "SPDR S&P 500 ETF (SPY)", "https://www.investopedia.com/articles/investing/122215/spy-spdr-sp-500-trust-etf.asp" ], [ "exchange-traded fund", "https://www.investopedia.com/terms/e/etf.asp" ], [ "S&P 500", "https://www.investopedia.com/terms/s/sp500.asp" ], [ "Dow Jones Industrial Average (DJIA)", "https://www.investopedia.com/terms/d/djia.asp" ], [ "liquid", "https://www.investopedia.com/terms/l/liquidity.asp" ] ]
https://www.investopedia.com/terms/a/accreditedinvestor.asp	Accredited Investor Defined: Understand the Requirements	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-an-accredited-investor"></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 Accredited Investor? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience. </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 the U.S., the term accredited investor is used by 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> under <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/regulationd.asp">Regulation D</a> to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high-net-worth individuals (HNWIs), banks, insurance companies, brokers, and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp">trusts</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_6-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_7-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Accredited investors are those individuals classified by the SEC as qualified to invest in complex or sophisticated types of securities.</li><li>To become accredited certain criteria must be met, such as having an average yearly income over $200,000 ($300,000 with a spouse or domestic partner) or working in the financial industry.<span class="ql-inline-citation" data-cite="6"></span></li><li>Sellers of unregistered securities are only allowed to sell to accredited investors, who are deemed financially sophisticated enough to bear the risks. </li><li>Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience.</li><li>Unregistered securities are considered inherently riskier because they lack the normal disclosures that come with SEC registration. </li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_8-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Acredited Investor" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/hdrdjzTnxMDZlMYEL-AFUDqewIM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/hdrdjzTnxMDZlMYEL-AFUDqewIM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg" data-srcset="https://www.investopedia.com/thmb/QsFKnkW_BQ81sxwFFI4zK5zPb9o=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Acredited Investor" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/hdrdjzTnxMDZlMYEL-AFUDqewIM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg" srcset="https://www.investopedia.com/thmb/QsFKnkW_BQ81sxwFFI4zK5zPb9o=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Katie Kerpel</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-accredited-investors"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_9-0"> <span class="mntl-sc-block-heading__text"> Understanding Accredited Investors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Accredited investors are legally authorized to purchase securities that are not registered with regulatory authorities like the SEC. Many companies decide to offer securities to this class of accredited investors directly. Because this decision allows companies exemption from registering securities with the SEC, it can save them a lot of money. </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 type of share offering is referred to as a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/privateplacement.asp">private placement</a>. It has the potential to present these accredited investors with a great deal of risk. Therefore authorities need to ensure that they are financially stable, experienced, and knowledgeable about their risky ventures.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When companies decide to offer their shares to accredited investors, the role of regulatory authorities is limited to verifying or offering the necessary guidelines for setting benchmarks to determine who qualifies as an accredited investor. Regulatory authorities help determine if the applicant possesses the necessary financial means and knowledge to take the risks involved in investing in unregistered securities.<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"> Accredited investors also have privileged access to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/venturecapital.asp">venture capital</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hedgefund.asp">hedge funds</a>, <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/angelinvestor.asp">angel investments</a>, and deals involving complex and higher-risk investments and instruments. </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-requirements-for-accredited-investors"></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"> Requirements for Accredited Investors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> The regulations for accredited investors vary from one jurisdiction to the other and are often defined by a local market regulator or a competent authority. In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse.<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_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> A person is also considered an accredited investor if they have a <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> exceeding $1 million, either individually or jointly with their spouse. This amount cannot include a primary residence. The SEC also considers a person to be an accredited investor if they are a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/generalpartner.asp">general partner</a>, executive officer, or director for the company that is issuing the unregistered securities.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.<span class="ql-inline-citation" data-cite="2"></span> However, an organization cannot be formed with the sole purpose of purchasing specific securities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_27-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_28-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block no-title" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>If a person can demonstrate sufficient education or job experience showing their professional knowledge of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unregistered-shares.asp">unregistered</a> securities, they too can qualify to be considered an accredited investor.<span class="ql-inline-citation" data-cite="2"></span></p></div></div></div> <span class="heading-toc" id="toc-recent-changes-to-the-accredited-investor-definition"></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"> Recent Changes to the Accredited Investor Definition </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Recently, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> On Aug. 26, 2020, the U.S. Securities and Exchange Commission amended the definition of an accredited investor. According to the SEC's press release, "the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify."<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisors.<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_35-0"></div> <span class="heading-toc" id="toc-purpose-of-accredited-investor-requirements"></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"> Purpose of Accredited Investor Requirements </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Any regulatory authority of a market is tasked with both promoting investment and safeguarding investors. On one hand, regulators have a vested interest in promoting investments in risky ventures and entrepreneurial activities because they have the potential to emerge as multi-baggers in the future. Such initiatives are risky, may be focused on concept-only research and development activities without any marketable product, and may have a high chance of failure. If these ventures are successful, they offer a big return to their investors. However, they also have a high probability of failure. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> On the other hand, regulators need to protect less-knowledgeable, individual investors who may not have the financial cushion to absorb high losses or understand the risks associated with their investments. Therefore, the provision of accredited investors allows access for both investors who are financially well-equipped, as well as investors who are knowledgeable and experienced. </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"> There is no formal process for becoming an accredited investor. Rather, it is the responsibility of the sellers of such securities to take a number of different steps in order to verify the status of entities or individuals who wish to be treated as accredited investors.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_42-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Individuals or parties who want to be accredited investors can approach the issuer of the unregistered securities. The issuer may ask the applicant to respond to a questionnaire to determine if the applicant qualifies as an accredited investor. The questionnaire may require various attachments: account information, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-statements.asp">financial statements</a>, and a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/balancesheet.asp">balance sheet</a> to verify the qualification. The list of attachments can extend to <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxreturn.asp">tax returns</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/w2form.asp">W-2</a> forms, salary slips, and even letters from reviews by <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cpa.asp">CPAs</a>, tax attorneys, investment <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broker.asp">brokers</a>, or advisors. Additionally, the issuers may also evaluate an individual’s <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditreport.asp">credit report</a> for additional assessment. </p> <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-example-of-an-accredited-investor"></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"> Example of an Accredited Investor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> For example, suppose there is an individual whose income was $150,000 for the last three years. They reported a primary residence value of $1 million (with a mortgage of $200,000), a car worth $100,000 (with an outstanding loan of $50,000), a 401(k) account with $500,000, and a savings account with $450,000. While this individual fails the income test, they are an accredited investor according to the test on net worth, which cannot include the value of an individual's primary residence. Net worth is calculated as <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">assets</a> minus <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/liability.asp">liabilities</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_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> This person's net worth is exactly $1 million. This involves a calculation of their assets (other than their primary residence) of $1,050,000 ($100,000 + $500,000 + $450,000) less a car loan equaling $50,000. Since they meet the net worth requirement, they qualify to be an accredited investor. </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-who-qualifies-to-be-an-accredited-investor"></span> <h2 class="mntl-sc-block-questionandanswer__question">Who Qualifies to Be an Accredited Investor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The SEC defines an accredited investor as either:<span class="ql-inline-citation" data-cite="7"></span></p><ol><li>an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.</li><li>a person whose individual net worth, or joint net worth with that person's spouse or partner, exceeds $1,000,000, excluding the person's primary residence.</li></ol></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_51-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_52-0"><span class="heading-toc" id="toc-are-there-any-other-ways-of-becoming-an-accredited-investor"></span> <h2 class="mntl-sc-block-questionandanswer__question">Are There Any Other Ways of Becoming an Accredited Investor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Under certain circumstances, an accredited investor designation may be assigned to a firm's directors, executive officers, or general partners if that firm is the issuer of the securities being offered or sold.<span class="ql-inline-citation" data-cite="2"></span> In some instances, a financial professional holding a FINRA Series 7, 65, or 82 can also act as an accredited investor. There are a few additional methods that are less relevant, such as somebody managing a trust with more than $5 million in assets.<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_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_54-0"><span class="heading-toc" id="toc-what-privileges-do-accredited-investors-receive-that-others-dont"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Privileges Do Accredited Investors Receive That Others Don't?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Under federal securities laws, only those who are accredited investors may participate in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/private-credit-vs-private-equity-7565530">certain securities offerings</a>. These may include shares in private placements, structured products, and private equity or hedge funds, among others.<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_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-why-do-you-need-to-be-accredited-to-invest-in-complex-financial-products"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Do You Need to Be Accredited to Invest in Complex Financial Products?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain bouts of volatility or the risk of large losses, thus rendering unnecessary the regulatory protections that come from a registered offering.</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-if-i-lie-about-being-an-accredited-investor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What If I Lie About Being an Accredited Investor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It is both your responsibility to represent yourself truthfully when opening a financial account, as well as the financial company itself to do its complete due diligence to ensure you are telling the truth (e.g., asking for tax returns or bank/brokerage statements to verify income or assets).<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_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"> The accredited investor rules are designed to protect potential investors with limited financial knowledge from risky ventures and losses they may be ill equipped to withstand. But on the flip side, it gives people already starting off with large financial assets a major advantage over those with more modest assets. </p></div>	## What Is an Accredited Investor? An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience. In the U.S., the term accredited investor is used by the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp) under [Regulation D](https://www.investopedia.com/terms/r/regulationd.asp) to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high-net-worth individuals (HNWIs), banks, insurance companies, brokers, and [trusts](https://www.investopedia.com/terms/t/trust.asp). ### Key Takeaways * Accredited investors are those individuals classified by the SEC as qualified to invest in complex or sophisticated types of securities. * To become accredited certain criteria must be met, such as having an average yearly income over $200,000 ($300,000 with a spouse or domestic partner) or working in the financial industry. * Sellers of unregistered securities are only allowed to sell to accredited investors, who are deemed financially sophisticated enough to bear the risks. * Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience. * Unregistered securities are considered inherently riskier because they lack the normal disclosures that come with SEC registration. ![Acredited Investor]() ![Acredited Investor](https://www.investopedia.com/thmb/hdrdjzTnxMDZlMYEL-AFUDqewIM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/accreditedinvestor_final-f821797e377f4f5aaf1310f1f47d181d.jpg) Investopedia / Katie Kerpel ## Understanding Accredited Investors Accredited investors are legally authorized to purchase securities that are not registered with regulatory authorities like the SEC. Many companies decide to offer securities to this class of accredited investors directly. Because this decision allows companies exemption from registering securities with the SEC, it can save them a lot of money. This type of share offering is referred to as a [private placement](https://www.investopedia.com/terms/p/privateplacement.asp). It has the potential to present these accredited investors with a great deal of risk. Therefore authorities need to ensure that they are financially stable, experienced, and knowledgeable about their risky ventures. When companies decide to offer their shares to accredited investors, the role of regulatory authorities is limited to verifying or offering the necessary guidelines for setting benchmarks to determine who qualifies as an accredited investor. Regulatory authorities help determine if the applicant possesses the necessary financial means and knowledge to take the risks involved in investing in unregistered securities. Accredited investors also have privileged access to [venture capital](https://www.investopedia.com/terms/v/venturecapital.asp), [hedge funds](https://www.investopedia.com/terms/h/hedgefund.asp), [angel investments](https://www.investopedia.com/terms/a/angelinvestor.asp), and deals involving complex and higher-risk investments and instruments. ## Requirements for Accredited Investors The regulations for accredited investors vary from one jurisdiction to the other and are often defined by a local market regulator or a competent authority. In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D. To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse. A person is also considered an accredited investor if they have a [net worth](https://www.investopedia.com/terms/n/networth.asp) exceeding $1 million, either individually or jointly with their spouse. This amount cannot include a primary residence. The SEC also considers a person to be an accredited investor if they are a [general partner](https://www.investopedia.com/terms/g/generalpartner.asp), executive officer, or director for the company that is issuing the unregistered securities. An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. However, an organization cannot be formed with the sole purpose of purchasing specific securities. ### If a person can demonstrate sufficient education or job experience showing their professional knowledge of [unregistered](https://www.investopedia.com/terms/u/unregistered-shares.asp) securities, they too can qualify to be considered an accredited investor. ## Recent Changes to the Accredited Investor Definition Recently, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors. On Aug. 26, 2020, the U.S. Securities and Exchange Commission amended the definition of an accredited investor. According to the SEC's press release, "the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify." Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisors. ## Purpose of Accredited Investor Requirements Any regulatory authority of a market is tasked with both promoting investment and safeguarding investors. On one hand, regulators have a vested interest in promoting investments in risky ventures and entrepreneurial activities because they have the potential to emerge as multi-baggers in the future. Such initiatives are risky, may be focused on concept-only research and development activities without any marketable product, and may have a high chance of failure. If these ventures are successful, they offer a big return to their investors. However, they also have a high probability of failure. On the other hand, regulators need to protect less-knowledgeable, individual investors who may not have the financial cushion to absorb high losses or understand the risks associated with their investments. Therefore, the provision of accredited investors allows access for both investors who are financially well-equipped, as well as investors who are knowledgeable and experienced. There is no formal process for becoming an accredited investor. Rather, it is the responsibility of the sellers of such securities to take a number of different steps in order to verify the status of entities or individuals who wish to be treated as accredited investors. Individuals or parties who want to be accredited investors can approach the issuer of the unregistered securities. The issuer may ask the applicant to respond to a questionnaire to determine if the applicant qualifies as an accredited investor. The questionnaire may require various attachments: account information, [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp), and a [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp) to verify the qualification. The list of attachments can extend to [tax returns](https://www.investopedia.com/terms/t/taxreturn.asp), [W-2](https://www.investopedia.com/terms/w/w2form.asp) forms, salary slips, and even letters from reviews by [CPAs](https://www.investopedia.com/terms/c/cpa.asp), tax attorneys, investment [brokers](https://www.investopedia.com/terms/b/broker.asp), or advisors. Additionally, the issuers may also evaluate an individual’s [credit report](https://www.investopedia.com/terms/c/creditreport.asp) for additional assessment. ## Example of an Accredited Investor For example, suppose there is an individual whose income was $150,000 for the last three years. They reported a primary residence value of $1 million (with a mortgage of $200,000), a car worth $100,000 (with an outstanding loan of $50,000), a 401(k) account with $500,000, and a savings account with $450,000. While this individual fails the income test, they are an accredited investor according to the test on net worth, which cannot include the value of an individual's primary residence. Net worth is calculated as [assets](https://www.investopedia.com/terms/a/asset.asp) minus [liabilities](https://www.investopedia.com/terms/l/liability.asp). This person's net worth is exactly $1 million. This involves a calculation of their assets (other than their primary residence) of $1,050,000 ($100,000 + $500,000 + $450,000) less a car loan equaling $50,000. Since they meet the net worth requirement, they qualify to be an accredited investor. ## Who Qualifies to Be an Accredited Investor? The SEC defines an accredited investor as either: 1. an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. 2. a person whose individual net worth, or joint net worth with that person's spouse or partner, exceeds $1,000,000, excluding the person's primary residence. ## Are There Any Other Ways of Becoming an Accredited Investor? Under certain circumstances, an accredited investor designation may be assigned to a firm's directors, executive officers, or general partners if that firm is the issuer of the securities being offered or sold. In some instances, a financial professional holding a FINRA Series 7, 65, or 82 can also act as an accredited investor. There are a few additional methods that are less relevant, such as somebody managing a trust with more than $5 million in assets. ## What Privileges Do Accredited Investors Receive That Others Don't? Under federal securities laws, only those who are accredited investors may participate in [certain securities offerings](https://www.investopedia.com/private-credit-vs-private-equity-7565530). These may include shares in private placements, structured products, and private equity or hedge funds, among others. ## Why Do You Need to Be Accredited to Invest in Complex Financial Products? One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain bouts of volatility or the risk of large losses, thus rendering unnecessary the regulatory protections that come from a registered offering. ## What If I Lie About Being an Accredited Investor? It is both your responsibility to represent yourself truthfully when opening a financial account, as well as the financial company itself to do its complete due diligence to ensure you are telling the truth (e.g., asking for tax returns or bank/brokerage statements to verify income or assets). ## The Bottom Line The accredited investor rules are designed to protect potential investors with limited financial knowledge from risky ventures and losses they may be ill equipped to withstand. But on the flip side, it gives people already starting off with large financial assets a major advantage over those with more modest assets.	What Is an Accredited Investor? An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience. In the U.S., the term accredited investor is used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high-net-worth individuals (HNWIs), banks, insurance companies, brokers, and trusts. Key Takeaways Accredited investors are those individuals classified by the SEC as qualified to invest in complex or sophisticated types of securities.To become accredited certain criteria must be met, such as having an average yearly income over $200,000 ($300,000 with a spouse or domestic partner) or working in the financial industry.Sellers of unregistered securities are only allowed to sell to accredited investors, who are deemed financially sophisticated enough to bear the risks. Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience.Unregistered securities are considered inherently riskier because they lack the normal disclosures that come with SEC registration. Investopedia / Katie Kerpel Understanding Accredited Investors Accredited investors are legally authorized to purchase securities that are not registered with regulatory authorities like the SEC. Many companies decide to offer securities to this class of accredited investors directly. Because this decision allows companies exemption from registering securities with the SEC, it can save them a lot of money. This type of share offering is referred to as a private placement. It has the potential to present these accredited investors with a great deal of risk. Therefore authorities need to ensure that they are financially stable, experienced, and knowledgeable about their risky ventures. When companies decide to offer their shares to accredited investors, the role of regulatory authorities is limited to verifying or offering the necessary guidelines for setting benchmarks to determine who qualifies as an accredited investor. Regulatory authorities help determine if the applicant possesses the necessary financial means and knowledge to take the risks involved in investing in unregistered securities. Accredited investors also have privileged access to venture capital, hedge funds, angel investments, and deals involving complex and higher-risk investments and instruments. Requirements for Accredited Investors The regulations for accredited investors vary from one jurisdiction to the other and are often defined by a local market regulator or a competent authority. In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D. To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse. A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse. This amount cannot include a primary residence. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities. An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. However, an organization cannot be formed with the sole purpose of purchasing specific securities. If a person can demonstrate sufficient education or job experience showing their professional knowledge of unregistered securities, they too can qualify to be considered an accredited investor. Recent Changes to the Accredited Investor Definition Recently, the U.S. Congress modified the definition of an accredited investor to include registered brokers and investment advisors. On Aug. 26, 2020, the U.S. Securities and Exchange Commission amended the definition of an accredited investor. According to the SEC's press release, "the amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify." Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisors. Purpose of Accredited Investor Requirements Any regulatory authority of a market is tasked with both promoting investment and safeguarding investors. On one hand, regulators have a vested interest in promoting investments in risky ventures and entrepreneurial activities because they have the potential to emerge as multi-baggers in the future. Such initiatives are risky, may be focused on concept-only research and development activities without any marketable product, and may have a high chance of failure. If these ventures are successful, they offer a big return to their investors. However, they also have a high probability of failure. On the other hand, regulators need to protect less-knowledgeable, individual investors who may not have the financial cushion to absorb high losses or understand the risks associated with their investments. Therefore, the provision of accredited investors allows access for both investors who are financially well-equipped, as well as investors who are knowledgeable and experienced. There is no formal process for becoming an accredited investor. Rather, it is the responsibility of the sellers of such securities to take a number of different steps in order to verify the status of entities or individuals who wish to be treated as accredited investors. Individuals or parties who want to be accredited investors can approach the issuer of the unregistered securities. The issuer may ask the applicant to respond to a questionnaire to determine if the applicant qualifies as an accredited investor. The questionnaire may require various attachments: account information, financial statements, and a balance sheet to verify the qualification. The list of attachments can extend to tax returns, W-2 forms, salary slips, and even letters from reviews by CPAs, tax attorneys, investment brokers, or advisors. Additionally, the issuers may also evaluate an individual’s credit report for additional assessment. Example of an Accredited Investor For example, suppose there is an individual whose income was $150,000 for the last three years. They reported a primary residence value of $1 million (with a mortgage of $200,000), a car worth $100,000 (with an outstanding loan of $50,000), a 401(k) account with $500,000, and a savings account with $450,000. While this individual fails the income test, they are an accredited investor according to the test on net worth, which cannot include the value of an individual's primary residence. Net worth is calculated as assets minus liabilities. This person's net worth is exactly $1 million. This involves a calculation of their assets (other than their primary residence) of $1,050,000 ($100,000 + $500,000 + $450,000) less a car loan equaling $50,000. Since they meet the net worth requirement, they qualify to be an accredited investor. Who Qualifies to Be an Accredited Investor? The SEC defines an accredited investor as either:an individual with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.a person whose individual net worth, or joint net worth with that person's spouse or partner, exceeds $1,000,000, excluding the person's primary residence. Are There Any Other Ways of Becoming an Accredited Investor? Under certain circumstances, an accredited investor designation may be assigned to a firm's directors, executive officers, or general partners if that firm is the issuer of the securities being offered or sold. In some instances, a financial professional holding a FINRA Series 7, 65, or 82 can also act as an accredited investor. There are a few additional methods that are less relevant, such as somebody managing a trust with more than $5 million in assets. What Privileges Do Accredited Investors Receive That Others Don't? Under federal securities laws, only those who are accredited investors may participate in certain securities offerings. These may include shares in private placements, structured products, and private equity or hedge funds, among others. Why Do You Need to Be Accredited to Invest in Complex Financial Products? One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain bouts of volatility or the risk of large losses, thus rendering unnecessary the regulatory protections that come from a registered offering. What If I Lie About Being an Accredited Investor? It is both your responsibility to represent yourself truthfully when opening a financial account, as well as the financial company itself to do its complete due diligence to ensure you are telling the truth (e.g., asking for tax returns or bank/brokerage statements to verify income or assets). The Bottom Line The accredited investor rules are designed to protect potential investors with limited financial knowledge from risky ventures and losses they may be ill equipped to withstand. But on the flip side, it gives people already starting off with large financial assets a major advantage over those with more modest assets.	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https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/	Using the Price to Earnings Ratio and PEG to Assess a Stock	<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 price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 index. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/012015/what-average-pricetoearnings-ratio-oil-gas-drilling-sector.asp">good P/E for one group or sector</a> could be a poor P/E for another sector so comparisons should compare similar companies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. It shows what the market is willing to pay for a stock based on its past or future earnings. </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 P/E ratio is calculated by dividing the market value price per share by the company's earnings per share.</li><li>A high P/E ratio can mean that a stock's price is high relative to earnings and possibly overvalued.</li><li>A low P/E ratio might indicate that the current stock price is low relative to earnings. </li><li>An investor could look for stocks within an industry that is expected to benefit from the economic cycle and find companies with the lowest P/Es to determine which stocks are the most undervalued.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-a-pe-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> What Is a P/E Ratio? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Companies that grow faster than average, such as technology companies, typically have higher P/Es. A higher P/E ratio shows that investors are willing to pay a higher share price now due to growth expectations in the future. The median P/E for the S&P 500 was 14.93 as of May 2023.<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Investors not only use the P/E ratio to determine a stock's market value but also in determining future earnings growth. Investors might expect the company to increase its dividends as a result if earnings are expected to rise. Higher earnings and rising dividends typically lead to a higher stock price. </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-formula-and-calculation-of-the-pe-ratio"></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"> Formula and Calculation of the P/E Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The P/E ratio is calculated by dividing the stock's current price by its latest earnings per share: <strong>Current price / most recent earnings per share = P/E ratio</strong>.<span class="ql-inline-citation" data-cite="3"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <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> is the amount of a company's profit allocated to each outstanding share of a company's common stock. It serves as an indicator of the company’s financial health. Earnings per share is the portion of a company's net income that would be earned per share if all profits were paid out to its shareholders. EPS is typically used by analysts and traders to establish the financial strength of a company. EPS provides the “E” or earnings portion of the P/E valuation ratio.<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_16-0"></div> <span class="heading-toc" id="toc-analyzing-pe-ratios"></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"> Analyzing P/E Ratios </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> A stock should be compared to other stocks in its sector or industry group to determine whether it's overvalued or undervalued. Similar companies should be compared to each other, like <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/051415/what-average-pricetoearnings-ratio-insurance-sector.asp">insurance to insurance</a> or oil producer to oil producer. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> An industry group will benefit during a particular phase of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businesscycle.asp">business cycle</a> in most cases, so many professional investors will concentrate on an industry group when their turn in the cycle is up. Remember that the P/E is a measure of expected earnings. <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">Inflation</a> tends to rise as economies mature. The Federal Reserve increases interest rates as a result of slowing the economy and taming inflation to prevent a rapid rise in prices. </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"> Certain industries do well in this environment. Banks earn more income as interest rates rise because they can charge higher rates on their credit products, such as credit cards and mortgages. Basic materials and energy companies also receive a boost in earnings from inflation because they can charge higher prices for the commodities they harvest. </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"> Interest rates will typically be low and banks tend to earn less revenue toward the end of an economic recession. But consumer <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cyclicalstock.asp">cyclical stocks</a> often have higher earnings because consumers may be more willing to purchase on credit when rates are low. </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-limitations-to-the-pe-ratio"></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"> Limitations to the P/E Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> The first part of the P/E equation or price is straightforward because the current market price of a stock is easily obtained, but determining an appropriate earnings number can be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp">more difficult</a>. Investors must determine how to define earnings and the factors that impact earnings. There are some limitations to the P/E ratio as a result as certain factors impact the P/E of a company. </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"> Volatile Market Prices </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Volatile market prices can throw off the P/E ratio, but this more commonly happens in the short term. </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"> Earnings Makeup of a Company </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> The earnings makeup of a company is often difficult to determine. The P/E is typically calculated by measuring historical earnings or trailing earnings, but historical earnings aren't of much use to investors because they reveal little about future earnings. </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-note" 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 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>Investors are most interested in determining future earnings.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Forward earnings or future earnings are based on the opinions of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/wallstreet.asp">Wall Street</a> analysts, and they can be overly optimistic in their assumptions during periods of economic expansion. They can be overly pessimistic during times of economic contraction. </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"> One-time adjustments such as the sale of a subsidiary could inflate earnings in the short term. This complicates the predictions of future earnings because the influx of cash from the sale wouldn't be a sustainable contributor to earnings in the long term. Forward earnings can be useful, but they're prone to inaccuracies. </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"> Earnings Growth </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Earnings growth isn't included in the P/E ratio. The biggest limitation of the P/E ratio is that it tells investors little about the company's EPS growth prospects. An investor might be comfortable buying in at a high P/E ratio expecting earnings growth to bring the P/E back down to a lower level if the company is growing quickly. But they might look elsewhere for a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/05/lowperatiostocksbetterinvestments.asp">stock with a lower P/E</a> if earnings aren't growing quickly enough. </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"> It can be difficult to tell if a high P/E multiple is the result of expected growth or if the stock is simply overvalued. </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-the-peg-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_46-0"> <span class="mntl-sc-block-heading__text"> The PEG Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> A P/E ratio doesn't always show whether the P/E is appropriate for a company's forecasted growth rate even when it's calculated using a forward <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earningsestimate.asp">earnings estimate</a>. Investors turn to another ratio known as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/pegratio.asp">PEG ratio</a> to address this limitation. </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 no-title" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E alone.<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_51-0"> The PEG ratio allows investors to calculate whether a stock's price is overvalued or undervalued by analyzing both today's earnings and the expected growth rate for the company in the future. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-example-of-a-peg-ratio"></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"> Example of a PEG Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> An advantage of using the PEG ratio is that you can compare the relative <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valuation.asp">valuations</a> of different industries that may have very different prevailing P/E ratios. This facilitates the comparison of different industries that each tend to each have their own <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/032315/what-average-pricetoearnings-ratio-financial-services-sector.asp">historical P/E ranges</a>. Here's a comparison of the relative valuation of a biotech stock and an integrated oil company. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_56-0"> <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> <tbody data-check="-1"> <tr> <td> </td> <td><b>Biotech Stock ABC</b> </td> <td><b>Oil Stock XYZ</b> </td> </tr> <tr> <td>Current P/E</td> <td>35 times earnings</td> <td>16 times earnings</td> </tr> <tr> <td>Five-year projected growth rate</td> <td>25%</td> <td>15%</td> </tr> <tr> <td><b>PEG</b></td> <td>35/25, or <b>1.40</b></td> <td>16/15, or <b>1.07</b></td> </tr> </tbody> </table> </div></figure> <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"> These two fictional companies have very different valuations and growth rates, but the PEG ratio gives an apples-to-apples comparison of the relative valuations. The PEG ratio of the S&P 500 would be <strong>16 / 12 = 1.33</strong> if the S&P 500 had a current P/E ratio of 16 times trailing earnings and if the average analyst estimate for future earnings growth in the S&P 500 is 12% over the next five years, </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_60-0"><span class="heading-toc" id="toc-what-does-it-mean-when-a-company-has-a-high-pe-ratio"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does It Mean When a Company Has a High P/E Ratio?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A company with a current P/E ratio of 25, which is above the S&P average, trades at 25 times its earnings. The high multiple indicates that investors expect higher growth from the company compared to the overall market. A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio should be considered against the backdrop of the P/E for the company's industry.</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-what-is-a-sector"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Sector?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A sector is a general segment of the economy that contains similar industries. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services.<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_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-is-a-relative-valuation"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Relative Valuation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A relative valuation is a mathematical way of determining whether a specific stock or a broad industry is more or less expensive than a broad market index such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a> or the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a>.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-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"> The price to earnings ratio (P/E) is one of the most common ratios used by investors to determine if a company's stock price is valued properly relative to its earnings. The P/E ratio is popular and easy to calculate, but it has shortcomings that investors should consider when using it to determine a stock's valuation. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The P/E ratio doesn't factor in future earnings growth, so the PEG ratio provides more insight into a stock's valuation. The PEG is a valuable tool for investors in calculating a stock's future prospects because it provides a forward-looking perspective. But no single ratio can tell investors all they need to know about a stock. It's important to use a variety of ratios to arrive at a complete picture of a company's financial health and its stock valuation. </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"> Every investor wants an edge in predicting a company's future, but a company's earnings guidance statements may not be a reliable source. </p></div>	The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 index. A [good P/E for one group or sector](https://www.investopedia.com/ask/answers/012015/what-average-pricetoearnings-ratio-oil-gas-drilling-sector.asp) could be a poor P/E for another sector so comparisons should compare similar companies. The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. It shows what the market is willing to pay for a stock based on its past or future earnings. ### Key Takeaways * The P/E ratio is calculated by dividing the market value price per share by the company's earnings per share. * A high P/E ratio can mean that a stock's price is high relative to earnings and possibly overvalued. * A low P/E ratio might indicate that the current stock price is low relative to earnings. * An investor could look for stocks within an industry that is expected to benefit from the economic cycle and find companies with the lowest P/Es to determine which stocks are the most undervalued. ## What Is a P/E Ratio? Companies that grow faster than average, such as technology companies, typically have higher P/Es. A higher P/E ratio shows that investors are willing to pay a higher share price now due to growth expectations in the future. The median P/E for the S&P 500 was 14.93 as of May 2023. Investors not only use the P/E ratio to determine a stock's market value but also in determining future earnings growth. Investors might expect the company to increase its dividends as a result if earnings are expected to rise. Higher earnings and rising dividends typically lead to a higher stock price. ## Formula and Calculation of the P/E Ratio The P/E ratio is calculated by dividing the stock's current price by its latest earnings per share: Current price / most recent earnings per share = P/E ratio. [Earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) is the amount of a company's profit allocated to each outstanding share of a company's common stock. It serves as an indicator of the company’s financial health. Earnings per share is the portion of a company's net income that would be earned per share if all profits were paid out to its shareholders. EPS is typically used by analysts and traders to establish the financial strength of a company. EPS provides the “E” or earnings portion of the P/E valuation ratio. ## Analyzing P/E Ratios A stock should be compared to other stocks in its sector or industry group to determine whether it's overvalued or undervalued. Similar companies should be compared to each other, like [insurance to insurance](https://www.investopedia.com/ask/answers/051415/what-average-pricetoearnings-ratio-insurance-sector.asp) or oil producer to oil producer. An industry group will benefit during a particular phase of the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp) in most cases, so many professional investors will concentrate on an industry group when their turn in the cycle is up. Remember that the P/E is a measure of expected earnings. [Inflation](https://www.investopedia.com/terms/i/inflation.asp) tends to rise as economies mature. The Federal Reserve increases interest rates as a result of slowing the economy and taming inflation to prevent a rapid rise in prices. Certain industries do well in this environment. Banks earn more income as interest rates rise because they can charge higher rates on their credit products, such as credit cards and mortgages. Basic materials and energy companies also receive a boost in earnings from inflation because they can charge higher prices for the commodities they harvest. Interest rates will typically be low and banks tend to earn less revenue toward the end of an economic recession. But consumer [cyclical stocks](https://www.investopedia.com/terms/c/cyclicalstock.asp) often have higher earnings because consumers may be more willing to purchase on credit when rates are low. ## Limitations to the P/E Ratio The first part of the P/E equation or price is straightforward because the current market price of a stock is easily obtained, but determining an appropriate earnings number can be [more difficult](https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp). Investors must determine how to define earnings and the factors that impact earnings. There are some limitations to the P/E ratio as a result as certain factors impact the P/E of a company. ### Volatile Market Prices Volatile market prices can throw off the P/E ratio, but this more commonly happens in the short term. ### Earnings Makeup of a Company The earnings makeup of a company is often difficult to determine. The P/E is typically calculated by measuring historical earnings or trailing earnings, but historical earnings aren't of much use to investors because they reveal little about future earnings. ### Investors are most interested in determining future earnings. Forward earnings or future earnings are based on the opinions of [Wall Street](https://www.investopedia.com/terms/w/wallstreet.asp) analysts, and they can be overly optimistic in their assumptions during periods of economic expansion. They can be overly pessimistic during times of economic contraction. One-time adjustments such as the sale of a subsidiary could inflate earnings in the short term. This complicates the predictions of future earnings because the influx of cash from the sale wouldn't be a sustainable contributor to earnings in the long term. Forward earnings can be useful, but they're prone to inaccuracies. ### Earnings Growth Earnings growth isn't included in the P/E ratio. The biggest limitation of the P/E ratio is that it tells investors little about the company's EPS growth prospects. An investor might be comfortable buying in at a high P/E ratio expecting earnings growth to bring the P/E back down to a lower level if the company is growing quickly. But they might look elsewhere for a [stock with a lower P/E](https://www.investopedia.com/ask/answers/05/lowperatiostocksbetterinvestments.asp) if earnings aren't growing quickly enough. It can be difficult to tell if a high P/E multiple is the result of expected growth or if the stock is simply overvalued. ## The PEG Ratio A P/E ratio doesn't always show whether the P/E is appropriate for a company's forecasted growth rate even when it's calculated using a forward [earnings estimate](https://www.investopedia.com/terms/e/earningsestimate.asp). Investors turn to another ratio known as the [PEG ratio](https://www.investopedia.com/terms/p/pegratio.asp) to address this limitation. ### The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E alone. The PEG ratio allows investors to calculate whether a stock's price is overvalued or undervalued by analyzing both today's earnings and the expected growth rate for the company in the future. ## Example of a PEG Ratio An advantage of using the PEG ratio is that you can compare the relative [valuations](https://www.investopedia.com/terms/v/valuation.asp) of different industries that may have very different prevailing P/E ratios. This facilitates the comparison of different industries that each tend to each have their own [historical P/E ranges](https://www.investopedia.com/ask/answers/032315/what-average-pricetoearnings-ratio-financial-services-sector.asp). Here's a comparison of the relative valuation of a biotech stock and an integrated oil company. \| \| Biotech Stock ABC \| Oil Stock XYZ \| \| --- \| --- \| --- \| \| Current P/E \| 35 times earnings \| 16 times earnings \| \| Five-year projected growth rate \| 25% \| 15% \| \| PEG \| 35/25, or 1.40 \| 16/15, or 1.07 \| These two fictional companies have very different valuations and growth rates, but the PEG ratio gives an apples-to-apples comparison of the relative valuations. The PEG ratio of the S&P 500 would be 16 / 12 = 1.33 if the S&P 500 had a current P/E ratio of 16 times trailing earnings and if the average analyst estimate for future earnings growth in the S&P 500 is 12% over the next five years, ## What Does It Mean When a Company Has a High P/E Ratio? A company with a current P/E ratio of 25, which is above the S&P average, trades at 25 times its earnings. The high multiple indicates that investors expect higher growth from the company compared to the overall market. A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio should be considered against the backdrop of the P/E for the company's industry. ## What Is a Sector? A sector is a general segment of the economy that contains similar industries. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services. ## What Is a Relative Valuation? A relative valuation is a mathematical way of determining whether a specific stock or a broad industry is more or less expensive than a broad market index such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp) or the [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp). ## The Bottom Line The price to earnings ratio (P/E) is one of the most common ratios used by investors to determine if a company's stock price is valued properly relative to its earnings. The P/E ratio is popular and easy to calculate, but it has shortcomings that investors should consider when using it to determine a stock's valuation. The P/E ratio doesn't factor in future earnings growth, so the PEG ratio provides more insight into a stock's valuation. The PEG is a valuable tool for investors in calculating a stock's future prospects because it provides a forward-looking perspective. But no single ratio can tell investors all they need to know about a stock. It's important to use a variety of ratios to arrive at a complete picture of a company's financial health and its stock valuation. Every investor wants an edge in predicting a company's future, but a company's earnings guidance statements may not be a reliable source.	The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company's stock price is overvalued or undervalued and can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 index. A good P/E for one group or sector could be a poor P/E for another sector so comparisons should compare similar companies. The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. It shows what the market is willing to pay for a stock based on its past or future earnings. Key Takeaways The P/E ratio is calculated by dividing the market value price per share by the company's earnings per share.A high P/E ratio can mean that a stock's price is high relative to earnings and possibly overvalued.A low P/E ratio might indicate that the current stock price is low relative to earnings. An investor could look for stocks within an industry that is expected to benefit from the economic cycle and find companies with the lowest P/Es to determine which stocks are the most undervalued. What Is a P/E Ratio? Companies that grow faster than average, such as technology companies, typically have higher P/Es. A higher P/E ratio shows that investors are willing to pay a higher share price now due to growth expectations in the future. The median P/E for the S&P 500 was 14.93 as of May 2023. Investors not only use the P/E ratio to determine a stock's market value but also in determining future earnings growth. Investors might expect the company to increase its dividends as a result if earnings are expected to rise. Higher earnings and rising dividends typically lead to a higher stock price. Formula and Calculation of the P/E Ratio The P/E ratio is calculated by dividing the stock's current price by its latest earnings per share: Current price / most recent earnings per share = P/E ratio. Earnings per share (EPS) is the amount of a company's profit allocated to each outstanding share of a company's common stock. It serves as an indicator of the company’s financial health. Earnings per share is the portion of a company's net income that would be earned per share if all profits were paid out to its shareholders. EPS is typically used by analysts and traders to establish the financial strength of a company. EPS provides the “E” or earnings portion of the P/E valuation ratio. Analyzing P/E Ratios A stock should be compared to other stocks in its sector or industry group to determine whether it's overvalued or undervalued. Similar companies should be compared to each other, like insurance to insurance or oil producer to oil producer. An industry group will benefit during a particular phase of the business cycle in most cases, so many professional investors will concentrate on an industry group when their turn in the cycle is up. Remember that the P/E is a measure of expected earnings. Inflation tends to rise as economies mature. The Federal Reserve increases interest rates as a result of slowing the economy and taming inflation to prevent a rapid rise in prices. Certain industries do well in this environment. Banks earn more income as interest rates rise because they can charge higher rates on their credit products, such as credit cards and mortgages. Basic materials and energy companies also receive a boost in earnings from inflation because they can charge higher prices for the commodities they harvest. Interest rates will typically be low and banks tend to earn less revenue toward the end of an economic recession. But consumer cyclical stocks often have higher earnings because consumers may be more willing to purchase on credit when rates are low. Limitations to the P/E Ratio The first part of the P/E equation or price is straightforward because the current market price of a stock is easily obtained, but determining an appropriate earnings number can be more difficult. Investors must determine how to define earnings and the factors that impact earnings. There are some limitations to the P/E ratio as a result as certain factors impact the P/E of a company. Volatile Market Prices Volatile market prices can throw off the P/E ratio, but this more commonly happens in the short term. Earnings Makeup of a Company The earnings makeup of a company is often difficult to determine. The P/E is typically calculated by measuring historical earnings or trailing earnings, but historical earnings aren't of much use to investors because they reveal little about future earnings. Investors are most interested in determining future earnings. Forward earnings or future earnings are based on the opinions of Wall Street analysts, and they can be overly optimistic in their assumptions during periods of economic expansion. They can be overly pessimistic during times of economic contraction. One-time adjustments such as the sale of a subsidiary could inflate earnings in the short term. This complicates the predictions of future earnings because the influx of cash from the sale wouldn't be a sustainable contributor to earnings in the long term. Forward earnings can be useful, but they're prone to inaccuracies. Earnings Growth Earnings growth isn't included in the P/E ratio. The biggest limitation of the P/E ratio is that it tells investors little about the company's EPS growth prospects. An investor might be comfortable buying in at a high P/E ratio expecting earnings growth to bring the P/E back down to a lower level if the company is growing quickly. But they might look elsewhere for a stock with a lower P/E if earnings aren't growing quickly enough. It can be difficult to tell if a high P/E multiple is the result of expected growth or if the stock is simply overvalued. The PEG Ratio A P/E ratio doesn't always show whether the P/E is appropriate for a company's forecasted growth rate even when it's calculated using a forward earnings estimate. Investors turn to another ratio known as the PEG ratio to address this limitation. The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E alone. The PEG ratio allows investors to calculate whether a stock's price is overvalued or undervalued by analyzing both today's earnings and the expected growth rate for the company in the future. Example of a PEG Ratio An advantage of using the PEG ratio is that you can compare the relative valuations of different industries that may have very different prevailing P/E ratios. This facilitates the comparison of different industries that each tend to each have their own historical P/E ranges. Here's a comparison of the relative valuation of a biotech stock and an integrated oil company. Biotech Stock ABC Oil Stock XYZ Current P/E 35 times earnings 16 times earnings Five-year projected growth rate 25% 15% PEG 35/25, or 1.40 16/15, or 1.07 These two fictional companies have very different valuations and growth rates, but the PEG ratio gives an apples-to-apples comparison of the relative valuations. The PEG ratio of the S&P 500 would be 16 / 12 = 1.33 if the S&P 500 had a current P/E ratio of 16 times trailing earnings and if the average analyst estimate for future earnings growth in the S&P 500 is 12% over the next five years, What Does It Mean When a Company Has a High P/E Ratio? A company with a current P/E ratio of 25, which is above the S&P average, trades at 25 times its earnings. The high multiple indicates that investors expect higher growth from the company compared to the overall market. A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio should be considered against the backdrop of the P/E for the company's industry. What Is a Sector? A sector is a general segment of the economy that contains similar industries. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services. What Is a Relative Valuation? A relative valuation is a mathematical way of determining whether a specific stock or a broad industry is more or less expensive than a broad market index such as the S&P 500 or the Nasdaq. The Bottom Line The price to earnings ratio (P/E) is one of the most common ratios used by investors to determine if a company's stock price is valued properly relative to its earnings. The P/E ratio is popular and easy to calculate, but it has shortcomings that investors should consider when using it to determine a stock's valuation. The P/E ratio doesn't factor in future earnings growth, so the PEG ratio provides more insight into a stock's valuation. The PEG is a valuable tool for investors in calculating a stock's future prospects because it provides a forward-looking perspective. But no single ratio can tell investors all they need to know about a stock. It's important to use a variety of ratios to arrive at a complete picture of a company's financial health and its stock valuation. Every investor wants an edge in predicting a company's future, but a company's earnings guidance statements may not be a reliable source.	[ [ "good P/E for one group or sector", "https://www.investopedia.com/ask/answers/012015/what-average-pricetoearnings-ratio-oil-gas-drilling-sector.asp" ], [ "Earnings per share (EPS)", "https://www.investopedia.com/terms/e/eps.asp" ], [ "insurance to insurance", "https://www.investopedia.com/ask/answers/051415/what-average-pricetoearnings-ratio-insurance-sector.asp" ], [ "business cycle", "https://www.investopedia.com/terms/b/businesscycle.asp" ], [ "Inflation", "https://www.investopedia.com/terms/i/inflation.asp" ], [ "cyclical stocks", "https://www.investopedia.com/terms/c/cyclicalstock.asp" ], [ "more difficult", "https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp" ], [ "Wall Street", "https://www.investopedia.com/terms/w/wallstreet.asp" ], [ "stock with a lower P/E", "https://www.investopedia.com/ask/answers/05/lowperatiostocksbetterinvestments.asp" ], [ "earnings estimate", "https://www.investopedia.com/terms/e/earningsestimate.asp" ], [ "PEG ratio", "https://www.investopedia.com/terms/p/pegratio.asp" ], [ "valuations", "https://www.investopedia.com/terms/v/valuation.asp" ], [ "historical P/E ranges", "https://www.investopedia.com/ask/answers/032315/what-average-pricetoearnings-ratio-financial-services-sector.asp" ], [ "S&P 500", "https://www.investopedia.com/terms/s/sp500.asp" ], [ "Nasdaq", "https://www.investopedia.com/terms/n/nasdaq.asp" ] ]
https://www.investopedia.com/articles/investing/031113/do-you-dare-sue-your-broker.asp	Do You Dare Sue Your Broker?	<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 theory, if you have lost money because 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 any financial institution) gave you bad advice, mismanaged your investments, misled you, or took other unlawful or unethical actions, you can sue for damages. If these breaches of duty are provable, the "merits of the case" are strong, as a lawyer would say. </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, these merits may not be enough to get you fair compensation with a fair amount of financial outlay. No matter how good the case, the road to financial damages is a rocky one. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>If you lose money in the market, it may be easy to quickly blame your broker or financial adviser for your predicament; but suing your broker is not as easy as it may sound.</li><li>Financial firms take allegations of fraud or misconduct seriously and have deep pockets to defend themselves. Winning a case can be costly and time-consuming.</li><li>Meticulous record-keeping and maintaining an audit trail of what happened are key to proving your case and that the fault of loss lies with your broker.</li><li>Still, brokers are beholden to strict regulatory guidance and ethical code that carry stiff penalties if they are found to have committed wrongdoing.</li></ul></div></div></div> <span class="heading-toc" id="toc-theory-vs-reality"></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"> Theory vs. Reality </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> In an ideal world, if you have a good case, you or your lawyer would write to the broker explaining the situation and requesting that they pay a certain amount of compensation or make a fair offer. The broker would face the realities of the situation and act with <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financialcareers/08/broker-ethics-tips.asp">integrity</a>, offering you a reasonable sum. </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"> If the broker genuinely believes you were mistaken, they would explain why, and back it up with financial or legal evidence. </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"> Unfortunately, we do not live in an ideal world and nothing makes a broker's blood run cold (or perhaps hot) more than a damages claim. The amount of money involved is generally not trivial and there is often a fear of "the floodgates opening," as you are probably not the only client in this position. </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 is also human nature that people are reluctant to admit they are in the wrong, no more so when this affects their pocket. Last, but very definitely not least, the civil law system has some intrinsic flaws that can be exploited by the unscrupulous and/or desperate. </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-so-what-actually-happens"></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"> So What Actually Happens? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> In many or most cases, the broker will <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/02/120502.asp">deny absolutely everything</a> with arguments that will make your own blood either boil or freeze. The defenses will range from blaming you, the market, or both, to distorting the figures or the laws, the logic, or anything else that shifts the liability for the losses away from the broker. This first response will generally be presented as one of injured innocence. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> If you push further, it will get nasty. Despite legal and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/professionals/071713/ethical-standards-you-should-expect-financial-advisors.asp">ethical obligations</a> to treat complaints fairly, this is also a theoretical ideal that is often totally disregarded in practice. The unstated and sole objective of the broker is to avoid (or evade) liability by any means available. </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"> Do not, therefore, expect fairness or sympathy and understanding; the firm will regard you as an enemy and treat you accordingly. You will be told that "our position is clear," which means "we will admit nothing and offer nothing, and if you want one dollar back then sue us if you dare." The question is, should you dare? </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-why-it-would-indeed-be-daring"></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"> Why It Would Indeed Be Daring </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> The odds are stacked against you, especially if you are dealing with a large firm. You will be stressed throughout the entire case and the firm will be as cool as the proverbial cucumber, because it will turn the case over to its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compliancedepartment.asp">compliance division</a> or lawyers, who are familiar with all the tricks of the trade, have available resources of all kinds, and who know that the opposite applies to you. </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"> Such cases are often complex, invariably very time-consuming, and truly draining on all of one's resources; financial, mental, and physical. </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 other side can and will run up massive legal fees, and if you back out partway you will owe them a frightening amount of money. The fees accruing on the other side are the real problem; they are used as a strategic weapon. The theory is that judges are infallible and if you lose, you were in the wrong, deserve no damages, and should, therefore, pay the costs of the other side. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_30-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_31-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Brokers are not typically held to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fiduciary.asp">fiduciary duty</a> in the way that financial advisers are.<span class="ql-inline-citation" data-cite="2"></span> Registered investment advisers are held to fiduciary duty while brokers are typically held to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/suitable.asp">suitability</a> standard.<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_32-0"> It is also common for the other side to try and avoid the real issues and merits of the case from ever being discussed openly and fairly. Thus, the civil process itself gets misused bureaucratically, through various administrative tricks and processes, while the actual financial mismanagement is either not dealt with at all or simply denied validity. </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"> Furthermore, the less of a case the firm has, the more they will resort to such tactics. The other side will probably believe it has a better chance of escaping liability by mismanaging your complaint and manipulating (or taking its chances with) the civil system than dealing with you fairly out of court, especially if you are in the right. </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"> In addition, you can still lose in court because the judge gets it wrong or the broker hires legal and financial "experts" who manage to convince them (often incorrectly) that the merits of the case are weak. There are a lot of financial people out there who will testify to anything for a not-so-modest fee. Justice is definitely not always done, hence the saying "on the high seas and in court, you are in God's hands." </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 ugly reality is that investors generally lose money because the investment was too risky, but trying to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/08/filing-claims-for-investment-losses.asp">get damages</a> out of the broker or firm is also fraught with financial and other risks. This all sounds daunting and rightly so. The emphasis must be made that you can still win, but you need to be aware of the harsh realities. Litigation, just like investments, can be mis-sold. </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-on-the-other-hand"></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"> On the Other Hand… </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_41-0"> If you are not dealing with a big firm, there is a far more level playing field and you have a much better chance. Likewise, if you have legal insurance that will cover most of the cost, you can proceed more easily. It is also sometimes possible to get "after-the-fact insurance," which is not cheap, but it does mean your potential losses have a ceiling. </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"> Furthermore, if you do have a powerful case, are mentally and physically tough, relatively risk-friendly, or lost a lot of money (but hopefully still have a lot) and really want to see justice done, it may still be worth going for it, even against a big player. </p> <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-frequently-asked-questions"></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"> Frequently Asked Questions </span> </h2> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_46-0"><span class="heading-toc" id="toc-can-you-sue-your-broker"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can You Sue Your Broker?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, you can sue your broker if you have had losses in your financial account. There are two primary ways of suing your broker: filing a suit or filing an arbitration. Keep in mind that you cannot simply sue your broker and be successful in doing so if you have suffered financial losses. Suing your broker can only successfully be done under a few circumstances, such as a breach of fiduciary duty (if they are a registered investment adviser), trading that was not authorized, information that was misrepresented, investments that were risky and not in line with your risk profile, and churning.</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-are-examples-of-broker-misconduct"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Examples of Broker Misconduct?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Examples of broker misconduct include high levels of trading in your account (churning), unauthorized trading, investments that don't align with your risk profile, significant changes in your portfolio's composition, lack of diversification, high uses of margin, poor performance when compared to the market, and lack of proper communication.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_50-0"><span class="heading-toc" id="toc-can-a-broker-steal-your-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can a Broker Steal Your Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, a broker can steal your money. A broker is meant to care for your money and financial health; stealing your money is illegal. The way that a broker can steal your money is known as "conversion of funds," which is illegal under FINRA Rule 2150. This is a misappropriation of money whereby they use several strategies to move money from your account to their account.<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_51-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_52-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> A financial damages claim is not for the fainthearted, but it may be worth it in the end. Make sure you think things through very carefully before the cost "clock" starts ticking away, and bear in mind that you will probably not get objective advice from a lawyer who is keen to sell (or mis-sell) litigation. Suing a large firm is certainly difficult, but it is not impossible and it may be worth trying. The more level the playing field in terms of resources, the better your chances. </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"> Either way, the unfortunate reality is that litigation is an investment in itself, with its own risks and rewards. There are substantial costs involved, both financial and non-financial. All these factors need to be weighed up in advance before a sensible decision is made. In some cases, it is better to live with the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realizedloss.asp">losses</a>. </p></div>	In theory, if you have lost money because your [broker](https://www.investopedia.com/terms/b/broker.asp) (or any financial institution) gave you bad advice, mismanaged your investments, misled you, or took other unlawful or unethical actions, you can sue for damages. If these breaches of duty are provable, the "merits of the case" are strong, as a lawyer would say. Unfortunately, these merits may not be enough to get you fair compensation with a fair amount of financial outlay. No matter how good the case, the road to financial damages is a rocky one. ### Key Takeaways * If you lose money in the market, it may be easy to quickly blame your broker or financial adviser for your predicament; but suing your broker is not as easy as it may sound. * Financial firms take allegations of fraud or misconduct seriously and have deep pockets to defend themselves. Winning a case can be costly and time-consuming. * Meticulous record-keeping and maintaining an audit trail of what happened are key to proving your case and that the fault of loss lies with your broker. * Still, brokers are beholden to strict regulatory guidance and ethical code that carry stiff penalties if they are found to have committed wrongdoing. ## Theory vs. Reality In an ideal world, if you have a good case, you or your lawyer would write to the broker explaining the situation and requesting that they pay a certain amount of compensation or make a fair offer. The broker would face the realities of the situation and act with [integrity](https://www.investopedia.com/articles/financialcareers/08/broker-ethics-tips.asp), offering you a reasonable sum. If the broker genuinely believes you were mistaken, they would explain why, and back it up with financial or legal evidence. Unfortunately, we do not live in an ideal world and nothing makes a broker's blood run cold (or perhaps hot) more than a damages claim. The amount of money involved is generally not trivial and there is often a fear of "the floodgates opening," as you are probably not the only client in this position. It is also human nature that people are reluctant to admit they are in the wrong, no more so when this affects their pocket. Last, but very definitely not least, the civil law system has some intrinsic flaws that can be exploited by the unscrupulous and/or desperate. ## So What Actually Happens? In many or most cases, the broker will [deny absolutely everything](https://www.investopedia.com/articles/02/120502.asp) with arguments that will make your own blood either boil or freeze. The defenses will range from blaming you, the market, or both, to distorting the figures or the laws, the logic, or anything else that shifts the liability for the losses away from the broker. This first response will generally be presented as one of injured innocence. If you push further, it will get nasty. Despite legal and [ethical obligations](https://www.investopedia.com/articles/professionals/071713/ethical-standards-you-should-expect-financial-advisors.asp) to treat complaints fairly, this is also a theoretical ideal that is often totally disregarded in practice. The unstated and sole objective of the broker is to avoid (or evade) liability by any means available. Do not, therefore, expect fairness or sympathy and understanding; the firm will regard you as an enemy and treat you accordingly. You will be told that "our position is clear," which means "we will admit nothing and offer nothing, and if you want one dollar back then sue us if you dare." The question is, should you dare? ## Why It Would Indeed Be Daring The odds are stacked against you, especially if you are dealing with a large firm. You will be stressed throughout the entire case and the firm will be as cool as the proverbial cucumber, because it will turn the case over to its [compliance division](https://www.investopedia.com/terms/c/compliancedepartment.asp) or lawyers, who are familiar with all the tricks of the trade, have available resources of all kinds, and who know that the opposite applies to you. Such cases are often complex, invariably very time-consuming, and truly draining on all of one's resources; financial, mental, and physical. The other side can and will run up massive legal fees, and if you back out partway you will owe them a frightening amount of money. The fees accruing on the other side are the real problem; they are used as a strategic weapon. The theory is that judges are infallible and if you lose, you were in the wrong, deserve no damages, and should, therefore, pay the costs of the other side. ### Brokers are not typically held to [fiduciary duty](https://www.investopedia.com/terms/f/fiduciary.asp) in the way that financial advisers are. Registered investment advisers are held to fiduciary duty while brokers are typically held to the [suitability](https://www.investopedia.com/terms/s/suitable.asp) standard. It is also common for the other side to try and avoid the real issues and merits of the case from ever being discussed openly and fairly. Thus, the civil process itself gets misused bureaucratically, through various administrative tricks and processes, while the actual financial mismanagement is either not dealt with at all or simply denied validity. Furthermore, the less of a case the firm has, the more they will resort to such tactics. The other side will probably believe it has a better chance of escaping liability by mismanaging your complaint and manipulating (or taking its chances with) the civil system than dealing with you fairly out of court, especially if you are in the right. In addition, you can still lose in court because the judge gets it wrong or the broker hires legal and financial "experts" who manage to convince them (often incorrectly) that the merits of the case are weak. There are a lot of financial people out there who will testify to anything for a not-so-modest fee. Justice is definitely not always done, hence the saying "on the high seas and in court, you are in God's hands." The ugly reality is that investors generally lose money because the investment was too risky, but trying to [get damages](https://www.investopedia.com/articles/stocks/08/filing-claims-for-investment-losses.asp) out of the broker or firm is also fraught with financial and other risks. This all sounds daunting and rightly so. The emphasis must be made that you can still win, but you need to be aware of the harsh realities. Litigation, just like investments, can be mis-sold. ## On the Other Hand… If you are not dealing with a big firm, there is a far more level playing field and you have a much better chance. Likewise, if you have legal insurance that will cover most of the cost, you can proceed more easily. It is also sometimes possible to get "after-the-fact insurance," which is not cheap, but it does mean your potential losses have a ceiling. Furthermore, if you do have a powerful case, are mentally and physically tough, relatively risk-friendly, or lost a lot of money (but hopefully still have a lot) and really want to see justice done, it may still be worth going for it, even against a big player. ## Frequently Asked Questions ## Can You Sue Your Broker? Yes, you can sue your broker if you have had losses in your financial account. There are two primary ways of suing your broker: filing a suit or filing an arbitration. Keep in mind that you cannot simply sue your broker and be successful in doing so if you have suffered financial losses. Suing your broker can only successfully be done under a few circumstances, such as a breach of fiduciary duty (if they are a registered investment adviser), trading that was not authorized, information that was misrepresented, investments that were risky and not in line with your risk profile, and churning. ## What Are Examples of Broker Misconduct? Examples of broker misconduct include high levels of trading in your account (churning), unauthorized trading, investments that don't align with your risk profile, significant changes in your portfolio's composition, lack of diversification, high uses of margin, poor performance when compared to the market, and lack of proper communication. ## Can a Broker Steal Your Money? Yes, a broker can steal your money. A broker is meant to care for your money and financial health; stealing your money is illegal. The way that a broker can steal your money is known as "conversion of funds," which is illegal under FINRA Rule 2150. This is a misappropriation of money whereby they use several strategies to move money from your account to their account. ## The Bottom Line A financial damages claim is not for the fainthearted, but it may be worth it in the end. Make sure you think things through very carefully before the cost "clock" starts ticking away, and bear in mind that you will probably not get objective advice from a lawyer who is keen to sell (or mis-sell) litigation. Suing a large firm is certainly difficult, but it is not impossible and it may be worth trying. The more level the playing field in terms of resources, the better your chances. Either way, the unfortunate reality is that litigation is an investment in itself, with its own risks and rewards. There are substantial costs involved, both financial and non-financial. All these factors need to be weighed up in advance before a sensible decision is made. In some cases, it is better to live with the [losses](https://www.investopedia.com/terms/r/realizedloss.asp).	In theory, if you have lost money because your broker (or any financial institution) gave you bad advice, mismanaged your investments, misled you, or took other unlawful or unethical actions, you can sue for damages. If these breaches of duty are provable, the "merits of the case" are strong, as a lawyer would say. Unfortunately, these merits may not be enough to get you fair compensation with a fair amount of financial outlay. No matter how good the case, the road to financial damages is a rocky one. Key Takeaways If you lose money in the market, it may be easy to quickly blame your broker or financial adviser for your predicament; but suing your broker is not as easy as it may sound.Financial firms take allegations of fraud or misconduct seriously and have deep pockets to defend themselves. Winning a case can be costly and time-consuming.Meticulous record-keeping and maintaining an audit trail of what happened are key to proving your case and that the fault of loss lies with your broker.Still, brokers are beholden to strict regulatory guidance and ethical code that carry stiff penalties if they are found to have committed wrongdoing. Theory vs. Reality In an ideal world, if you have a good case, you or your lawyer would write to the broker explaining the situation and requesting that they pay a certain amount of compensation or make a fair offer. The broker would face the realities of the situation and act with integrity, offering you a reasonable sum. If the broker genuinely believes you were mistaken, they would explain why, and back it up with financial or legal evidence. Unfortunately, we do not live in an ideal world and nothing makes a broker's blood run cold (or perhaps hot) more than a damages claim. The amount of money involved is generally not trivial and there is often a fear of "the floodgates opening," as you are probably not the only client in this position. It is also human nature that people are reluctant to admit they are in the wrong, no more so when this affects their pocket. Last, but very definitely not least, the civil law system has some intrinsic flaws that can be exploited by the unscrupulous and/or desperate. So What Actually Happens? In many or most cases, the broker will deny absolutely everything with arguments that will make your own blood either boil or freeze. The defenses will range from blaming you, the market, or both, to distorting the figures or the laws, the logic, or anything else that shifts the liability for the losses away from the broker. This first response will generally be presented as one of injured innocence. If you push further, it will get nasty. Despite legal and ethical obligations to treat complaints fairly, this is also a theoretical ideal that is often totally disregarded in practice. The unstated and sole objective of the broker is to avoid (or evade) liability by any means available. Do not, therefore, expect fairness or sympathy and understanding; the firm will regard you as an enemy and treat you accordingly. You will be told that "our position is clear," which means "we will admit nothing and offer nothing, and if you want one dollar back then sue us if you dare." The question is, should you dare? Why It Would Indeed Be Daring The odds are stacked against you, especially if you are dealing with a large firm. You will be stressed throughout the entire case and the firm will be as cool as the proverbial cucumber, because it will turn the case over to its compliance division or lawyers, who are familiar with all the tricks of the trade, have available resources of all kinds, and who know that the opposite applies to you. Such cases are often complex, invariably very time-consuming, and truly draining on all of one's resources; financial, mental, and physical. The other side can and will run up massive legal fees, and if you back out partway you will owe them a frightening amount of money. The fees accruing on the other side are the real problem; they are used as a strategic weapon. The theory is that judges are infallible and if you lose, you were in the wrong, deserve no damages, and should, therefore, pay the costs of the other side. Brokers are not typically held to fiduciary duty in the way that financial advisers are. Registered investment advisers are held to fiduciary duty while brokers are typically held to the suitability standard. It is also common for the other side to try and avoid the real issues and merits of the case from ever being discussed openly and fairly. Thus, the civil process itself gets misused bureaucratically, through various administrative tricks and processes, while the actual financial mismanagement is either not dealt with at all or simply denied validity. Furthermore, the less of a case the firm has, the more they will resort to such tactics. The other side will probably believe it has a better chance of escaping liability by mismanaging your complaint and manipulating (or taking its chances with) the civil system than dealing with you fairly out of court, especially if you are in the right. In addition, you can still lose in court because the judge gets it wrong or the broker hires legal and financial "experts" who manage to convince them (often incorrectly) that the merits of the case are weak. There are a lot of financial people out there who will testify to anything for a not-so-modest fee. Justice is definitely not always done, hence the saying "on the high seas and in court, you are in God's hands." The ugly reality is that investors generally lose money because the investment was too risky, but trying to get damages out of the broker or firm is also fraught with financial and other risks. This all sounds daunting and rightly so. The emphasis must be made that you can still win, but you need to be aware of the harsh realities. Litigation, just like investments, can be mis-sold. On the Other Hand… If you are not dealing with a big firm, there is a far more level playing field and you have a much better chance. Likewise, if you have legal insurance that will cover most of the cost, you can proceed more easily. It is also sometimes possible to get "after-the-fact insurance," which is not cheap, but it does mean your potential losses have a ceiling. Furthermore, if you do have a powerful case, are mentally and physically tough, relatively risk-friendly, or lost a lot of money (but hopefully still have a lot) and really want to see justice done, it may still be worth going for it, even against a big player. Frequently Asked Questions Can You Sue Your Broker? Yes, you can sue your broker if you have had losses in your financial account. There are two primary ways of suing your broker: filing a suit or filing an arbitration. Keep in mind that you cannot simply sue your broker and be successful in doing so if you have suffered financial losses. Suing your broker can only successfully be done under a few circumstances, such as a breach of fiduciary duty (if they are a registered investment adviser), trading that was not authorized, information that was misrepresented, investments that were risky and not in line with your risk profile, and churning. What Are Examples of Broker Misconduct? Examples of broker misconduct include high levels of trading in your account (churning), unauthorized trading, investments that don't align with your risk profile, significant changes in your portfolio's composition, lack of diversification, high uses of margin, poor performance when compared to the market, and lack of proper communication. Can a Broker Steal Your Money? Yes, a broker can steal your money. A broker is meant to care for your money and financial health; stealing your money is illegal. The way that a broker can steal your money is known as "conversion of funds," which is illegal under FINRA Rule 2150. This is a misappropriation of money whereby they use several strategies to move money from your account to their account. The Bottom Line A financial damages claim is not for the fainthearted, but it may be worth it in the end. Make sure you think things through very carefully before the cost "clock" starts ticking away, and bear in mind that you will probably not get objective advice from a lawyer who is keen to sell (or mis-sell) litigation. Suing a large firm is certainly difficult, but it is not impossible and it may be worth trying. The more level the playing field in terms of resources, the better your chances. Either way, the unfortunate reality is that litigation is an investment in itself, with its own risks and rewards. There are substantial costs involved, both financial and non-financial. All these factors need to be weighed up in advance before a sensible decision is made. In some cases, it is better to live with the losses.	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https://www.investopedia.com/managing-wealth/when-should-you-hire-financial-advisor/	Do I Need a Financial Advisor?	<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-do-i-need-a-financial-advisor"></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"> Do I Need a Financial Advisor? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> As you’re sorting through your finances, you might be asking yourself this question: Do I need a financial advisor? The answer depends on your financial situation. But in most cases, you can benefit from a financial advisor’s knowledge. </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"> Before hiring a <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>: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_5-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <li>Evaluate your financial situation</li><li>Consider which type of financial advisor you need</li><li>Ask about their fees</li><li>Investigate their qualifications<br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A financial advisor helps people manage their money and map out a plan for the future, including retirement.</li><li>Whether they focus on financial planning in a broader form or focus on niche topics, financial advisors draw up plans or recommend specific investment products and vehicles to meet the needs of their clients.</li><li>Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your financial situation, including your net worth, expenses, and financial goals. </li><li>If you choose a financial adviser, always make sure that they abide by fiduciary standards and legal obligations to act in your best interests and disclose any conflicts of interest.</li></ul></div></div></div> <span class="heading-toc" id="toc-what-does-a-financial-advisor-do"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_10-0"> <span class="mntl-sc-block-heading__text"> What Does a Financial Advisor Do? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Broadly speaking, a financial advisor helps people manage their money and map out a plan for the future, including retirement. Some financial advisors might offer a wide range of services, while others may narrow their focus to a niche topic. </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"> Among the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/050815/what-do-financial-advisers-do.asp">tasks that financial advisors might undertake</a> on behalf of clients are: </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>Plotting a long-term financial strategy, including a retirement plan</li> <li>Helping handle financial matters such as buying a house, saving money for a child’s college education, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/091815/do-financial-advisors-prepare-tax-returns-clients.asp">devising a tax plan</a>, purchasing insurance and coming up with an estate plan</li> <li>Researching and recommending investment opportunities</li> <li>Managing investment portfolios<span class="ql-inline-citation" data-cite="1"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_16-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_17-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_18-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>For more guidance on building your financial goals, order a copy of Investopedia's <a data-component="amazon" data-ordinal="1" data-source="affiliate" data-type="externalLink" href="https://www.amazon.com/dp/1547862912/ref=sr_1_7?keywords=investopedia&qid=1684168403&sr=8-9" rel="sponsored nofollow">What To Do With $10,000 magazine</a>, today.</p></div></div></div> <span class="heading-toc" id="toc-how-to-evaluate-your-financial-situation"></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 Evaluate Your Financial Situation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your finances. This will give you a better sense of where you stand financially and what a financial advisor may be able to help you with. </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"> Here are four things to consider and ask yourself when figuring out whether you should tap the expertise of a financial advisor. </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"> What Is Your Net Worth? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Your net worth is not your income, but rather an amount that can help you understand what money you earn, how much you save, and where you spend money, too. </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"> You can calculate your net worth by subtracting your liabilities (what you owe) from your assets (what you own). Assets include investments and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/account-number.asp">bank accounts</a>, while liabilities include credit card bills and mortgage payments. Of course, a positive net worth is far better than a negative net worth. </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-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_30-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0">Tip</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Looking for some direction as you’re evaluating your financial situation? The Consumer Financial Protection Bureau offers an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.consumerfinance.gov/consumer-tools/financial-well-being/">online quiz</a> that helps measure your financial well-being.</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"> How Much Are You Earning and Spending? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Another key to assessing your financial situation is examining your monthly income and expenses. Even if you don’t hire a financial advisor, monitoring your income and expenses can give you an idea of whether you need to reduce expenses or to bump up your allocations toward retirement and savings. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If you don’t already have 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>, now might be a good time to set up one. You can use a spreadsheet or a budgeting app, for instance, to keep on top of your monthly income and expenses. </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"> What Are Your Financial Goals? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Do you dream of retiring at age 60? Do you hope to someday <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/updates/first-time-home-buyer/">buy a home</a>? Setting and working toward financial goals is a key part of healthy money management. Figuring out your short-term and long-term financial goals can steer you toward a decision about hiring a financial advisor. </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"> How Much Investment Risk Are You Comfortable With? </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> Are you fearless when it comes to up-and-down movements in the stock market? Or do you get anxious when you see turmoil in the stock market? Nailing down your risk tolerance regarding investments can help you determine an investment strategy—and can help you choose a financial advisor if you wind up going down that path.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <span class="heading-toc" id="toc-when-to-hire-a-financial-advisor"></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"> When to Hire a Financial Advisor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Once you’ve evaluated your financial situation, it’s time to decide whether to hire a financial advisor. It’s worth noting that you don’t need to be wealthy to seek advice from a financial advisor. If you already have an advisor, you might need to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisor/042216/4-signs-its-time-fire-your-financial-advisor.asp">change advisors at some point</a> in your financial life. In most cases, a major life change or decision will trigger the decision to search for and hire a financial advisor. Below, find six possible scenarios. </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"> You Need Help Realizing Your Financial Goals </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> OK, so you aim to retire at age 60. Or you yearn to buy a home. But how are you going to accomplish these and other goals? A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/103013/how-do-i-know-i-can-trust-my-financial-advisor.asp">trustworthy financial advisor</a> can draw up a roadmap with you that can help you achieve both short-term and long-term financial goals. </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"> You’re Unsure How to Invest Your Money </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> A financial advisor can hold your hand, so to speak, as you make your way through the risky and often confusing investment landscape. They may able to point you in the right direction regarding: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_50-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> <li>How much money you should invest, along with how much money you put in an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/">emergency fund</a></li> <li>What types of investments, such as a 401(k) or IRA, would work best for you</li> <li>When to rebalance your investment portfolio to account for changes in the stock market</li> <li>What tax consequences you face if you withdraw money from retirement accounts</li> </ul> <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"> You’re Going through a Major Life Event </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> You just got married and need help merging finances. Your baby is on the way. Your divorce is pending. You’re nearing retirement. These and other major life events may prompt the need to visit with a financial advisor about your investments, your financial goals, and other monetary matters. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_55-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_56-0"> <span class="mntl-sc-block-subheading__text"> You Received a Lump Sum of Funds </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> Let’s say your mom left you a tidy sum of money in her will. Now what? How do you make the best use of the inheritance? A financial advisor can <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/050115/top-places-work-financial-advisors-rjf-axp.asp">help you make smart choices</a> about your inheritance or any other large windfall, whether it’s a lump sum of money, an investment account, or a life insurance policy. </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"> You Need Accountability </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> You may have sketched out your own financial plan, but have a hard time sticking with it. A financial advisor may offer the accountability that you need to put your financial plan on track. They also may recommend how to tweak your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/100116/importance-making-annual-financial-plan.asp">financial plan</a> in order to maximize the potential outcomes. </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"> You Need Help Managing Debt </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> Many people in the U.S. struggle with debt management. In fact, 30% of all adults—representing over 4 in 10 people who received higher education—said they incurred at least some debt for their education, according to 2022 data from the Federal Reserve.<span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_64-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> No matter the debt you may be working to pay off, it can be overwhelming tackling it by yourself. A financial advisor may be able to help ease your debt burden by developing a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp">debt payoff strategy</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <span class="heading-toc" id="toc-types-of-financial-advisors"></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"> Types of Financial Advisors </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> Several types of financial professionals fall under the umbrella of “financial advisor.” </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"> In general, a financial advisor holds a bachelor’s degree in a field like finance, accounting or business management. They also may be licensed or certified, depending on the services they offer.<span class="ql-inline-citation" data-cite="3"></span> It's also worth nothing that you could see an advisor on a one-time basis, or work with them more regularly. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_71-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_72-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_73-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0">Important</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>“Financial advisor” is a broad term referring to financial professionals such as financial planners and investment managers. Anyone can say they’re a financial advisor, but an advisor with professional designations is ideally the one you should hire.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> In 2021, an estimated 330,300 Americans worked as personal financial advisors, according to the U.S. Bureau of Labor Statistics (BLS). Most financial advisors are self-employed, the bureau says.<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_75-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> Generally, there are five types of financial advisors. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_78-0"> <span class="mntl-sc-block-subheading__text"> Registered Representative </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> A registered representative, also known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stockbroker.asp">stockbroker</a>, buys and sells stocks, bonds, mutual funds, exchange-traded funds and other investment products on behalf of their clients. Brokers typically earn commissions on trades they make. Brokers are regulated by the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state securities regulators.<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_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"> Registered Investment Advisor </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> A registered investment advisor, either a person or a firm, is much like a registered representative. Both buy and sell investments on behalf of their clients.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_83-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> However, registered investment advisors supply financial advice, while registered representatives do not. Also, unlike a registered representative, is a fiduciary who must act in a client’s best interest.<span class="ql-inline-citation" data-cite="7"></span> Furthermore, a registered investment advisor <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">earns an advisory fee</a> for managing a client’s investments; they don’t receive sales commissions.<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_85-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> Depending on the value of assets being managed by a registered investment advisor, either the SEC or a state securities regulator oversees them. FINRA typically doesn’t regulate registered investment advisors.<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_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"> Financial Planner </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> A financial planner might be a registered representative or an insurance agent, for instance. Most often, though, the term refers to a Certified Financial Planner (CFP). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> A CFP must adhere to strict education and training standards. For example, they must hold at least a bachelor’s degree or have at least three years of full-time financial planning experience or an equivalent amount of part-time experience. They also must complete 30 hours of continuing education every two years.<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_92-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_93-0"> As a whole, though, financial planning professionals aren’t overseen by a single regulator. But depending on the services they offer, they may be regulated. For instance, an accountant can be considered a financial planner; they’re regulated by the state accounting board where they practice. Meanwhile, a registered investment advisor—another type of financial planner—is governed by the SEC or a state securities regulator. </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"> Wealth Manager </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> A wealth manager advises wealthy clients on their financial goals and investment approaches. Offerings can include retirement, estate and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-planning.asp">tax planning</a>, along with investment management. </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"> Wealth managers generally are registered representatives, meaning they’re regulated by the SEC, FINRA and state securities regulators. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_99-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_100-0"> <span class="mntl-sc-block-subheading__text"> Robo-Advisor </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp">robo-advisor</a> is an automated online investment manager that relies on algorithms to take care of a client’s assets. Clients generally don’t gain any human-supplied financial advice from a robo-advisor service. </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 SEC regulates robo-advisors. They make money by charging a fee for each trade, a flat monthly fee or a percentage fee based on the dollar amount of assets being managed.<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_104-0"></div> <span class="heading-toc" id="toc-questions-to-ask-a-financial-advisor"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_105-0"> <span class="mntl-sc-block-heading__text"> Questions to Ask a Financial Advisor </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_106-0"> Investors looking for the right advisor should ask a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/financial-advisors/020415/essential-questions-financial-advisor.asp">number of questions</a>, including: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_108-0"> <li><strong>Do you have experience working with a client like me? </strong>A financial advisor that works with you will likely not be the same as a financial advisor who works with another. You may be looking for someone who specifically works with retired people, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-find-an-lgbtq-friendly-financial-planner-5186139">same-sex couples</a>, divorced people, surviving spouses, a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-find-a-woman-financial-advisor-or-planner-5270527">woman</a>, a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-find-bipoc-financial-advisor-5271050">Black or Indigenous Person of Color (BIPOC)</a>, an LGBTQ+ individual, or any applicable niche.</li> <li><strong>What services do you offer?</strong> Depending on whether you’re looking for a wide-ranging financial plan or are simply looking for investment guidance, this question will be important.</li> <li><strong>How do you charge your clients?</strong> Financial advisors have different methods of <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/021216/can-you-afford-financial-advisor.asp">charging their clients</a>, and it will often depend on how often you work with one. Be sure to ask if the advisor follows a fee-only or commission-based system. </li> <li><strong>What sort of education do you have?</strong> If you’re working with a human advisor, you’ll undoubtedly be curious about their education. For instance, do they have a college degree in a field like accounting or finance? You want to make sure their education matches the type of advisory services you need.</li><span class="mntl-sc-block-adslot mntl-sc-block-adslot-inline"></span> <li><strong>What are their credentials?</strong> Are they regulated by the SEC, for example, or certified by an organization like the National Financial Educators Council? Resources that can help you investigate whether an advisor is registered, certified or in trouble include FINRA’s <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://brokercheck.finra.org">BrokerCheck tool</a>, the <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="externalLink" href="https://www.cfp.net/verify-a-cfp-professional">CFP verification tool</a>, and the SEC’s <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="externalLink" href="https://www.sec.gov/litigations/sec-action-look-up">Action Lookup tool</a>.</li> <li>How often will they contact you, and by what method? Are there any limitations on how frequently they can be contacted?</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_109-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_110-0"> The nature of the advisory field is also changing. Investors now usually have access to their accounts digitally and thus, beyond traditional in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_111-0"></div> <span class="heading-toc" id="toc-situations-where-you-can-do-it-yourself"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_112-0"> <span class="mntl-sc-block-heading__text"> Situations Where You Can Do It Yourself </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> It is possible to create a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/060415/financial-planning-can-you-do-it-yourself.asp">do-it-yourself financial plan</a>. If you have little-to-no debts and are comfortable investing on your own, for example, you likely can track your financial situation on your own and set financial goals on your own. Generally, a basic, suitable financial plan includes the following elements: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_114-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_115-0"> <li>Your determined net worth</li> <li>Financial goals</li> <li>A budget to account for expenses</li> <li>Debt management</li> <li><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/091114/build-your-own-retirement-plan.asp">A plan for retirement</a></li> <li>An emergency fund</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_116-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_117-0"> While you may feel comfortable managing your finances on your own now, this may change. It’s always important to check in on your financial situation regularly. As your personal life changes, your finances likely will too, and a financial advisor may come in handy. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_118-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_119-0"><span class="heading-toc" id="toc-do-i-need-a-financial-advisor-if-i-dont-have-much-money"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do I Need a Financial Advisor if I Don’t Have Much Money?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Even if you have little to no money, you may be able to benefit from a financial advisor’s expertise. For instance, a financial advisor may be able to help put on the right track toward saving money for retirement.</p></div> </div> <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-what-is-a-good-percentage-to-pay-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is a Good Percentage to Pay a Financial Advisor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A good percentage to pay a financial advisor might be 1%, based on the value of your assets.<span class="ql-inline-citation" data-cite="11"></span> However, some financial advisors might use a different percentage or might charge an hourly or flat fee instead.<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_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-what-are-red-flags-in-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">What are Red Flags in a Financial Advisor?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Red flags in a financial advisor include not being upfront about how they make money, aggressively pushing investment products, being unresponsive to clients’ inquiries, and lacking professional designations.</p><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_124-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_125-0"><span class="heading-toc" id="toc-how-do-you-choose-a-financial-advisor"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Choose a Financial Advisor?</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/updates/find-financial-advisor-planner/">Finding a financial advisor</a> or planner can seem intimidating at first, but it can pay off if your portfolio is too large to manage alone. The first step is to figure out what kind of financial advice you need–whether that be estate planning, saving for retirement, or simply seeking the best way to invest your savings. This will determine what kind of specialist is best suited to your needs. It is also important to understand any fees and commissions. Some advisors may benefit from selling unnecessary products, while a fiduciary is legally required to choose investments with the client's needs in mind.<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_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"> Deciding whether you need a financial advisor involves evaluating your financial situation, determining which type of financial advisor you need and diving into the background of any financial advisor you’re thinking of hiring. </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"> Before hiring a financial advisor, be sure to ask about what menu of services they offer and what they charge for those services. While you may need to put in some work to find the right financial advisor, the work can be worth it if the advisor <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/insights/biggest-stock-market-myths/">gives you solid advice</a> and helps put you in a better financial position.<br/> </p></div>	## Do I Need a Financial Advisor? As you’re sorting through your finances, you might be asking yourself this question: Do I need a financial advisor? The answer depends on your financial situation. But in most cases, you can benefit from a financial advisor’s knowledge. Before hiring a [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp): * Evaluate your financial situation * Consider which type of financial advisor you need * Ask about their fees * Investigate their qualifications ### Key Takeaways * A financial advisor helps people manage their money and map out a plan for the future, including retirement. * Whether they focus on financial planning in a broader form or focus on niche topics, financial advisors draw up plans or recommend specific investment products and vehicles to meet the needs of their clients. * Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your financial situation, including your net worth, expenses, and financial goals. * If you choose a financial adviser, always make sure that they abide by fiduciary standards and legal obligations to act in your best interests and disclose any conflicts of interest. ## What Does a Financial Advisor Do? Broadly speaking, a financial advisor helps people manage their money and map out a plan for the future, including retirement. Some financial advisors might offer a wide range of services, while others may narrow their focus to a niche topic. Among the [tasks that financial advisors might undertake](https://www.investopedia.com/articles/personal-finance/050815/what-do-financial-advisers-do.asp) on behalf of clients are: * Plotting a long-term financial strategy, including a retirement plan * Helping handle financial matters such as buying a house, saving money for a child’s college education, [devising a tax plan](https://www.investopedia.com/ask/answers/091815/do-financial-advisors-prepare-tax-returns-clients.asp), purchasing insurance and coming up with an estate plan * Researching and recommending investment opportunities * Managing investment portfolios ### Tip For more guidance on building your financial goals, order a copy of Investopedia's [What To Do With $10,000 magazine](https://www.amazon.com/dp/1547862912/ref=sr_1_7?keywords=investopedia&qid=1684168403&sr=8-9), today. ## How to Evaluate Your Financial Situation Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your finances. This will give you a better sense of where you stand financially and what a financial advisor may be able to help you with. Here are four things to consider and ask yourself when figuring out whether you should tap the expertise of a financial advisor. ### What Is Your Net Worth? Your net worth is not your income, but rather an amount that can help you understand what money you earn, how much you save, and where you spend money, too. You can calculate your net worth by subtracting your liabilities (what you owe) from your assets (what you own). Assets include investments and [bank accounts](https://www.investopedia.com/terms/a/account-number.asp), while liabilities include credit card bills and mortgage payments. Of course, a positive net worth is far better than a negative net worth. ### Tip Looking for some direction as you’re evaluating your financial situation? The Consumer Financial Protection Bureau offers an [online quiz](https://www.consumerfinance.gov/consumer-tools/financial-well-being/) that helps measure your financial well-being. ### How Much Are You Earning and Spending? Another key to assessing your financial situation is examining your monthly income and expenses. Even if you don’t hire a financial advisor, monitoring your income and expenses can give you an idea of whether you need to reduce expenses or to bump up your allocations toward retirement and savings. If you don’t already have a [budget](https://www.investopedia.com/terms/b/budget.asp), now might be a good time to set up one. You can use a spreadsheet or a budgeting app, for instance, to keep on top of your monthly income and expenses. ### What Are Your Financial Goals? Do you dream of retiring at age 60? Do you hope to someday [buy a home](https://www.investopedia.com/updates/first-time-home-buyer/)? Setting and working toward financial goals is a key part of healthy money management. Figuring out your short-term and long-term financial goals can steer you toward a decision about hiring a financial advisor. ### How Much Investment Risk Are You Comfortable With? Are you fearless when it comes to up-and-down movements in the stock market? Or do you get anxious when you see turmoil in the stock market? Nailing down your risk tolerance regarding investments can help you determine an investment strategy—and can help you choose a financial advisor if you wind up going down that path. ## When to Hire a Financial Advisor Once you’ve evaluated your financial situation, it’s time to decide whether to hire a financial advisor. It’s worth noting that you don’t need to be wealthy to seek advice from a financial advisor. If you already have an advisor, you might need to [change advisors at some point](https://www.investopedia.com/articles/financial-advisor/042216/4-signs-its-time-fire-your-financial-advisor.asp) in your financial life. In most cases, a major life change or decision will trigger the decision to search for and hire a financial advisor. Below, find six possible scenarios. ### You Need Help Realizing Your Financial Goals OK, so you aim to retire at age 60. Or you yearn to buy a home. But how are you going to accomplish these and other goals? A [trustworthy financial advisor](https://www.investopedia.com/articles/personal-finance/103013/how-do-i-know-i-can-trust-my-financial-advisor.asp) can draw up a roadmap with you that can help you achieve both short-term and long-term financial goals. ### You’re Unsure How to Invest Your Money A financial advisor can hold your hand, so to speak, as you make your way through the risky and often confusing investment landscape. They may able to point you in the right direction regarding: * How much money you should invest, along with how much money you put in an [emergency fund](https://www.investopedia.com/personal-finance/how-to-build-emergency-fund/) * What types of investments, such as a 401(k) or IRA, would work best for you * When to rebalance your investment portfolio to account for changes in the stock market * What tax consequences you face if you withdraw money from retirement accounts ### You’re Going through a Major Life Event You just got married and need help merging finances. Your baby is on the way. Your divorce is pending. You’re nearing retirement. These and other major life events may prompt the need to visit with a financial advisor about your investments, your financial goals, and other monetary matters. ### You Received a Lump Sum of Funds Let’s say your mom left you a tidy sum of money in her will. Now what? How do you make the best use of the inheritance? A financial advisor can [help you make smart choices](https://www.investopedia.com/articles/financial-advisors/050115/top-places-work-financial-advisors-rjf-axp.asp) about your inheritance or any other large windfall, whether it’s a lump sum of money, an investment account, or a life insurance policy. ### You Need Accountability You may have sketched out your own financial plan, but have a hard time sticking with it. A financial advisor may offer the accountability that you need to put your financial plan on track. They also may recommend how to tweak your [financial plan](https://www.investopedia.com/articles/investing/100116/importance-making-annual-financial-plan.asp) in order to maximize the potential outcomes. ### You Need Help Managing Debt Many people in the U.S. struggle with debt management. In fact, 30% of all adults—representing over 4 in 10 people who received higher education—said they incurred at least some debt for their education, according to 2022 data from the Federal Reserve. No matter the debt you may be working to pay off, it can be overwhelming tackling it by yourself. A financial advisor may be able to help ease your debt burden by developing a [debt payoff strategy](https://www.investopedia.com/articles/personal-finance/082115/10-tips-managing-your-student-loan-debt.asp). ## Types of Financial Advisors Several types of financial professionals fall under the umbrella of “financial advisor.” In general, a financial advisor holds a bachelor’s degree in a field like finance, accounting or business management. They also may be licensed or certified, depending on the services they offer. It's also worth nothing that you could see an advisor on a one-time basis, or work with them more regularly. ### Important “Financial advisor” is a broad term referring to financial professionals such as financial planners and investment managers. Anyone can say they’re a financial advisor, but an advisor with professional designations is ideally the one you should hire. In 2021, an estimated 330,300 Americans worked as personal financial advisors, according to the U.S. Bureau of Labor Statistics (BLS). Most financial advisors are self-employed, the bureau says. Generally, there are five types of financial advisors. ### Registered Representative A registered representative, also known as a [stockbroker](https://www.investopedia.com/terms/s/stockbroker.asp), buys and sells stocks, bonds, mutual funds, exchange-traded funds and other investment products on behalf of their clients. Brokers typically earn commissions on trades they make. Brokers are regulated by the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state securities regulators. ### Registered Investment Advisor A registered investment advisor, either a person or a firm, is much like a registered representative. Both buy and sell investments on behalf of their clients. However, registered investment advisors supply financial advice, while registered representatives do not. Also, unlike a registered representative, is a fiduciary who must act in a client’s best interest. Furthermore, a registered investment advisor [earns an advisory fee](https://www.investopedia.com/articles/personal-finance/071415/how-cut-financial-advisor-expenses.asp) for managing a client’s investments; they don’t receive sales commissions. Depending on the value of assets being managed by a registered investment advisor, either the SEC or a state securities regulator oversees them. FINRA typically doesn’t regulate registered investment advisors. ### Financial Planner A financial planner might be a registered representative or an insurance agent, for instance. Most often, though, the term refers to a Certified Financial Planner (CFP). A CFP must adhere to strict education and training standards. For example, they must hold at least a bachelor’s degree or have at least three years of full-time financial planning experience or an equivalent amount of part-time experience. They also must complete 30 hours of continuing education every two years. As a whole, though, financial planning professionals aren’t overseen by a single regulator. But depending on the services they offer, they may be regulated. For instance, an accountant can be considered a financial planner; they’re regulated by the state accounting board where they practice. Meanwhile, a registered investment advisor—another type of financial planner—is governed by the SEC or a state securities regulator. ### Wealth Manager A wealth manager advises wealthy clients on their financial goals and investment approaches. Offerings can include retirement, estate and [tax planning](https://www.investopedia.com/terms/t/tax-planning.asp), along with investment management. Wealth managers generally are registered representatives, meaning they’re regulated by the SEC, FINRA and state securities regulators. ### Robo-Advisor A [robo-advisor](https://www.investopedia.com/terms/r/roboadvisor-roboadviser.asp) is an automated online investment manager that relies on algorithms to take care of a client’s assets. Clients generally don’t gain any human-supplied financial advice from a robo-advisor service. The SEC regulates robo-advisors. They make money by charging a fee for each trade, a flat monthly fee or a percentage fee based on the dollar amount of assets being managed. ## Questions to Ask a Financial Advisor Investors looking for the right advisor should ask a [number of questions](https://www.investopedia.com/articles/financial-advisors/020415/essential-questions-financial-advisor.asp), including: * Do you have experience working with a client like me? A financial advisor that works with you will likely not be the same as a financial advisor who works with another. You may be looking for someone who specifically works with retired people, [same-sex couples](https://www.investopedia.com/how-to-find-an-lgbtq-friendly-financial-planner-5186139), divorced people, surviving spouses, a [woman](https://www.investopedia.com/how-to-find-a-woman-financial-advisor-or-planner-5270527), a [Black or Indigenous Person of Color (BIPOC)](https://www.investopedia.com/how-to-find-bipoc-financial-advisor-5271050), an LGBTQ+ individual, or any applicable niche. * What services do you offer? Depending on whether you’re looking for a wide-ranging financial plan or are simply looking for investment guidance, this question will be important. * How do you charge your clients? Financial advisors have different methods of [charging their clients](https://www.investopedia.com/articles/personal-finance/021216/can-you-afford-financial-advisor.asp), and it will often depend on how often you work with one. Be sure to ask if the advisor follows a fee-only or commission-based system. * What sort of education do you have? If you’re working with a human advisor, you’ll undoubtedly be curious about their education. For instance, do they have a college degree in a field like accounting or finance? You want to make sure their education matches the type of advisory services you need. * What are their credentials? Are they regulated by the SEC, for example, or certified by an organization like the National Financial Educators Council? Resources that can help you investigate whether an advisor is registered, certified or in trouble include FINRA’s [BrokerCheck tool](https://brokercheck.finra.org), the [CFP verification tool](https://www.cfp.net/verify-a-cfp-professional), and the SEC’s [Action Lookup tool](https://www.sec.gov/litigations/sec-action-look-up). * How often will they contact you, and by what method? Are there any limitations on how frequently they can be contacted? The nature of the advisory field is also changing. Investors now usually have access to their accounts digitally and thus, beyond traditional in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions. ## Situations Where You Can Do It Yourself It is possible to create a [do-it-yourself financial plan](https://www.investopedia.com/articles/personal-finance/060415/financial-planning-can-you-do-it-yourself.asp). If you have little-to-no debts and are comfortable investing on your own, for example, you likely can track your financial situation on your own and set financial goals on your own. Generally, a basic, suitable financial plan includes the following elements: * Your determined net worth * Financial goals * A budget to account for expenses * Debt management * [A plan for retirement](https://www.investopedia.com/articles/personal-finance/091114/build-your-own-retirement-plan.asp) * An emergency fund While you may feel comfortable managing your finances on your own now, this may change. It’s always important to check in on your financial situation regularly. As your personal life changes, your finances likely will too, and a financial advisor may come in handy. ## Do I Need a Financial Advisor if I Don’t Have Much Money? Even if you have little to no money, you may be able to benefit from a financial advisor’s expertise. For instance, a financial advisor may be able to help put on the right track toward saving money for retirement. ## What is a Good Percentage to Pay a Financial Advisor? A good percentage to pay a financial advisor might be 1%, based on the value of your assets. However, some financial advisors might use a different percentage or might charge an hourly or flat fee instead. ## What are Red Flags in a Financial Advisor? Red flags in a financial advisor include not being upfront about how they make money, aggressively pushing investment products, being unresponsive to clients’ inquiries, and lacking professional designations. ## How Do You Choose a Financial Advisor? [Finding a financial advisor](https://www.investopedia.com/updates/find-financial-advisor-planner/) or planner can seem intimidating at first, but it can pay off if your portfolio is too large to manage alone. The first step is to figure out what kind of financial advice you need–whether that be estate planning, saving for retirement, or simply seeking the best way to invest your savings. This will determine what kind of specialist is best suited to your needs. It is also important to understand any fees and commissions. Some advisors may benefit from selling unnecessary products, while a fiduciary is legally required to choose investments with the client's needs in mind. ## The Bottom Line Deciding whether you need a financial advisor involves evaluating your financial situation, determining which type of financial advisor you need and diving into the background of any financial advisor you’re thinking of hiring. Before hiring a financial advisor, be sure to ask about what menu of services they offer and what they charge for those services. While you may need to put in some work to find the right financial advisor, the work can be worth it if the advisor [gives you solid advice](https://www.investopedia.com/insights/biggest-stock-market-myths/) and helps put you in a better financial position.	Do I Need a Financial Advisor? As you’re sorting through your finances, you might be asking yourself this question: Do I need a financial advisor? The answer depends on your financial situation. But in most cases, you can benefit from a financial advisor’s knowledge. Before hiring a financial advisor: Evaluate your financial situationConsider which type of financial advisor you needAsk about their feesInvestigate their qualifications Key Takeaways A financial advisor helps people manage their money and map out a plan for the future, including retirement.Whether they focus on financial planning in a broader form or focus on niche topics, financial advisors draw up plans or recommend specific investment products and vehicles to meet the needs of their clients.Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your financial situation, including your net worth, expenses, and financial goals. If you choose a financial adviser, always make sure that they abide by fiduciary standards and legal obligations to act in your best interests and disclose any conflicts of interest. What Does a Financial Advisor Do? Broadly speaking, a financial advisor helps people manage their money and map out a plan for the future, including retirement. Some financial advisors might offer a wide range of services, while others may narrow their focus to a niche topic. Among the tasks that financial advisors might undertake on behalf of clients are: Plotting a long-term financial strategy, including a retirement plan Helping handle financial matters such as buying a house, saving money for a child’s college education, devising a tax plan, purchasing insurance and coming up with an estate plan Researching and recommending investment opportunities Managing investment portfolios Tip For more guidance on building your financial goals, order a copy of Investopedia's What To Do With $10,000 magazine, today. How to Evaluate Your Financial Situation Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your finances. This will give you a better sense of where you stand financially and what a financial advisor may be able to help you with. Here are four things to consider and ask yourself when figuring out whether you should tap the expertise of a financial advisor. What Is Your Net Worth? Your net worth is not your income, but rather an amount that can help you understand what money you earn, how much you save, and where you spend money, too. You can calculate your net worth by subtracting your liabilities (what you owe) from your assets (what you own). Assets include investments and bank accounts, while liabilities include credit card bills and mortgage payments. Of course, a positive net worth is far better than a negative net worth. Tip Looking for some direction as you’re evaluating your financial situation? The Consumer Financial Protection Bureau offers an online quiz that helps measure your financial well-being. How Much Are You Earning and Spending? Another key to assessing your financial situation is examining your monthly income and expenses. Even if you don’t hire a financial advisor, monitoring your income and expenses can give you an idea of whether you need to reduce expenses or to bump up your allocations toward retirement and savings. If you don’t already have a budget, now might be a good time to set up one. You can use a spreadsheet or a budgeting app, for instance, to keep on top of your monthly income and expenses. What Are Your Financial Goals? Do you dream of retiring at age 60? Do you hope to someday buy a home? Setting and working toward financial goals is a key part of healthy money management. Figuring out your short-term and long-term financial goals can steer you toward a decision about hiring a financial advisor. How Much Investment Risk Are You Comfortable With? Are you fearless when it comes to up-and-down movements in the stock market? Or do you get anxious when you see turmoil in the stock market? Nailing down your risk tolerance regarding investments can help you determine an investment strategy—and can help you choose a financial advisor if you wind up going down that path. When to Hire a Financial Advisor Once you’ve evaluated your financial situation, it’s time to decide whether to hire a financial advisor. It’s worth noting that you don’t need to be wealthy to seek advice from a financial advisor. If you already have an advisor, you might need to change advisors at some point in your financial life. In most cases, a major life change or decision will trigger the decision to search for and hire a financial advisor. Below, find six possible scenarios. You Need Help Realizing Your Financial Goals OK, so you aim to retire at age 60. Or you yearn to buy a home. But how are you going to accomplish these and other goals? A trustworthy financial advisor can draw up a roadmap with you that can help you achieve both short-term and long-term financial goals. You’re Unsure How to Invest Your Money A financial advisor can hold your hand, so to speak, as you make your way through the risky and often confusing investment landscape. They may able to point you in the right direction regarding: How much money you should invest, along with how much money you put in an emergency fund What types of investments, such as a 401(k) or IRA, would work best for you When to rebalance your investment portfolio to account for changes in the stock market What tax consequences you face if you withdraw money from retirement accounts You’re Going through a Major Life Event You just got married and need help merging finances. Your baby is on the way. Your divorce is pending. You’re nearing retirement. These and other major life events may prompt the need to visit with a financial advisor about your investments, your financial goals, and other monetary matters. You Received a Lump Sum of Funds Let’s say your mom left you a tidy sum of money in her will. Now what? How do you make the best use of the inheritance? A financial advisor can help you make smart choices about your inheritance or any other large windfall, whether it’s a lump sum of money, an investment account, or a life insurance policy. You Need Accountability You may have sketched out your own financial plan, but have a hard time sticking with it. A financial advisor may offer the accountability that you need to put your financial plan on track. They also may recommend how to tweak your financial plan in order to maximize the potential outcomes. You Need Help Managing Debt Many people in the U.S. struggle with debt management. In fact, 30% of all adults—representing over 4 in 10 people who received higher education—said they incurred at least some debt for their education, according to 2022 data from the Federal Reserve. No matter the debt you may be working to pay off, it can be overwhelming tackling it by yourself. A financial advisor may be able to help ease your debt burden by developing a debt payoff strategy. Types of Financial Advisors Several types of financial professionals fall under the umbrella of “financial advisor.” In general, a financial advisor holds a bachelor’s degree in a field like finance, accounting or business management. They also may be licensed or certified, depending on the services they offer. It's also worth nothing that you could see an advisor on a one-time basis, or work with them more regularly. Important “Financial advisor” is a broad term referring to financial professionals such as financial planners and investment managers. Anyone can say they’re a financial advisor, but an advisor with professional designations is ideally the one you should hire. In 2021, an estimated 330,300 Americans worked as personal financial advisors, according to the U.S. Bureau of Labor Statistics (BLS). Most financial advisors are self-employed, the bureau says. Generally, there are five types of financial advisors. Registered Representative A registered representative, also known as a stockbroker, buys and sells stocks, bonds, mutual funds, exchange-traded funds and other investment products on behalf of their clients. Brokers typically earn commissions on trades they make. Brokers are regulated by the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state securities regulators. Registered Investment Advisor A registered investment advisor, either a person or a firm, is much like a registered representative. Both buy and sell investments on behalf of their clients. However, registered investment advisors supply financial advice, while registered representatives do not. Also, unlike a registered representative, is a fiduciary who must act in a client’s best interest. Furthermore, a registered investment advisor earns an advisory fee for managing a client’s investments; they don’t receive sales commissions. Depending on the value of assets being managed by a registered investment advisor, either the SEC or a state securities regulator oversees them. FINRA typically doesn’t regulate registered investment advisors. Financial Planner A financial planner might be a registered representative or an insurance agent, for instance. Most often, though, the term refers to a Certified Financial Planner (CFP). A CFP must adhere to strict education and training standards. For example, they must hold at least a bachelor’s degree or have at least three years of full-time financial planning experience or an equivalent amount of part-time experience. They also must complete 30 hours of continuing education every two years. As a whole, though, financial planning professionals aren’t overseen by a single regulator. But depending on the services they offer, they may be regulated. For instance, an accountant can be considered a financial planner; they’re regulated by the state accounting board where they practice. Meanwhile, a registered investment advisor—another type of financial planner—is governed by the SEC or a state securities regulator. Wealth Manager A wealth manager advises wealthy clients on their financial goals and investment approaches. Offerings can include retirement, estate and tax planning, along with investment management. Wealth managers generally are registered representatives, meaning they’re regulated by the SEC, FINRA and state securities regulators. Robo-Advisor A robo-advisor is an automated online investment manager that relies on algorithms to take care of a client’s assets. Clients generally don’t gain any human-supplied financial advice from a robo-advisor service. The SEC regulates robo-advisors. They make money by charging a fee for each trade, a flat monthly fee or a percentage fee based on the dollar amount of assets being managed. Questions to Ask a Financial Advisor Investors looking for the right advisor should ask a number of questions, including: Do you have experience working with a client like me? A financial advisor that works with you will likely not be the same as a financial advisor who works with another. You may be looking for someone who specifically works with retired people, same-sex couples, divorced people, surviving spouses, a woman, a Black or Indigenous Person of Color (BIPOC), an LGBTQ+ individual, or any applicable niche. What services do you offer? Depending on whether you’re looking for a wide-ranging financial plan or are simply looking for investment guidance, this question will be important. How do you charge your clients? Financial advisors have different methods of charging their clients, and it will often depend on how often you work with one. Be sure to ask if the advisor follows a fee-only or commission-based system. What sort of education do you have? If you’re working with a human advisor, you’ll undoubtedly be curious about their education. For instance, do they have a college degree in a field like accounting or finance? You want to make sure their education matches the type of advisory services you need. What are their credentials? Are they regulated by the SEC, for example, or certified by an organization like the National Financial Educators Council? Resources that can help you investigate whether an advisor is registered, certified or in trouble include FINRA’s BrokerCheck tool, the CFP verification tool, and the SEC’s Action Lookup tool. How often will they contact you, and by what method? Are there any limitations on how frequently they can be contacted? The nature of the advisory field is also changing. Investors now usually have access to their accounts digitally and thus, beyond traditional in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions. Situations Where You Can Do It Yourself It is possible to create a do-it-yourself financial plan. If you have little-to-no debts and are comfortable investing on your own, for example, you likely can track your financial situation on your own and set financial goals on your own. Generally, a basic, suitable financial plan includes the following elements: Your determined net worth Financial goals A budget to account for expenses Debt management A plan for retirement An emergency fund While you may feel comfortable managing your finances on your own now, this may change. It’s always important to check in on your financial situation regularly. As your personal life changes, your finances likely will too, and a financial advisor may come in handy. Do I Need a Financial Advisor if I Don’t Have Much Money? Even if you have little to no money, you may be able to benefit from a financial advisor’s expertise. For instance, a financial advisor may be able to help put on the right track toward saving money for retirement. What is a Good Percentage to Pay a Financial Advisor? A good percentage to pay a financial advisor might be 1%, based on the value of your assets. However, some financial advisors might use a different percentage or might charge an hourly or flat fee instead. What are Red Flags in a Financial Advisor? Red flags in a financial advisor include not being upfront about how they make money, aggressively pushing investment products, being unresponsive to clients’ inquiries, and lacking professional designations. How Do You Choose a Financial Advisor? Finding a financial advisor or planner can seem intimidating at first, but it can pay off if your portfolio is too large to manage alone. The first step is to figure out what kind of financial advice you need–whether that be estate planning, saving for retirement, or simply seeking the best way to invest your savings. This will determine what kind of specialist is best suited to your needs. It is also important to understand any fees and commissions. Some advisors may benefit from selling unnecessary products, while a fiduciary is legally required to choose investments with the client's needs in mind. The Bottom Line Deciding whether you need a financial advisor involves evaluating your financial situation, determining which type of financial advisor you need and diving into the background of any financial advisor you’re thinking of hiring. Before hiring a financial advisor, be sure to ask about what menu of services they offer and what they charge for those services. While you may need to put in some work to find the right financial advisor, the work can be worth it if the advisor gives you solid advice and helps put you in a better financial position.	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https://www.investopedia.com/ask/answers/062315/what-types-raw-materials-would-be-used-auto-manufacturer.asp	What Raw Materials Do Auto Manufacturers Use?	<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"> Automobile manufacturing is resource-intensive, requiring a substantial amount of raw materials sourced from all over the globe. Their journey from extraction to your driveway is complex, and as more esoteric metals are needed for batteries in electric vehicles (EVs) and for other sophisticated features, it's becoming even more so. Below, we lead you through what you need to know, whether you're considering investing in the sector or want to know what's under and around your hood while you're on the road.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>The automobile industry consumes raw materials from around the world in the production of cars and auto parts.</li><li>Steel, rubber, plastics, and aluminum are the four most common commodities found in cars.</li><li>The auto industry relies heavily on petroleum products, not just for gasoline for autos with internal combustion engines (ICE), but for synthesizing plastics and other synthetic materials.</li><li>The rise of electric vehicles (EVs) has brought wide attention to the sources of materials for their batteries.</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 sector uses more raw materials than just about any other industry.<span class="ql-inline-citation" data-cite="12"></span> These include aluminum and glass, useful because it is lightweight and durable, and iron, which is converted into steel and employed for its strength and versatility. In addition, petroleum products aren't just used to power automobiles after production but are the basis for plastics, rubber, and specialized fibers found throughout cars. </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-understanding-whats-in-your-car"></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 What's In Your Car </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> The materials chosen for automobiles need to be relatively inexpensive, available in the vast quantities needed for mass production, meet regulatory standards that can span several continents, meet automotive company sustainability guidelines, and withstand punishing speeds and potential crashes. As some auto manufacturers look more like tech companies and as climate change forces increases in fuel efficiency, automobiles have grown ever more complicated. To understand what it takes to make today's automobiles, it's best to first look at the range of ways we power our vehicles since that affects many of the raw materials needed: </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"> Battery Electric Vehicles (BEVs) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> <li>Fuel type: Powered entirely by electricity, stored in batteries (typically lithium-ion). Some BEVs also have a regenerative braking system that can capture the energy lost during braking and store it for later use.<br/></li><li>Engine mechanics: Rapidly evolving with advances in battery technology, charging infrastructure, and vehicle efficiency. It uses electric motors and battery packs for propulsion; no internal combustion.</li><li>Emissions: Zero tailpipe emissions, and overall emissions are indirect and depend on the electricity source for charging. The production of BEVs produces 8.8 metric tons of CO<sub>2</sub>, 43 % for battery production.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="16"></span></li><li>Charging and range: Requires charging at electric vehicle stations or through home charging setups. In 2023, the average BEV on American roads had a range of almost 300 miles when fully charged.<span class="ql-inline-citation" data-cite="18"></span></li> </ul> <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"> Fuel Cell Electric Vehicles (FCEVs) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li>Fuel type: Powered by hydrogen gas used in a fuel cell to produce electricity. Many FCEVs have a regenerative braking system that can capture the energy lost during braking and store it for later use.</li><li>Engine mechanics: FCEVs use propulsion like that of electric vehicles. Energy stored as hydrogen is transformed into electricity by a fuel cell.</li><li>Emissions: Only emits water vapor; zero greenhouse gases from the vehicle. CO<sub>2</sub> from manufacturing is about the same as that from ICE vehicles.<span class="ql-inline-citation" data-cite="16"></span></li><li>Fueling and range: Refueling with hydrogen is required at specialized hydrogen stations. The driving range is more than 300 miles.<span class="ql-inline-citation" data-cite="20"></span></li> </ul> <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"> Hybrid Electric Vehicles (HEVs) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> <li>Fuel type: Combines a traditional internal combustion engine with an electric motor, but unlike PHEVs, they cannot be plugged in to recharge.</li><li>Engine mechanics: The electric battery can be recharged by the internal combustion engine and sometimes by regenerative braking.</li><li>Emissions: Generally lower emissions compared with traditional ICE vehicles because of improved fuel efficiency, about 2.16 metric tons of CO<sub>2</sub> annually.<span class="ql-inline-citation" data-cite="20"></span></li><li>Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity.<br/></li> </ul> <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"> Internal Combustion Engine (ICE) Vehicles </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <li>Fuel type: It uses gasoline or diesel, produced from crude oil, extracted from oil wells, and processed in refineries to separate out numerous components.</li><li>Engine mechanics: One of the oldest automotive technologies with an extended and easily found infrastructure for repair and refueling. Fuel combustion generates power that drives the pistons and turns the crankshaft, propelling the vehicle.</li><li>Emissions: Manufacturing an average ICE vehicle produces 5.6 tons of CO<sub>2</sub>.<span class="ql-inline-citation" data-cite="17"></span><span class="ql-inline-citation" data-cite="16"></span> They also emit carbon dioxide and other pollutants because of fuel combustion. The average passenger vehicle emits about 4.6 metric tons of CO<sub>2 </sub>annually and has an average fuel economy of 22.2 miles per gallon. That's about 30% of total U.S. energy-related CO<sub>2</sub> emissions.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="14"></span></li><li>Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity.<br/></li> </ul> <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"> Plug-in Hybrid Electric Vehicles (PHEVs) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> <li>Fuel type: Combines an internal combustion engine with an electric battery that can be recharged by plugging into an external power source.</li><li>Engine mechanics: Bridges the gap between traditional ICE and fully electric vehicles. Can switch between the electric motor and internal combustion engine for propulsion.</li><li>Emissions: Lower emissions than ICE vehicles when operating in electric mode; produces emissions when using the combustion engine. These vehicles also generally produce more CO<sub>2</sub> during manufacturing than traditional ICE vehicles.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="19"></span></li><li>Fueling and range: Can be fueled at gas stations and charged at electric vehicle charging stations or with home outlets. It can operate as an electric vehicle for short distances, from 25 to 60 miles.<span class="ql-inline-citation" data-cite="19"></span><br/></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <span class="heading-toc" id="toc-raw-materials-in-automobiles"></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"> Raw Materials in Automobiles </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Since early on, the automotive industry has been used as a textbook case of modern, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/020915/when-did-globalization-start.asp">globalized</a> manufacturing and raw material sourcing. The automotive supply chain spans several continents, with countries like Australia, China, Russia, the U.S., and several others playing significant roles for most of the materials needed for today's vehicles. </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 availability of raw materials for automobiles is often dictated by geography and the geopolitical volatility of the supply chain. More specialized metals are often called upon as manufacturing needs change, and this brings still more countries into the global automotive supply chain. For example, rare earth elements are predominantly sourced from China, while countries like Indonesia and the Philippines are crucial for nickel, essential in EV battery production. Prices and demand for materials like palladium, platinum, and lithium are extremely volatile, and political stability, trade policies, and international relations significantly impact the supply chain. Issues like trade tensions can disrupt the flow of materials, and even local issues like a union strike or regional political crisis can affect production and prices globally. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The ecological effects of sourcing and processing these materials, such as the mining of lithium or cobalt, have brought sustainability and ethical sourcing to the forefront of the industry and the general public. The sector faces many <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/12/auto-industry.asp">challenges and changes</a>, including weighing efficiency and cost-effectiveness with environmental responsibility and ethical practices. This means not just looking to source materials in more sustainable ways, but also working to ensure better practices are used when automobiles are no longer driveable.<span class="ql-inline-citation" data-cite="36"></span> Today, the ultimate outcome is that 86% of the raw materials discussed here will be recycled for further use.<span class="ql-inline-citation" data-cite="35"></span><br/> </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"> Aluminum </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li>Sources (here and below, listed by the amount produced): Guinea, Australia, Vietnam, and Jamaica.<span class="ql-inline-citation" data-cite="23"></span></li><li>Found in: Engine blocks, transmission housings, wheels, and body parts of all vehicle types.</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"> Bauxite, the primary ore for aluminum, and alumina are used to produce aluminum, which, year by year, is becoming the dominant metal in cars. Primarily because of its malleability and lightweight nature, it's suitable for increasing fuel efficiency or extending the EV battery range. The metal has replaced steel and iron in the construction of many critical auto parts, such as engine blocks. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> In 1975, just 84 pounds of aluminum was used in the typical car. In 2020, the figure was about 466 pounds in 2020, with industry expectations that it'll reach 565 pounds by 2030.<span class="ql-inline-citation" data-cite="13"></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_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"> Cobalt </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> <li>Sources: Democratic Republic of Congo, Indonesia, Australia, and the Philippines.<span class="ql-inline-citation" data-cite="22"></span></li><li>Found in: Batteries for BEVs and PHEVs.</li> </ul> <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"> The DRC dominates, producing about 73% of the world's cobalt supply.<span class="ql-inline-citation" data-cite="22"></span> The most prominent use of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/critical-earth-minerals-7568912">cobalt</a> in automobiles is for the lithium-ion batteries in electric vehicles since it's a key material in their cathodes. Aside from batteries, cobalt is an alloying element for several car parts, especially those that must withstand extreme conditions.<br/> </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"> Copper </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> <li>Sources: Chile, Peru, China, and the U.S.<span class="ql-inline-citation" data-cite="24"></span></li><li>Found in: Electrical wiring, electronics, computer systems in all vehicle types; starters in ICE, PHEVs, and FECVs.</li> </ul> <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"> Copper’s conductivity is essential for the vehicle’s electrical systems, providing efficient power distribution and operation of complex electronics. It is thus used to operate everything from the radio to navigational systems and rearview cameras. </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"> Fiberglass </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <li>Sources: The raw material for fiberglass also trademarked as fiberglas is silica sand, which is abundant worldwide. China is the largest producer, manufacturing more than the next three major source countries combined.<span class="ql-inline-citation" data-cite="26"></span></li><li>Found in: Bumpers, car doors, and wheels of all vehicle types.</li> </ul> <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"> Fiberglass is a composite material made from extremely fine glass fibers. It's a light, noncorrosive material used instead of metals for certain applications. Combined with resin, it creates a light material that can't corrode, making it a good replacement for metals in bumpers, car doors, and wheels. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> Glass </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> <li>Sources: The raw material is silica sand, abundant worldwide. However, China exports about 29% of the glass used in manufacturing.<span class="ql-inline-citation" data-cite="25"></span> </li><li>Found in: Windshields, windows, and rearview and side view mirrors of all vehicle types.</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"> Glass is common to all cars. From windshields and windows to rearview and side view mirrors, you need glass to build a vehicle. Glass is an incredibly common material that is used for many other purposes, with the global market being worth $106.44 billion in 2022.<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_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"> Lead </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <li>Sources: China is the largest producer worldwide.<span class="ql-inline-citation" data-cite="21"></span> There are also significant mining operations in Australia, Mexico, Peru, and the U.S. (Missouri).</li><li>Found in: Wheel balancing weights (all vehicle types); car batteries (ICE and FECV).</li> </ul> <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"> Lead is a heavy metal that car manufacturers use to ensure cars stay balanced. Car wheels typically have some amount of lead to balance their weight, too. Batteries can include lead, which helps them remain at a lower temperature during use. </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"> Lithium </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> <li>Sources: Australia, Chile, China, and Australia.</li><li>Found in: Batteries of BEVs. Lithium-ion batteries are central to the operation of electric vehicles, offering high energy capacity and the ability to be recharged.</li> </ul> <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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing/lithium-mining-dirty-investment-or-sustainable-business/">Lithium</a> is one of the primary components of the batteries used to build electric cars. Lithium-ion batteries have a higher capacity than batteries with other metals that can be used in mass production, and they can be charged many times before they degrade. The use of lithium in auto manufacturing is expected to increase, with the number of EVs on the road expected to reach almost 150 million by 2030.<span class="ql-inline-citation" data-cite="7"></span> Analysts estimate a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cagr.asp">CAGR</a> of 12.8% between 2024 and 2030.<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_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"> Magnesium (magnesite) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> <li>Sources: China is by far the major producer, more than the next nine countries combined.<span class="ql-inline-citation" data-cite="27"></span></li><li>Found in: Portions of a car's body, structure, engine.</li> </ul> <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 primary source of magnesium is seawater and underground deposits of minerals such as magnesite (magnesium carbonate) and dolomite (magnesium calcium carbonate). Magnesium can also be obtained from saltwater brines, which contain significant amounts of magnesium chloride. Lighter than steel or aluminum, magnesium is used in areas where weight reduction is needed without compromising strength. </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"> Nickel </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_75-0"> <li>Sources: Australia, Indonesia, Brazil, Russia, and the Philippines.<span class="ql-inline-citation" data-cite="28"></span></li><li>Found in: The cathodes of lithium-ion batteries, which are used in BEVs and PHEVs.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_77-0"> Nickel is added to other metals to create alloys with enhanced properties like strength at high temperatures, corrosion resistance, and toughness. These alloys are used in many automotive parts to ensure durability and reliability. </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"> Petroleum </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> <li>Sources: U.S., Saudi Arabia, Russia, Canada, and Iraq.<span class="ql-inline-citation" data-cite="32"></span></li><li>Used in: Plastics and polymers found in dashboards, door handles, air vents, air bags, instrument panels, seats, and HVAC systems of all vehicle types.</li> </ul> <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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/petroleum.asp">Petroleum</a> is the raw material for the many plastic components in cars. Chemical companies transform petroleum byproducts into plastic. Plastics are the challenger to steel for prominence in auto manufacturing. The typical new car is made with 151 kilograms of plastics and composite materials, accounting for about 8% of the vehicle's weight and 50% of the volume of materials.<span class="ql-inline-citation" data-cite="2"></span> Among the countless car parts made from plastic are door handles, air vents, the dashboard, and air bags. The versatility, durability, and lightweight character of plastics make them an ideal material for automotive parts. </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"> Platinum (palladium) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <li>Sources: South Africa, Canada, U.S., and Zimbabwe.<span class="ql-inline-citation" data-cite="34"></span></li><li>Found in: Used in catalytic converters (ICE, HEVs, and PHEVs).</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Palladium and platinum are extracted from ore deposits, often found alongside nickel and copper ores. Both palladium and platinum are crucial components in catalytic converters, which are devices used to reduce harmful emissions in vehicle exhaust systems. They are catalysts, facilitating the conversion of toxic gases from the engine (like carbon monoxide, nitrogen oxides, and hydrocarbons) into less harmful substances (like carbon dioxide, nitrogen, and water vapor). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-subheading__text"> Rare earth elements </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> <li>Sources: China, U.S., and Australia<span class="ql-inline-citation" data-cite="29"></span></li><li>Found in: Electric motors in all EVs. They are found in some batteries and electronic components of other vehicle types.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> The importance of rare earth metals in the automotive industry, particularly for electric and hybrid vehicles, lies in their unique magnetic and electric properties. They are typically extracted from bastnaesite, monazite, and xenotime ores, which involve using acids and the causes of radioactive byproducts.<span class="ql-inline-citation" data-cite="30"></span> Rare earth elements like neodymium are primarily sourced from China, which dominates the market. Other sources include Australia and the U.S. They are preferred for their strength and ability to operate efficiently at high temperatures. Because of their unique chemical properties, other rare earth elements like lanthanum and cerium can be used in battery electrodes and electronic components.<br> </br></p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_94-0"> <span class="mntl-sc-block-subheading__text"> Rubber </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_95-0"> <li>Sources: Natural rubbers are sourced in Thailand, Indonesia, and Vietnam.<span class="ql-inline-citation" data-cite="33"></span> Synthetic rubber is derived from petroleum products (see above).</li><li>Found in: Tires, belts, hoses, and seals.</li> </ul> <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"> Rubber is essential for cars, and the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/041615/what-automotive-sector.asp">auto industry</a>. Tires are one of the most important parts of a car. Rubber is also used for making numerous belts, hoses, and seals critical to the functioning of a car's engine in ICE, HEVs, and PHEVs. Like plastic, rubber is durable and easily molded into different shapes. Demand for natural rubber is forecast to reach $33.87 billion by 2027, up from $28.65 billion in 2019, with the automotive sector accounting for 65.3%.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_98-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_99-0"> <span class="mntl-sc-block-subheading__text"> Steel (iron ore) </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_100-0"> <li>Sources: China, India, Japan, and the U.S.<span class="ql-inline-citation" data-cite="31"></span></li><li>Found in: Chassis, body, roof, door panels, and beams between doors for all vehicle types; mufflers and exhaust pipes for HEVs, ICE, and PHEVs.</li> </ul> <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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/top-steel-stocks-q2-2023-7488232">Steel</a> is produced from iron ore and is traditionally widely used in auto manufacturing. On average, 900 kilograms of steel is used in every car. Steel is used to construct a car's chassis and body, including the roof, body, door panels, and the beams between doors. Steel is also used in mufflers and exhaust pipes. Technological advances over the years have enabled automakers to deploy different types of steel with varying levels of rigidity or move away toward less dense materials altogether.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_103-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_104-0"><span class="heading-toc" id="toc-how-have-the-materials-used-in-cars-changed-over-time"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Have the Materials Used in Cars Changed Over Time?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>For most of their history, steel was the main material used to build cars. Only in the past quarter-century have more complex materials like aluminum, carbon fiber, and magnesium, begun to see use.<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_105-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_106-0"><span class="heading-toc" id="toc-how-long-does-it-take-to-manufacture-a-car"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Long Does it Take to Manufacture a Car?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A typical car has about 30,000 different parts. Usually, each of those parts is manufactured at different facilities and sent to a final production plant where the vehicle is assembled. Depending on the complexity of the car, it can take 18 to 35 hours for an assembly line to assemble a car from start to finish.<span class="ql-inline-citation" data-cite="10"></span><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_107-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_108-0"><span class="heading-toc" id="toc-why-are-lightweight-materials-important-for-cars"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Lightweight Materials Important for Cars?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Recent trends in auto production have shown the importance of replacing heavier materials with lighter ones, such as fiberglass and magnesium. Reducing the weight of a car can improve or maintain safety and reduce the fuel used. For every 10% reduction in vehicle weight, drivers see a 6% to 8% fuel economy increase, which could help Americans save as much as 5 billion gallons of fuel each year by 2030.<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_109-0"></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_110-0"> <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_111-0"> The automotive supply chain spans several continents, with countries like China, the U.S., Russia, Australia, and several others playing pivotal roles, in particular, for materials ranging from steel, aluminum, and rare earth elements to petroleum products and natural resources like rubber and silica sand. As technology and environmental considerations evolve, so does the automotive industry's approach to materials, as seen in the increased use of aluminum for lowering the weight of vehicles. There's also been a shift toward more sustainable sources of rubber and plastics. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_112-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_113-0"> Economic, ecological, and geopolitical changes greatly influence the sourcing of these materials. From metals to fibers to the sand and quartz used to make glass, automobile manufacturing uses more raw materials than just about any other industry. Since it first developed the assembly line process, the auto industry has always been the leading example of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mass-production.asp">mass production</a>, and its continued adaptive use of raw materials has been as important to the rise and central place of the automobile as the invention of the internal combustion engine. </p></div>	Automobile manufacturing is resource-intensive, requiring a substantial amount of raw materials sourced from all over the globe. Their journey from extraction to your driveway is complex, and as more esoteric metals are needed for batteries in electric vehicles (EVs) and for other sophisticated features, it's becoming even more so. Below, we lead you through what you need to know, whether you're considering investing in the sector or want to know what's under and around your hood while you're on the road. ### Key Takeaways * The automobile industry consumes raw materials from around the world in the production of cars and auto parts. * Steel, rubber, plastics, and aluminum are the four most common commodities found in cars. * The auto industry relies heavily on petroleum products, not just for gasoline for autos with internal combustion engines (ICE), but for synthesizing plastics and other synthetic materials. * The rise of electric vehicles (EVs) has brought wide attention to the sources of materials for their batteries. The sector uses more raw materials than just about any other industry. These include aluminum and glass, useful because it is lightweight and durable, and iron, which is converted into steel and employed for its strength and versatility. In addition, petroleum products aren't just used to power automobiles after production but are the basis for plastics, rubber, and specialized fibers found throughout cars. ## Understanding What's In Your Car The materials chosen for automobiles need to be relatively inexpensive, available in the vast quantities needed for mass production, meet regulatory standards that can span several continents, meet automotive company sustainability guidelines, and withstand punishing speeds and potential crashes. As some auto manufacturers look more like tech companies and as climate change forces increases in fuel efficiency, automobiles have grown ever more complicated. To understand what it takes to make today's automobiles, it's best to first look at the range of ways we power our vehicles since that affects many of the raw materials needed: ### Battery Electric Vehicles (BEVs) * Fuel type: Powered entirely by electricity, stored in batteries (typically lithium-ion). Some BEVs also have a regenerative braking system that can capture the energy lost during braking and store it for later use. * Engine mechanics: Rapidly evolving with advances in battery technology, charging infrastructure, and vehicle efficiency. It uses electric motors and battery packs for propulsion; no internal combustion. * Emissions: Zero tailpipe emissions, and overall emissions are indirect and depend on the electricity source for charging. The production of BEVs produces 8.8 metric tons of CO2, 43 % for battery production. * Charging and range: Requires charging at electric vehicle stations or through home charging setups. In 2023, the average BEV on American roads had a range of almost 300 miles when fully charged. ### Fuel Cell Electric Vehicles (FCEVs) * Fuel type: Powered by hydrogen gas used in a fuel cell to produce electricity. Many FCEVs have a regenerative braking system that can capture the energy lost during braking and store it for later use. * Engine mechanics: FCEVs use propulsion like that of electric vehicles. Energy stored as hydrogen is transformed into electricity by a fuel cell. * Emissions: Only emits water vapor; zero greenhouse gases from the vehicle. CO2 from manufacturing is about the same as that from ICE vehicles. * Fueling and range: Refueling with hydrogen is required at specialized hydrogen stations. The driving range is more than 300 miles. ### Hybrid Electric Vehicles (HEVs) * Fuel type: Combines a traditional internal combustion engine with an electric motor, but unlike PHEVs, they cannot be plugged in to recharge. * Engine mechanics: The electric battery can be recharged by the internal combustion engine and sometimes by regenerative braking. * Emissions: Generally lower emissions compared with traditional ICE vehicles because of improved fuel efficiency, about 2.16 metric tons of CO2 annually. * Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity. ### Internal Combustion Engine (ICE) Vehicles * Fuel type: It uses gasoline or diesel, produced from crude oil, extracted from oil wells, and processed in refineries to separate out numerous components. * Engine mechanics: One of the oldest automotive technologies with an extended and easily found infrastructure for repair and refueling. Fuel combustion generates power that drives the pistons and turns the crankshaft, propelling the vehicle. * Emissions: Manufacturing an average ICE vehicle produces 5.6 tons of CO2. They also emit carbon dioxide and other pollutants because of fuel combustion. The average passenger vehicle emits about 4.6 metric tons of CO2annually and has an average fuel economy of 22.2 miles per gallon. That's about 30% of total U.S. energy-related CO2 emissions. * Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity. ### Plug-in Hybrid Electric Vehicles (PHEVs) * Fuel type: Combines an internal combustion engine with an electric battery that can be recharged by plugging into an external power source. * Engine mechanics: Bridges the gap between traditional ICE and fully electric vehicles. Can switch between the electric motor and internal combustion engine for propulsion. * Emissions: Lower emissions than ICE vehicles when operating in electric mode; produces emissions when using the combustion engine. These vehicles also generally produce more CO2 during manufacturing than traditional ICE vehicles. * Fueling and range: Can be fueled at gas stations and charged at electric vehicle charging stations or with home outlets. It can operate as an electric vehicle for short distances, from 25 to 60 miles. ## Raw Materials in Automobiles Since early on, the automotive industry has been used as a textbook case of modern, [globalized](https://www.investopedia.com/ask/answers/020915/when-did-globalization-start.asp) manufacturing and raw material sourcing. The automotive supply chain spans several continents, with countries like Australia, China, Russia, the U.S., and several others playing significant roles for most of the materials needed for today's vehicles. The availability of raw materials for automobiles is often dictated by geography and the geopolitical volatility of the supply chain. More specialized metals are often called upon as manufacturing needs change, and this brings still more countries into the global automotive supply chain. For example, rare earth elements are predominantly sourced from China, while countries like Indonesia and the Philippines are crucial for nickel, essential in EV battery production. Prices and demand for materials like palladium, platinum, and lithium are extremely volatile, and political stability, trade policies, and international relations significantly impact the supply chain. Issues like trade tensions can disrupt the flow of materials, and even local issues like a union strike or regional political crisis can affect production and prices globally. The ecological effects of sourcing and processing these materials, such as the mining of lithium or cobalt, have brought sustainability and ethical sourcing to the forefront of the industry and the general public. The sector faces many [challenges and changes](https://www.investopedia.com/articles/pf/12/auto-industry.asp), including weighing efficiency and cost-effectiveness with environmental responsibility and ethical practices. This means not just looking to source materials in more sustainable ways, but also working to ensure better practices are used when automobiles are no longer driveable. Today, the ultimate outcome is that 86% of the raw materials discussed here will be recycled for further use. ### Aluminum * Sources (here and below, listed by the amount produced): Guinea, Australia, Vietnam, and Jamaica. * Found in: Engine blocks, transmission housings, wheels, and body parts of all vehicle types. Bauxite, the primary ore for aluminum, and alumina are used to produce aluminum, which, year by year, is becoming the dominant metal in cars. Primarily because of its malleability and lightweight nature, it's suitable for increasing fuel efficiency or extending the EV battery range. The metal has replaced steel and iron in the construction of many critical auto parts, such as engine blocks. In 1975, just 84 pounds of aluminum was used in the typical car. In 2020, the figure was about 466 pounds in 2020, with industry expectations that it'll reach 565 pounds by 2030. ### Cobalt * Sources: Democratic Republic of Congo, Indonesia, Australia, and the Philippines. * Found in: Batteries for BEVs and PHEVs. The DRC dominates, producing about 73% of the world's cobalt supply. The most prominent use of [cobalt](https://www.investopedia.com/critical-earth-minerals-7568912) in automobiles is for the lithium-ion batteries in electric vehicles since it's a key material in their cathodes. Aside from batteries, cobalt is an alloying element for several car parts, especially those that must withstand extreme conditions. ### Copper * Sources: Chile, Peru, China, and the U.S. * Found in: Electrical wiring, electronics, computer systems in all vehicle types; starters in ICE, PHEVs, and FECVs. Copper’s conductivity is essential for the vehicle’s electrical systems, providing efficient power distribution and operation of complex electronics. It is thus used to operate everything from the radio to navigational systems and rearview cameras. ### Fiberglass * Sources: The raw material for fiberglass also trademarked as fiberglas is silica sand, which is abundant worldwide. China is the largest producer, manufacturing more than the next three major source countries combined. * Found in: Bumpers, car doors, and wheels of all vehicle types. Fiberglass is a composite material made from extremely fine glass fibers. It's a light, noncorrosive material used instead of metals for certain applications. Combined with resin, it creates a light material that can't corrode, making it a good replacement for metals in bumpers, car doors, and wheels. ### Glass * Sources: The raw material is silica sand, abundant worldwide. However, China exports about 29% of the glass used in manufacturing. * Found in: Windshields, windows, and rearview and side view mirrors of all vehicle types. Glass is common to all cars. From windshields and windows to rearview and side view mirrors, you need glass to build a vehicle. Glass is an incredibly common material that is used for many other purposes, with the global market being worth $106.44 billion in 2022. ### Lead * Sources: China is the largest producer worldwide. There are also significant mining operations in Australia, Mexico, Peru, and the U.S. (Missouri). * Found in: Wheel balancing weights (all vehicle types); car batteries (ICE and FECV). Lead is a heavy metal that car manufacturers use to ensure cars stay balanced. Car wheels typically have some amount of lead to balance their weight, too. Batteries can include lead, which helps them remain at a lower temperature during use. ### Lithium * Sources: Australia, Chile, China, and Australia. * Found in: Batteries of BEVs. Lithium-ion batteries are central to the operation of electric vehicles, offering high energy capacity and the ability to be recharged. [Lithium](https://www.investopedia.com/investing/lithium-mining-dirty-investment-or-sustainable-business/) is one of the primary components of the batteries used to build electric cars. Lithium-ion batteries have a higher capacity than batteries with other metals that can be used in mass production, and they can be charged many times before they degrade. The use of lithium in auto manufacturing is expected to increase, with the number of EVs on the road expected to reach almost 150 million by 2030. Analysts estimate a [CAGR](https://www.investopedia.com/terms/c/cagr.asp) of 12.8% between 2024 and 2030. ### Magnesium (magnesite) * Sources: China is by far the major producer, more than the next nine countries combined. * Found in: Portions of a car's body, structure, engine. The primary source of magnesium is seawater and underground deposits of minerals such as magnesite (magnesium carbonate) and dolomite (magnesium calcium carbonate). Magnesium can also be obtained from saltwater brines, which contain significant amounts of magnesium chloride. Lighter than steel or aluminum, magnesium is used in areas where weight reduction is needed without compromising strength. ### Nickel * Sources: Australia, Indonesia, Brazil, Russia, and the Philippines. * Found in: The cathodes of lithium-ion batteries, which are used in BEVs and PHEVs. Nickel is added to other metals to create alloys with enhanced properties like strength at high temperatures, corrosion resistance, and toughness. These alloys are used in many automotive parts to ensure durability and reliability. ### Petroleum * Sources: U.S., Saudi Arabia, Russia, Canada, and Iraq. * Used in: Plastics and polymers found in dashboards, door handles, air vents, air bags, instrument panels, seats, and HVAC systems of all vehicle types. [Petroleum](https://www.investopedia.com/terms/p/petroleum.asp) is the raw material for the many plastic components in cars. Chemical companies transform petroleum byproducts into plastic. Plastics are the challenger to steel for prominence in auto manufacturing. The typical new car is made with 151 kilograms of plastics and composite materials, accounting for about 8% of the vehicle's weight and 50% of the volume of materials. Among the countless car parts made from plastic are door handles, air vents, the dashboard, and air bags. The versatility, durability, and lightweight character of plastics make them an ideal material for automotive parts. ### Platinum (palladium) * Sources: South Africa, Canada, U.S., and Zimbabwe. * Found in: Used in catalytic converters (ICE, HEVs, and PHEVs). Palladium and platinum are extracted from ore deposits, often found alongside nickel and copper ores. Both palladium and platinum are crucial components in catalytic converters, which are devices used to reduce harmful emissions in vehicle exhaust systems. They are catalysts, facilitating the conversion of toxic gases from the engine (like carbon monoxide, nitrogen oxides, and hydrocarbons) into less harmful substances (like carbon dioxide, nitrogen, and water vapor). ### Rare earth elements * Sources: China, U.S., and Australia * Found in: Electric motors in all EVs. They are found in some batteries and electronic components of other vehicle types. The importance of rare earth metals in the automotive industry, particularly for electric and hybrid vehicles, lies in their unique magnetic and electric properties. They are typically extracted from bastnaesite, monazite, and xenotime ores, which involve using acids and the causes of radioactive byproducts. Rare earth elements like neodymium are primarily sourced from China, which dominates the market. Other sources include Australia and the U.S. They are preferred for their strength and ability to operate efficiently at high temperatures. Because of their unique chemical properties, other rare earth elements like lanthanum and cerium can be used in battery electrodes and electronic components. ### Rubber * Sources: Natural rubbers are sourced in Thailand, Indonesia, and Vietnam. Synthetic rubber is derived from petroleum products (see above). * Found in: Tires, belts, hoses, and seals. Rubber is essential for cars, and the [auto industry](https://www.investopedia.com/ask/answers/041615/what-automotive-sector.asp). Tires are one of the most important parts of a car. Rubber is also used for making numerous belts, hoses, and seals critical to the functioning of a car's engine in ICE, HEVs, and PHEVs. Like plastic, rubber is durable and easily molded into different shapes. Demand for natural rubber is forecast to reach $33.87 billion by 2027, up from $28.65 billion in 2019, with the automotive sector accounting for 65.3%. ### Steel (iron ore) * Sources: China, India, Japan, and the U.S. * Found in: Chassis, body, roof, door panels, and beams between doors for all vehicle types; mufflers and exhaust pipes for HEVs, ICE, and PHEVs. [Steel](https://www.investopedia.com/top-steel-stocks-q2-2023-7488232) is produced from iron ore and is traditionally widely used in auto manufacturing. On average, 900 kilograms of steel is used in every car. Steel is used to construct a car's chassis and body, including the roof, body, door panels, and the beams between doors. Steel is also used in mufflers and exhaust pipes. Technological advances over the years have enabled automakers to deploy different types of steel with varying levels of rigidity or move away toward less dense materials altogether. ## How Have the Materials Used in Cars Changed Over Time? For most of their history, steel was the main material used to build cars. Only in the past quarter-century have more complex materials like aluminum, carbon fiber, and magnesium, begun to see use. ## How Long Does it Take to Manufacture a Car? A typical car has about 30,000 different parts. Usually, each of those parts is manufactured at different facilities and sent to a final production plant where the vehicle is assembled. Depending on the complexity of the car, it can take 18 to 35 hours for an assembly line to assemble a car from start to finish. ## Why Are Lightweight Materials Important for Cars? Recent trends in auto production have shown the importance of replacing heavier materials with lighter ones, such as fiberglass and magnesium. Reducing the weight of a car can improve or maintain safety and reduce the fuel used. For every 10% reduction in vehicle weight, drivers see a 6% to 8% fuel economy increase, which could help Americans save as much as 5 billion gallons of fuel each year by 2030. ## The Bottom Line The automotive supply chain spans several continents, with countries like China, the U.S., Russia, Australia, and several others playing pivotal roles, in particular, for materials ranging from steel, aluminum, and rare earth elements to petroleum products and natural resources like rubber and silica sand. As technology and environmental considerations evolve, so does the automotive industry's approach to materials, as seen in the increased use of aluminum for lowering the weight of vehicles. There's also been a shift toward more sustainable sources of rubber and plastics. Economic, ecological, and geopolitical changes greatly influence the sourcing of these materials. From metals to fibers to the sand and quartz used to make glass, automobile manufacturing uses more raw materials than just about any other industry. Since it first developed the assembly line process, the auto industry has always been the leading example of [mass production](https://www.investopedia.com/terms/m/mass-production.asp), and its continued adaptive use of raw materials has been as important to the rise and central place of the automobile as the invention of the internal combustion engine.	Automobile manufacturing is resource-intensive, requiring a substantial amount of raw materials sourced from all over the globe. Their journey from extraction to your driveway is complex, and as more esoteric metals are needed for batteries in electric vehicles (EVs) and for other sophisticated features, it's becoming even more so. Below, we lead you through what you need to know, whether you're considering investing in the sector or want to know what's under and around your hood while you're on the road. Key Takeaways The automobile industry consumes raw materials from around the world in the production of cars and auto parts.Steel, rubber, plastics, and aluminum are the four most common commodities found in cars.The auto industry relies heavily on petroleum products, not just for gasoline for autos with internal combustion engines (ICE), but for synthesizing plastics and other synthetic materials.The rise of electric vehicles (EVs) has brought wide attention to the sources of materials for their batteries. The sector uses more raw materials than just about any other industry. These include aluminum and glass, useful because it is lightweight and durable, and iron, which is converted into steel and employed for its strength and versatility. In addition, petroleum products aren't just used to power automobiles after production but are the basis for plastics, rubber, and specialized fibers found throughout cars. Understanding What's In Your Car The materials chosen for automobiles need to be relatively inexpensive, available in the vast quantities needed for mass production, meet regulatory standards that can span several continents, meet automotive company sustainability guidelines, and withstand punishing speeds and potential crashes. As some auto manufacturers look more like tech companies and as climate change forces increases in fuel efficiency, automobiles have grown ever more complicated. To understand what it takes to make today's automobiles, it's best to first look at the range of ways we power our vehicles since that affects many of the raw materials needed: Battery Electric Vehicles (BEVs) Fuel type: Powered entirely by electricity, stored in batteries (typically lithium-ion). Some BEVs also have a regenerative braking system that can capture the energy lost during braking and store it for later use.Engine mechanics: Rapidly evolving with advances in battery technology, charging infrastructure, and vehicle efficiency. It uses electric motors and battery packs for propulsion; no internal combustion.Emissions: Zero tailpipe emissions, and overall emissions are indirect and depend on the electricity source for charging. The production of BEVs produces 8.8 metric tons of CO2, 43 % for battery production.Charging and range: Requires charging at electric vehicle stations or through home charging setups. In 2023, the average BEV on American roads had a range of almost 300 miles when fully charged. Fuel Cell Electric Vehicles (FCEVs) Fuel type: Powered by hydrogen gas used in a fuel cell to produce electricity. Many FCEVs have a regenerative braking system that can capture the energy lost during braking and store it for later use.Engine mechanics: FCEVs use propulsion like that of electric vehicles. Energy stored as hydrogen is transformed into electricity by a fuel cell.Emissions: Only emits water vapor; zero greenhouse gases from the vehicle. CO2 from manufacturing is about the same as that from ICE vehicles.Fueling and range: Refueling with hydrogen is required at specialized hydrogen stations. The driving range is more than 300 miles. Hybrid Electric Vehicles (HEVs) Fuel type: Combines a traditional internal combustion engine with an electric motor, but unlike PHEVs, they cannot be plugged in to recharge.Engine mechanics: The electric battery can be recharged by the internal combustion engine and sometimes by regenerative braking.Emissions: Generally lower emissions compared with traditional ICE vehicles because of improved fuel efficiency, about 2.16 metric tons of CO2 annually.Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity. Internal Combustion Engine (ICE) Vehicles Fuel type: It uses gasoline or diesel, produced from crude oil, extracted from oil wells, and processed in refineries to separate out numerous components.Engine mechanics: One of the oldest automotive technologies with an extended and easily found infrastructure for repair and refueling. Fuel combustion generates power that drives the pistons and turns the crankshaft, propelling the vehicle.Emissions: Manufacturing an average ICE vehicle produces 5.6 tons of CO2. They also emit carbon dioxide and other pollutants because of fuel combustion. The average passenger vehicle emits about 4.6 metric tons of CO2 annually and has an average fuel economy of 22.2 miles per gallon. That's about 30% of total U.S. energy-related CO2 emissions.Fueling and range: Requires refueling at gas stations. Range depends on the fuel tank capacity. Plug-in Hybrid Electric Vehicles (PHEVs) Fuel type: Combines an internal combustion engine with an electric battery that can be recharged by plugging into an external power source.Engine mechanics: Bridges the gap between traditional ICE and fully electric vehicles. Can switch between the electric motor and internal combustion engine for propulsion.Emissions: Lower emissions than ICE vehicles when operating in electric mode; produces emissions when using the combustion engine. These vehicles also generally produce more CO2 during manufacturing than traditional ICE vehicles.Fueling and range: Can be fueled at gas stations and charged at electric vehicle charging stations or with home outlets. It can operate as an electric vehicle for short distances, from 25 to 60 miles. Raw Materials in Automobiles Since early on, the automotive industry has been used as a textbook case of modern, globalized manufacturing and raw material sourcing. The automotive supply chain spans several continents, with countries like Australia, China, Russia, the U.S., and several others playing significant roles for most of the materials needed for today's vehicles. The availability of raw materials for automobiles is often dictated by geography and the geopolitical volatility of the supply chain. More specialized metals are often called upon as manufacturing needs change, and this brings still more countries into the global automotive supply chain. For example, rare earth elements are predominantly sourced from China, while countries like Indonesia and the Philippines are crucial for nickel, essential in EV battery production. Prices and demand for materials like palladium, platinum, and lithium are extremely volatile, and political stability, trade policies, and international relations significantly impact the supply chain. Issues like trade tensions can disrupt the flow of materials, and even local issues like a union strike or regional political crisis can affect production and prices globally. The ecological effects of sourcing and processing these materials, such as the mining of lithium or cobalt, have brought sustainability and ethical sourcing to the forefront of the industry and the general public. The sector faces many challenges and changes, including weighing efficiency and cost-effectiveness with environmental responsibility and ethical practices. This means not just looking to source materials in more sustainable ways, but also working to ensure better practices are used when automobiles are no longer driveable. Today, the ultimate outcome is that 86% of the raw materials discussed here will be recycled for further use. Aluminum Sources (here and below, listed by the amount produced): Guinea, Australia, Vietnam, and Jamaica.Found in: Engine blocks, transmission housings, wheels, and body parts of all vehicle types. Bauxite, the primary ore for aluminum, and alumina are used to produce aluminum, which, year by year, is becoming the dominant metal in cars. Primarily because of its malleability and lightweight nature, it's suitable for increasing fuel efficiency or extending the EV battery range. The metal has replaced steel and iron in the construction of many critical auto parts, such as engine blocks. In 1975, just 84 pounds of aluminum was used in the typical car. In 2020, the figure was about 466 pounds in 2020, with industry expectations that it'll reach 565 pounds by 2030. Cobalt Sources: Democratic Republic of Congo, Indonesia, Australia, and the Philippines.Found in: Batteries for BEVs and PHEVs. The DRC dominates, producing about 73% of the world's cobalt supply. The most prominent use of cobalt in automobiles is for the lithium-ion batteries in electric vehicles since it's a key material in their cathodes. Aside from batteries, cobalt is an alloying element for several car parts, especially those that must withstand extreme conditions. Copper Sources: Chile, Peru, China, and the U.S.Found in: Electrical wiring, electronics, computer systems in all vehicle types; starters in ICE, PHEVs, and FECVs. Copper’s conductivity is essential for the vehicle’s electrical systems, providing efficient power distribution and operation of complex electronics. It is thus used to operate everything from the radio to navigational systems and rearview cameras. Fiberglass Sources: The raw material for fiberglass also trademarked as fiberglas is silica sand, which is abundant worldwide. China is the largest producer, manufacturing more than the next three major source countries combined.Found in: Bumpers, car doors, and wheels of all vehicle types. Fiberglass is a composite material made from extremely fine glass fibers. It's a light, noncorrosive material used instead of metals for certain applications. Combined with resin, it creates a light material that can't corrode, making it a good replacement for metals in bumpers, car doors, and wheels. Glass Sources: The raw material is silica sand, abundant worldwide. However, China exports about 29% of the glass used in manufacturing. Found in: Windshields, windows, and rearview and side view mirrors of all vehicle types. Glass is common to all cars. From windshields and windows to rearview and side view mirrors, you need glass to build a vehicle. Glass is an incredibly common material that is used for many other purposes, with the global market being worth $106.44 billion in 2022. Lead Sources: China is the largest producer worldwide. There are also significant mining operations in Australia, Mexico, Peru, and the U.S. (Missouri).Found in: Wheel balancing weights (all vehicle types); car batteries (ICE and FECV). Lead is a heavy metal that car manufacturers use to ensure cars stay balanced. Car wheels typically have some amount of lead to balance their weight, too. Batteries can include lead, which helps them remain at a lower temperature during use. Lithium Sources: Australia, Chile, China, and Australia.Found in: Batteries of BEVs. Lithium-ion batteries are central to the operation of electric vehicles, offering high energy capacity and the ability to be recharged. Lithium is one of the primary components of the batteries used to build electric cars. Lithium-ion batteries have a higher capacity than batteries with other metals that can be used in mass production, and they can be charged many times before they degrade. The use of lithium in auto manufacturing is expected to increase, with the number of EVs on the road expected to reach almost 150 million by 2030. Analysts estimate a CAGR of 12.8% between 2024 and 2030. Magnesium (magnesite) Sources: China is by far the major producer, more than the next nine countries combined.Found in: Portions of a car's body, structure, engine. The primary source of magnesium is seawater and underground deposits of minerals such as magnesite (magnesium carbonate) and dolomite (magnesium calcium carbonate). Magnesium can also be obtained from saltwater brines, which contain significant amounts of magnesium chloride. Lighter than steel or aluminum, magnesium is used in areas where weight reduction is needed without compromising strength. Nickel Sources: Australia, Indonesia, Brazil, Russia, and the Philippines.Found in: The cathodes of lithium-ion batteries, which are used in BEVs and PHEVs. Nickel is added to other metals to create alloys with enhanced properties like strength at high temperatures, corrosion resistance, and toughness. These alloys are used in many automotive parts to ensure durability and reliability. Petroleum Sources: U.S., Saudi Arabia, Russia, Canada, and Iraq.Used in: Plastics and polymers found in dashboards, door handles, air vents, air bags, instrument panels, seats, and HVAC systems of all vehicle types. Petroleum is the raw material for the many plastic components in cars. Chemical companies transform petroleum byproducts into plastic. Plastics are the challenger to steel for prominence in auto manufacturing. The typical new car is made with 151 kilograms of plastics and composite materials, accounting for about 8% of the vehicle's weight and 50% of the volume of materials. Among the countless car parts made from plastic are door handles, air vents, the dashboard, and air bags. The versatility, durability, and lightweight character of plastics make them an ideal material for automotive parts. Platinum (palladium) Sources: South Africa, Canada, U.S., and Zimbabwe.Found in: Used in catalytic converters (ICE, HEVs, and PHEVs). Palladium and platinum are extracted from ore deposits, often found alongside nickel and copper ores. Both palladium and platinum are crucial components in catalytic converters, which are devices used to reduce harmful emissions in vehicle exhaust systems. They are catalysts, facilitating the conversion of toxic gases from the engine (like carbon monoxide, nitrogen oxides, and hydrocarbons) into less harmful substances (like carbon dioxide, nitrogen, and water vapor). Rare earth elements Sources: China, U.S., and AustraliaFound in: Electric motors in all EVs. They are found in some batteries and electronic components of other vehicle types. The importance of rare earth metals in the automotive industry, particularly for electric and hybrid vehicles, lies in their unique magnetic and electric properties. They are typically extracted from bastnaesite, monazite, and xenotime ores, which involve using acids and the causes of radioactive byproducts. Rare earth elements like neodymium are primarily sourced from China, which dominates the market. Other sources include Australia and the U.S. They are preferred for their strength and ability to operate efficiently at high temperatures. Because of their unique chemical properties, other rare earth elements like lanthanum and cerium can be used in battery electrodes and electronic components. Rubber Sources: Natural rubbers are sourced in Thailand, Indonesia, and Vietnam. Synthetic rubber is derived from petroleum products (see above).Found in: Tires, belts, hoses, and seals. Rubber is essential for cars, and the auto industry. Tires are one of the most important parts of a car. Rubber is also used for making numerous belts, hoses, and seals critical to the functioning of a car's engine in ICE, HEVs, and PHEVs. Like plastic, rubber is durable and easily molded into different shapes. Demand for natural rubber is forecast to reach $33.87 billion by 2027, up from $28.65 billion in 2019, with the automotive sector accounting for 65.3%. Steel (iron ore) Sources: China, India, Japan, and the U.S.Found in: Chassis, body, roof, door panels, and beams between doors for all vehicle types; mufflers and exhaust pipes for HEVs, ICE, and PHEVs. Steel is produced from iron ore and is traditionally widely used in auto manufacturing. On average, 900 kilograms of steel is used in every car. Steel is used to construct a car's chassis and body, including the roof, body, door panels, and the beams between doors. Steel is also used in mufflers and exhaust pipes. Technological advances over the years have enabled automakers to deploy different types of steel with varying levels of rigidity or move away toward less dense materials altogether. How Have the Materials Used in Cars Changed Over Time? For most of their history, steel was the main material used to build cars. Only in the past quarter-century have more complex materials like aluminum, carbon fiber, and magnesium, begun to see use. How Long Does it Take to Manufacture a Car? A typical car has about 30,000 different parts. Usually, each of those parts is manufactured at different facilities and sent to a final production plant where the vehicle is assembled. Depending on the complexity of the car, it can take 18 to 35 hours for an assembly line to assemble a car from start to finish. Why Are Lightweight Materials Important for Cars? Recent trends in auto production have shown the importance of replacing heavier materials with lighter ones, such as fiberglass and magnesium. Reducing the weight of a car can improve or maintain safety and reduce the fuel used. For every 10% reduction in vehicle weight, drivers see a 6% to 8% fuel economy increase, which could help Americans save as much as 5 billion gallons of fuel each year by 2030. The Bottom Line The automotive supply chain spans several continents, with countries like China, the U.S., Russia, Australia, and several others playing pivotal roles, in particular, for materials ranging from steel, aluminum, and rare earth elements to petroleum products and natural resources like rubber and silica sand. As technology and environmental considerations evolve, so does the automotive industry's approach to materials, as seen in the increased use of aluminum for lowering the weight of vehicles. There's also been a shift toward more sustainable sources of rubber and plastics. Economic, ecological, and geopolitical changes greatly influence the sourcing of these materials. From metals to fibers to the sand and quartz used to make glass, automobile manufacturing uses more raw materials than just about any other industry. Since it first developed the assembly line process, the auto industry has always been the leading example of mass production, and its continued adaptive use of raw materials has been as important to the rise and central place of the automobile as the invention of the internal combustion engine.	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https://www.investopedia.com/bitcoin-tests-usd65000-as-fund-inflows-halving-event-fuel-rally-8603610	Bitcoin Tops $65,000 as Fund Inflows, Upcoming Halving Event Fuel Rally—Key Level to Watch	<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>Bitcoin climbed to a two-year high above $65,000 in early Monday trading, driven by spot Bitcoin ETF inflows and anticipation of the cryptocurrency's April halving event.</li><li>Investors view Bitcoin halving events as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. </li><li>Bitcoin's prior record close at $69,000 may provide near-term resistance, but could become a support area after a successful breakout.</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"> Investors remain focused on Bitcoin (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD">BTC</a>) this week after the largest cryptocurrency by market capitalization climbed to a two-year high above $65,000 in early Monday trading as record inflows into <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/spot-bitcoin-etfs-8358373">spot Bitcoin exchange-traded funds (ETFs)</a> and anticipation about the asset's April <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-halving-4843769">halving event</a> continue to drive bullish sentiment. </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 Bitcoin funds, which <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">began trading on Jan. 11</a> after receiving regulatory approval from the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sec.asp">Securities and Exchange Commission (SEC)</a>, have helped fuel a 50% gain in the pioneer cryptocurrency since the start of the year as a wave of new <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/institutionalinvestor.asp">institutional</a> money enters the asset class.<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"> Between their January debut and the end of last month, Bitcoin ETFs have seen <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fund-flow.asp">net inflows</a> exceed $7 billion.<span class="ql-inline-citation" data-cite="2"></span> "The flows are not drying up as investors feel more confident the higher price appears to go," Markus Thielen, head of research at 10x Research in Singapore, was quoted by <em>Reuters</em> as saying.<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"> Looking ahead, investors have turned their attention to Bitcoin’s April halving, an event that occurs every four years and reduces <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/tech/how-does-bitcoin-mining-work/">mining</a> rewards by 50% for validating transactions on the Bitcoin <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/blockchain.asp">blockchain</a>. Investors typically view halvings as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. </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"> Like other <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/risk-on-risk-off.asp">risk-on</a> assets, Bitcoin continues to benefit from expectations that the Federal Reserve will begin cutting <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/fundamental/04/061604.asp#:~:text=The%20direction%20of%20interest%20rates,higher%20return%20or%20risk%20premium.">interest rates</a> later this year, but also remains subject to increased volatility amid an uncertain macroeconomic backdrop. </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"> Bitcoin’s price has continued to trend higher since a bullish <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/goldencross.asp">golden cross</a> signal appeared on the weekly chart in late December last year. In the coming days, investors should keep an eye on the cryptocurrency’s <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/record_high.asp#:~:text=Key%20Takeaways,will%20continue%20to%20perform%20well.">record high</a> at $69,000 set in November 2021. This closely watched level may provide resistance in the near term, but could also become a new area of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/support-and-resistance-basics/">support</a> after a successful breakout. </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"> <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="internalLink" href="https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer">warranty and liability disclaimer</a> for more info.</em> </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>As of the date this article was written, the author does not own any of the above securities.</em><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 * Bitcoin climbed to a two-year high above $65,000 in early Monday trading, driven by spot Bitcoin ETF inflows and anticipation of the cryptocurrency's April halving event. * Investors view Bitcoin halving events as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. * Bitcoin's prior record close at $69,000 may provide near-term resistance, but could become a support area after a successful breakout. Investors remain focused on Bitcoin ([BTC](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BTCUSD)) this week after the largest cryptocurrency by market capitalization climbed to a two-year high above $65,000 in early Monday trading as record inflows into [spot Bitcoin exchange-traded funds (ETFs)](https://www.investopedia.com/spot-bitcoin-etfs-8358373) and anticipation about the asset's April [halving event](https://www.investopedia.com/bitcoin-halving-4843769) continue to drive bullish sentiment. The Bitcoin funds, which [began trading on Jan. 11](https://www.investopedia.com/spot-bitcoin-etfs-start-trading-today-heres-what-you-need-to-know-8425024) after receiving regulatory approval from the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp), have helped fuel a 50% gain in the pioneer cryptocurrency since the start of the year as a wave of new [institutional](https://www.investopedia.com/terms/i/institutionalinvestor.asp) money enters the asset class. Between their January debut and the end of last month, Bitcoin ETFs have seen [net inflows](https://www.investopedia.com/terms/f/fund-flow.asp) exceed $7 billion. "The flows are not drying up as investors feel more confident the higher price appears to go," Markus Thielen, head of research at 10x Research in Singapore, was quoted by Reuters as saying. Looking ahead, investors have turned their attention to Bitcoin’s April halving, an event that occurs every four years and reduces [mining](https://www.investopedia.com/tech/how-does-bitcoin-mining-work/) rewards by 50% for validating transactions on the Bitcoin [blockchain](https://www.investopedia.com/terms/b/blockchain.asp). Investors typically view halvings as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. Like other [risk-on](https://www.investopedia.com/terms/r/risk-on-risk-off.asp) assets, Bitcoin continues to benefit from expectations that the Federal Reserve will begin cutting [interest rates](https://www.investopedia.com/articles/fundamental/04/061604.asp#:~:text=The%20direction%20of%20interest%20rates,higher%20return%20or%20risk%20premium.) later this year, but also remains subject to increased volatility amid an uncertain macroeconomic backdrop. Bitcoin’s price has continued to trend higher since a bullish [golden cross](https://www.investopedia.com/terms/g/goldencross.asp) signal appeared on the weekly chart in late December last year. In the coming days, investors should keep an eye on the cryptocurrency’s [record high](https://www.investopedia.com/terms/r/record_high.asp#:~:text=Key%20Takeaways,will%20continue%20to%20perform%20well.) at $69,000 set in November 2021. This closely watched level may provide resistance in the near term, but could also become a new area of [support](https://www.investopedia.com/trading/support-and-resistance-basics/) after a successful breakout. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info. As of the date this article was written, the author does not own any of the above securities. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways Bitcoin climbed to a two-year high above $65,000 in early Monday trading, driven by spot Bitcoin ETF inflows and anticipation of the cryptocurrency's April halving event.Investors view Bitcoin halving events as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. Bitcoin's prior record close at $69,000 may provide near-term resistance, but could become a support area after a successful breakout. Investors remain focused on Bitcoin (BTC) this week after the largest cryptocurrency by market capitalization climbed to a two-year high above $65,000 in early Monday trading as record inflows into spot Bitcoin exchange-traded funds (ETFs) and anticipation about the asset's April halving event continue to drive bullish sentiment. The Bitcoin funds, which began trading on Jan. 11 after receiving regulatory approval from the Securities and Exchange Commission (SEC), have helped fuel a 50% gain in the pioneer cryptocurrency since the start of the year as a wave of new institutional money enters the asset class. Between their January debut and the end of last month, Bitcoin ETFs have seen net inflows exceed $7 billion. "The flows are not drying up as investors feel more confident the higher price appears to go," Markus Thielen, head of research at 10x Research in Singapore, was quoted by Reuters as saying. Looking ahead, investors have turned their attention to Bitcoin’s April halving, an event that occurs every four years and reduces mining rewards by 50% for validating transactions on the Bitcoin blockchain. Investors typically view halvings as a bullish catalyst because they reduce the rate at which new Bitcoins are created, helping to increase the asset's scarcity. Like other risk-on assets, Bitcoin continues to benefit from expectations that the Federal Reserve will begin cutting interest rates later this year, but also remains subject to increased volatility amid an uncertain macroeconomic backdrop. Bitcoin’s price has continued to trend higher since a bullish golden cross signal appeared on the weekly chart in late December last year. In the coming days, investors should keep an eye on the cryptocurrency’s record high at $69,000 set in November 2021. This closely watched level may provide resistance in the near term, but could also become a new area of support after a successful breakout. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own any of the above securities. Do you have a news tip for Investopedia reporters? 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https://www.investopedia.com/articles/bonds/08/treasuries-fed.asp	How to Buy Treasury Bonds and Bills	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> There are several ways to buy <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp">Treasuries</a>. For many people, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurydirect.asp">TreasuryDirect</a> is a good option; however, retirement savers and investors who already have brokerage accounts are often better off buying bonds on the secondary market or with <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange-traded funds (ETFs)</a>. Treasury money market accounts also offer more convenience and liquidity than TreasuryDirect. </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>TreasuryDirect allows investors to buy Treasury bonds and bills directly from the U.S. government.</li><li>It is not possible to open IRAs or other tax-advantaged accounts at TreasuryDirect.</li><li>Investors must transfer bonds from TreasuryDirect to banks or brokerages if they want to sell them before the maturity date.</li><li>Some of the other ways to buy treasuries include ETFs, money market accounts, and the secondary market.</li><li>When you buy bond ETFs or bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account.</li></ul></div></div></div> <span class="heading-toc" id="toc-treasurydirect"></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"> TreasuryDirect </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> TreasuryDirect is an electronic marketplace and online account system where investors can buy, hold, and redeem eligible book-entry Treasury securities. The TreasuryDirect system is run by the U.S. Department of the Treasury.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Individual investors with TreasuryDirect accounts can participate in Treasury debt auctions and purchase debt securities including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/ussavingsbonds.asp">U.S. savings bonds</a> directly from the U.S. Treasury. Opening an account takes about 10 minutes. TreasuryDirect offers a simple and relatively inexpensive way to buy government debt securities.<span class="ql-inline-citation" data-cite="2"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>While you can't open tax-advantaged retirement accounts at TreasuryDirect, you can do so at banks and brokers.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Investors must have a valid Social Security number (or taxpayer identification number) and a U.S. address. They also need an email address, a web browser that supports 128-bit encryption, and a checking or savings 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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Bear in mind that you can't redeem Treasuries purchased on TreasuryDirect before maturity. If you decide that you need or want to sell them, you must transfer your securities to a broker and then sell them on the secondary market through that broker.<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> <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"> How to Purchase Treasuries on TreasuryDirect </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Eligible securities for TreasuryDirect purchases include <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybill.asp">Treasury bills</a>, Treasury notes, Treasury bonds, Floating Rate Notes (FRNs), and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tips.asp">Treasury Inflation-Protected Securities (TIPS)</a>. Buying is simple. Once you log on, you can access the BuyDirect system. You'll be prompted to select the owner of the security.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Many investors buy Treasuries for gifts and charitable transfers. You'll also choose the product type or term, source of funds, and the amount to purchase. You can schedule the purchase whenever you like and how often you like, although dates are subject to availability. The system will allow you to review your order before submitting it. </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"> Securities are generally issued to your account within two business days of the purchase date for savings bonds or within one week of the auction date for bills, notes, bonds, FRNs, and TIPS.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> Transfers into TreasuryDirect are permissible and start at the outgoing firm. That is unlike the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/acat.asp">ACAT transfer process</a> for broker-to-broker transfers, which is initiated at the receiving firm. </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"> Once T-bills have matured, their proceeds are easy to reinvest. Simply select the "schedule repeat purchases" option and then choose the number of repeat purchases and their frequency after you have finished entering the registration and purchase information for your transaction. Maturing notes and bonds may also be reinvested.<span class="ql-inline-citation" data-cite="5"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_26-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> Your account is subject to several restrictions. The minimum purchase amount for savings bonds is $25 per person. Above that, savings bonds are sold in penny increments up to $10,000 per year. For T-bills, notes, bonds, and TIPS, an investor may submit noncompetitive bids from $100 up to $10 million for each security type in $100 increments.<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_28-0"></div> <span class="heading-toc" id="toc-how-to-participate-in-treasury-auctions"></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"> How to Participate in Treasury Auctions </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> TreasuryDirect account holders can participate in Treasury <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/auction.asp">auctions</a> held on a regular schedule throughout the year. In 2022, there were 384 public auctions for $15 trillion in Treasury debt securities.<span class="ql-inline-citation" data-cite="20"></span><span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> The first step in the auction process is the announcement of upcoming auctions, generally four to five business days before the auction date. The announcement discloses the date of the auction, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/bid-prices-t-bills-higher-ask/">the amount of a security to be auctioned</a>, its issue and maturity dates, terms and conditions, eligible participants, and deadlines for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/competitivetender.asp">competitive</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/noncompetitivetender.asp">noncompetitive bids</a>.<span class="ql-inline-citation" data-cite="20"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> Noncompetitive bids guarantee the bidder will receive the desired amount of the auctioned security at a price set by competitive bidders in the auction. Noncompetitive bids are limited to $10 million. Competitive bids specify the expected discount rate, yield, or spread for a security and may only be filled in part, or not at all. Most individual investors make noncompetitive bids, while competitive bids typically come from financial institutions. </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 second step of the auction process is the auction itself. On the auction date, the Treasury reviews all bids received for compliance with applicable rules. Compliant noncompetitive bids must be received by the close time stated in the auction announcement. </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 final step of the auction process is the issuance of the securities. Securities are deposited to investor accounts, and payment is delivered to the Treasury.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-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 with-title" id="mntl-sc-block-callout-heading_3-0">Buying Treasuries at Auction: TreasuryDirect vs. Brokers</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>You can buy Treasuries at auction from online brokers for the same price as at TreasuryDirect. Some brokers may charge a fee for this service whereas others do not. In addition, there is a difference in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/settlementdate.asp">settlement process</a>. TreasuryDirect takes your payment on the day the securities are issued, which is usually several days after the auction date. Some online brokers, on the other hand, may require payment before the issue date.<span class="ql-inline-citation" data-cite="7"></span></p> <p>Finally, you can instruct TreasuryDirect to handle the rollover of funds from a maturing security into the purchase of another. Some brokers offer such automatic rollovers but you should check with yours for the details, including any fee charged for the service.</p></div></div></div> <span class="heading-toc" id="toc-transferring-treasuries-through-treasurydirect"></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"> Transferring Treasuries Through TreasuryDirect </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> Treasuries can be held until they mature or sold before that time. To sell Treasuries held in your account at TreasuryDirect, first, you must transfer them to an account you have with a bank, broker, or dealer, and then place an order to sell them.<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_44-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> A Transfer Request Form must be completed online or on paper to transfer Treasuries out of your TreasuryDirect account. This form should indicate the correct routing number, bank name, and any special handling instructions for your transfer.<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"> To redeem a savings bond electronically, click the "Redeem" button found near the bottom of the "Current Holdings" page. You will need to specify whether it is a partial or full redemption and furnish the payment destination where you want the redemption proceeds deposited.<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_48-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> The redeem button will not appear on the holdings page if there are no bonds eligible for online redemption in your account. You can redeem paper bonds at most local financial institutions, such as your bank. That is the easiest and quickest way to get access to your money. </p> <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-other-ways-to-buy-treasuries"></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"> Other Ways to Buy Treasuries </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Some of the other ways to buy Treasuries include ETFs, money market accounts, and the secondary market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_54-0"> <span class="mntl-sc-block-subheading__text"> Buying Treasuries as ETFs </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_55-0"> It is possible to buy Treasuries through ETFs at most brokerages. ETFs are bought and sold like stocks, and many qualify for commission-free trades. Investors can choose from government bond ETFs focused on short-term Treasuries, long-term Treasuries, TIPS, and FRNs.<span class="ql-inline-citation" data-cite="25"></span><span class="ql-inline-citation" data-cite="24"></span><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_56-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_57-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/treasury-exchange-traded-funds-8536147">Treasury ETFs</a> can be held in IRAs and other tax-advantaged retirement accounts.<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-note" 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 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>Many Treasury ETFs have modest fees. Some of the largest funds offer expense ratios as low as 0.15% annually, making them a very affordable investment option.<span class="ql-inline-citation" data-cite="23"></span></p></div></div></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_61-0"> <span class="mntl-sc-block-subheading__text"> Buying Treasury Bills Through the Money Market </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> You can also buy Treasury bills by investing in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/united-states-treasury-money-mutual-funds.asp">Treasury money market mutual fund</a>. Such funds typically have low fees and low yields limited by rates on the shortest-term Treasury bills. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> The U.S. Treasury's Office of Financial Research tracks the investments of U.S. money market mutual funds in the aggregate and by financial institution.<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_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"> Buying Treasuries in the Secondary Market </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_67-0"> Buying Treasuries in the secondary market is easier than most people think. Many brokerages give their customers full access to the bond market, but fees vary. If buying and selling Treasuries is important to you, many of the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">best brokerages</a> offer free trading for Treasury bonds. </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"> Even better, you completely avoid the annual fees of ETFs and the money market. Buying standard U.S. government bonds is easier than buying most other bonds because all you need to know is the time to maturity. TIPS can be trickier to trade. </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"> When you buy bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account. Buying on the secondary market also makes it easier to sell Treasury bonds at a later date. </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"> <em>We recommend the best products through an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/review-process-4802351">independent review process</a>, and advertisers do not influence our picks. We may receive compensation if you visit partners we recommend. Read our <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/legal-4768893#advertising-disclosure">advertiser disclosure</a> for more info.</em><br/> </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> <colgroup span="1" style=""></colgroup> <thead> <tr> <th class="mntl-sc-block-table__title" colspan="5">Compare the Best Online Brokers</th> </tr> </thead> <tbody data-check="-1"> <tr> <td><b>Company</b></td> <td><b>Category </b></td> <td><b> Investopedia Rating</b></td> <td><b>Account Minimum</b></td> <td><b>Basic Fee</b></td> </tr> <tr> <td><b><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=1082344.960&type=3&subid=0" rel="sponsored nofollow">Fidelity Investments</a></b></td> <td>Best Overall and Best for Low Costs</td> <td>4.8</td> <td>$0 </td> <td>$0 for stock/ETF trades, $0 plus $0.65/contract for options trade</td> </tr> <tr> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://ad.doubleclick.net/ddm/trackclk/N3941.investopedia.com/B26958620.323528883;dc_trk_aid=517538065;dc_trk_cid=67442974;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=" rel="sponsored nofollow">TD Ameritrade</a></b></td> <td>Best for Beginners and Best Mobile App</td> <td> 4.5</td> <td>$0 </td> <td>$0 for stock/ETF trades, $0 plus $0.65/contract for options trade</td> </tr> <tr> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://tastytrade.com/" rel="nofollow">Tastytrade</a></b></td> <td>Best for Options</td> <td>3.8</td> <td>$0 </td> <td>$0 stock/ETF trades, $1.00 to open options trades and $0 to close</td> </tr> <tr> <td><b><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></b></td> <td>Best for Advanced Traders and Best for International Trading</td> <td>4.6</td> <td>$0 </td> <td>$0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value </td> </tr> <tr> <td><b><a class="null" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.schwab.com/trading?cid=29101415\|887291\|184464738\|354473582" rel="noopener noreferrer">Charles Schwab</a></b></td> <td>Best for ETFs</td> <td>4.7</td> <td>$0</td> <td>$0 for stock/ETF trades, $0 plus $0.65/contract for options trade</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> <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-how-do-you-buy-and-sell-short-term-treasury-bills"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Buy and Sell Short Term Treasury Bills?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not wish to hold your Treasuries until maturity, the only way to sell them is through a bank or broker.<span class="ql-inline-citation" data-cite="26"></span><span class="ql-inline-citation" data-cite="18"></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-how-many-treasury-bills-can-you-buy"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Many Treasury Bills Can You Buy?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The maximum amount of Treasury bills that you can buy in a single auction is $10 million if the bids are noncompetitive, or 35% of the offering amount for competitive bids.<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_80-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-how-do-you-buy-t-bills-online"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Buy T-Bills Online?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can buy T-bills online directly from the U.S. government at TreasuryDirect. Alternatively, you can also buy T-bills at auction or on the secondary market through a bank or broker. Bills are issued weekly through an auction bidding process.<span class="ql-inline-citation" data-cite="27"></span><span class="ql-inline-citation" data-cite="20"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_83-0"><span class="heading-toc" id="toc-how-do-you-buy-canadian-treasury-bills"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Buy Canadian Treasury Bills?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You can buy Canadian Treasury bills from a financial institution or from a broker. The minimum investment for purchasing a Canadian Treasury bill is CA$1,000.<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_84-0"></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_85-0"> <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_86-0"> Treasuries are a great way to diversify your investment portfolio and reduce its risk since U.S. Treasuries are backed by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/full-faith-credit.asp">full faith and credit</a> of the U.S. government. Treasuries are an important part of a retirement portfolio for many savers because they are liquid, low-risk, and provide an income stream.<span class="ql-inline-citation" data-cite="19"></span> </p></div>	There are several ways to buy [Treasuries](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp). For many people, [TreasuryDirect](https://www.investopedia.com/terms/t/treasurydirect.asp) is a good option; however, retirement savers and investors who already have brokerage accounts are often better off buying bonds on the secondary market or with [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). Treasury money market accounts also offer more convenience and liquidity than TreasuryDirect. ### Key Takeaways * TreasuryDirect allows investors to buy Treasury bonds and bills directly from the U.S. government. * It is not possible to open IRAs or other tax-advantaged accounts at TreasuryDirect. * Investors must transfer bonds from TreasuryDirect to banks or brokerages if they want to sell them before the maturity date. * Some of the other ways to buy treasuries include ETFs, money market accounts, and the secondary market. * When you buy bond ETFs or bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account. ## TreasuryDirect TreasuryDirect is an electronic marketplace and online account system where investors can buy, hold, and redeem eligible book-entry Treasury securities. The TreasuryDirect system is run by the U.S. Department of the Treasury. Individual investors with TreasuryDirect accounts can participate in Treasury debt auctions and purchase debt securities including [U.S. savings bonds](https://www.investopedia.com/terms/u/ussavingsbonds.asp) directly from the U.S. Treasury. Opening an account takes about 10 minutes. TreasuryDirect offers a simple and relatively inexpensive way to buy government debt securities. ### While you can't open tax-advantaged retirement accounts at TreasuryDirect, you can do so at banks and brokers. Investors must have a valid Social Security number (or taxpayer identification number) and a U.S. address. They also need an email address, a web browser that supports 128-bit encryption, and a checking or savings account. Bear in mind that you can't redeem Treasuries purchased on TreasuryDirect before maturity. If you decide that you need or want to sell them, you must transfer your securities to a broker and then sell them on the secondary market through that broker. ### How to Purchase Treasuries on TreasuryDirect Eligible securities for TreasuryDirect purchases include [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), Treasury notes, Treasury bonds, Floating Rate Notes (FRNs), and [Treasury Inflation-Protected Securities (TIPS)](https://www.investopedia.com/terms/t/tips.asp). Buying is simple. Once you log on, you can access the BuyDirect system. You'll be prompted to select the owner of the security. Many investors buy Treasuries for gifts and charitable transfers. You'll also choose the product type or term, source of funds, and the amount to purchase. You can schedule the purchase whenever you like and how often you like, although dates are subject to availability. The system will allow you to review your order before submitting it. Securities are generally issued to your account within two business days of the purchase date for savings bonds or within one week of the auction date for bills, notes, bonds, FRNs, and TIPS. Transfers into TreasuryDirect are permissible and start at the outgoing firm. That is unlike the [ACAT transfer process](https://www.investopedia.com/terms/a/acat.asp) for broker-to-broker transfers, which is initiated at the receiving firm. Once T-bills have matured, their proceeds are easy to reinvest. Simply select the "schedule repeat purchases" option and then choose the number of repeat purchases and their frequency after you have finished entering the registration and purchase information for your transaction. Maturing notes and bonds may also be reinvested. Your account is subject to several restrictions. The minimum purchase amount for savings bonds is $25 per person. Above that, savings bonds are sold in penny increments up to $10,000 per year. For T-bills, notes, bonds, and TIPS, an investor may submit noncompetitive bids from $100 up to $10 million for each security type in $100 increments. ## How to Participate in Treasury Auctions TreasuryDirect account holders can participate in Treasury [auctions](https://www.investopedia.com/terms/a/auction.asp) held on a regular schedule throughout the year. In 2022, there were 384 public auctions for $15 trillion in Treasury debt securities. The first step in the auction process is the announcement of upcoming auctions, generally four to five business days before the auction date. The announcement discloses the date of the auction, [the amount of a security to be auctioned](https://www.investopedia.com/ask/answers/bid-prices-t-bills-higher-ask/), its issue and maturity dates, terms and conditions, eligible participants, and deadlines for [competitive](https://www.investopedia.com/terms/c/competitivetender.asp) and [noncompetitive bids](https://www.investopedia.com/terms/n/noncompetitivetender.asp). Noncompetitive bids guarantee the bidder will receive the desired amount of the auctioned security at a price set by competitive bidders in the auction. Noncompetitive bids are limited to $10 million. Competitive bids specify the expected discount rate, yield, or spread for a security and may only be filled in part, or not at all. Most individual investors make noncompetitive bids, while competitive bids typically come from financial institutions. The second step of the auction process is the auction itself. On the auction date, the Treasury reviews all bids received for compliance with applicable rules. Compliant noncompetitive bids must be received by the close time stated in the auction announcement. The final step of the auction process is the issuance of the securities. Securities are deposited to investor accounts, and payment is delivered to the Treasury. ### Buying Treasuries at Auction: TreasuryDirect vs. Brokers You can buy Treasuries at auction from online brokers for the same price as at TreasuryDirect. Some brokers may charge a fee for this service whereas others do not. In addition, there is a difference in the [settlement process](https://www.investopedia.com/terms/s/settlementdate.asp). TreasuryDirect takes your payment on the day the securities are issued, which is usually several days after the auction date. Some online brokers, on the other hand, may require payment before the issue date. Finally, you can instruct TreasuryDirect to handle the rollover of funds from a maturing security into the purchase of another. Some brokers offer such automatic rollovers but you should check with yours for the details, including any fee charged for the service. ## Transferring Treasuries Through TreasuryDirect Treasuries can be held until they mature or sold before that time. To sell Treasuries held in your account at TreasuryDirect, first, you must transfer them to an account you have with a bank, broker, or dealer, and then place an order to sell them. A Transfer Request Form must be completed online or on paper to transfer Treasuries out of your TreasuryDirect account. This form should indicate the correct routing number, bank name, and any special handling instructions for your transfer. To redeem a savings bond electronically, click the "Redeem" button found near the bottom of the "Current Holdings" page. You will need to specify whether it is a partial or full redemption and furnish the payment destination where you want the redemption proceeds deposited. The redeem button will not appear on the holdings page if there are no bonds eligible for online redemption in your account. You can redeem paper bonds at most local financial institutions, such as your bank. That is the easiest and quickest way to get access to your money. ## Other Ways to Buy Treasuries Some of the other ways to buy Treasuries include ETFs, money market accounts, and the secondary market. ### Buying Treasuries as ETFs It is possible to buy Treasuries through ETFs at most brokerages. ETFs are bought and sold like stocks, and many qualify for commission-free trades. Investors can choose from government bond ETFs focused on short-term Treasuries, long-term Treasuries, TIPS, and FRNs. [Treasury ETFs](https://www.investopedia.com/treasury-exchange-traded-funds-8536147) can be held in IRAs and other tax-advantaged retirement accounts. ### Many Treasury ETFs have modest fees. Some of the largest funds offer expense ratios as low as 0.15% annually, making them a very affordable investment option. ### Buying Treasury Bills Through the Money Market You can also buy Treasury bills by investing in a [Treasury money market mutual fund](https://www.investopedia.com/terms/u/united-states-treasury-money-mutual-funds.asp). Such funds typically have low fees and low yields limited by rates on the shortest-term Treasury bills. The U.S. Treasury's Office of Financial Research tracks the investments of U.S. money market mutual funds in the aggregate and by financial institution. ### Buying Treasuries in the Secondary Market Buying Treasuries in the secondary market is easier than most people think. Many brokerages give their customers full access to the bond market, but fees vary. If buying and selling Treasuries is important to you, many of the [best brokerages](https://www.investopedia.com/best-online-brokers-4587872) offer free trading for Treasury bonds. Even better, you completely avoid the annual fees of ETFs and the money market. Buying standard U.S. government bonds is easier than buying most other bonds because all you need to know is the time to maturity. TIPS can be trickier to trade. When you buy bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account. Buying on the secondary market also makes it easier to sell Treasury bonds at a later date. We recommend the best products through an [independent review process](https://www.investopedia.com/review-process-4802351), and advertisers do not influence our picks. We may receive compensation if you visit partners we recommend. Read our [advertiser disclosure](https://www.investopedia.com/legal-4768893#advertising-disclosure) for more info. \| Compare the Best Online Brokers \| \| \| \| \| \| --- \| --- \| --- \| --- \| --- \| \| Company \| Category \| Investopedia Rating \| Account Minimum \| Basic Fee \| \| *[Fidelity Investments](https://click.linksynergy.com/fs-bin/click?id=RL7M2q4kuk&offerid=1082344.960&type=3&subid=0) \| Best Overall and Best for Low Costs \| 4.8 \| $0 \| $0 for stock/ETF trades, $0 plus $0.65/contract for options trade \| \| [TD Ameritrade](https://ad.doubleclick.net/ddm/trackclk/N3941.investopedia.com/B26958620.323528883;dc_trk_aid=517538065;dc_trk_cid=67442974;dc_lat=;dc_rdid=;tag_for_child_directed_treatment=;tfua=;ltd=) \| Best for Beginners and Best Mobile App \| 4.5 \| $0 \| $0 for stock/ETF trades, $0 plus $0.65/contract for options trade \| \| [Tastytrade](https://tastytrade.com/) \| Best for Options \| 3.8 \| $0 \| $0 stock/ETF trades, $1.00 to open options trades and $0 to close \| \| [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) \| Best for Advanced Traders and Best for International Trading \| 4.6 \| $0 \| $0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value \| \| [Charles Schwab](https://www.schwab.com/trading?cid=29101415\|887291\|184464738\|354473582)** \| Best for ETFs \| 4.7 \| $0 \| $0 for stock/ETF trades, $0 plus $0.65/contract for options trade \| ## How Do You Buy and Sell Short Term Treasury Bills? You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not wish to hold your Treasuries until maturity, the only way to sell them is through a bank or broker. ## How Many Treasury Bills Can You Buy? The maximum amount of Treasury bills that you can buy in a single auction is $10 million if the bids are noncompetitive, or 35% of the offering amount for competitive bids. ## How Do You Buy T-Bills Online? You can buy T-bills online directly from the U.S. government at TreasuryDirect. Alternatively, you can also buy T-bills at auction or on the secondary market through a bank or broker. Bills are issued weekly through an auction bidding process. ## How Do You Buy Canadian Treasury Bills? You can buy Canadian Treasury bills from a financial institution or from a broker. The minimum investment for purchasing a Canadian Treasury bill is CA$1,000. ## The Bottom Line Treasuries are a great way to diversify your investment portfolio and reduce its risk since U.S. Treasuries are backed by the [full faith and credit](https://www.investopedia.com/terms/f/full-faith-credit.asp) of the U.S. government. Treasuries are an important part of a retirement portfolio for many savers because they are liquid, low-risk, and provide an income stream.	There are several ways to buy Treasuries. For many people, TreasuryDirect is a good option; however, retirement savers and investors who already have brokerage accounts are often better off buying bonds on the secondary market or with exchange-traded funds (ETFs). Treasury money market accounts also offer more convenience and liquidity than TreasuryDirect. Key Takeaways TreasuryDirect allows investors to buy Treasury bonds and bills directly from the U.S. government.It is not possible to open IRAs or other tax-advantaged accounts at TreasuryDirect.Investors must transfer bonds from TreasuryDirect to banks or brokerages if they want to sell them before the maturity date.Some of the other ways to buy treasuries include ETFs, money market accounts, and the secondary market.When you buy bond ETFs or bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account. TreasuryDirect TreasuryDirect is an electronic marketplace and online account system where investors can buy, hold, and redeem eligible book-entry Treasury securities. The TreasuryDirect system is run by the U.S. Department of the Treasury. Individual investors with TreasuryDirect accounts can participate in Treasury debt auctions and purchase debt securities including U.S. savings bonds directly from the U.S. Treasury. Opening an account takes about 10 minutes. TreasuryDirect offers a simple and relatively inexpensive way to buy government debt securities. While you can't open tax-advantaged retirement accounts at TreasuryDirect, you can do so at banks and brokers. Investors must have a valid Social Security number (or taxpayer identification number) and a U.S. address. They also need an email address, a web browser that supports 128-bit encryption, and a checking or savings account. Bear in mind that you can't redeem Treasuries purchased on TreasuryDirect before maturity. If you decide that you need or want to sell them, you must transfer your securities to a broker and then sell them on the secondary market through that broker. How to Purchase Treasuries on TreasuryDirect Eligible securities for TreasuryDirect purchases include Treasury bills, Treasury notes, Treasury bonds, Floating Rate Notes (FRNs), and Treasury Inflation-Protected Securities (TIPS). Buying is simple. Once you log on, you can access the BuyDirect system. You'll be prompted to select the owner of the security. Many investors buy Treasuries for gifts and charitable transfers. You'll also choose the product type or term, source of funds, and the amount to purchase. You can schedule the purchase whenever you like and how often you like, although dates are subject to availability. The system will allow you to review your order before submitting it. Securities are generally issued to your account within two business days of the purchase date for savings bonds or within one week of the auction date for bills, notes, bonds, FRNs, and TIPS. Transfers into TreasuryDirect are permissible and start at the outgoing firm. That is unlike the ACAT transfer process for broker-to-broker transfers, which is initiated at the receiving firm. Once T-bills have matured, their proceeds are easy to reinvest. Simply select the "schedule repeat purchases" option and then choose the number of repeat purchases and their frequency after you have finished entering the registration and purchase information for your transaction. Maturing notes and bonds may also be reinvested. Your account is subject to several restrictions. The minimum purchase amount for savings bonds is $25 per person. Above that, savings bonds are sold in penny increments up to $10,000 per year. For T-bills, notes, bonds, and TIPS, an investor may submit noncompetitive bids from $100 up to $10 million for each security type in $100 increments. How to Participate in Treasury Auctions TreasuryDirect account holders can participate in Treasury auctions held on a regular schedule throughout the year. In 2022, there were 384 public auctions for $15 trillion in Treasury debt securities. The first step in the auction process is the announcement of upcoming auctions, generally four to five business days before the auction date. The announcement discloses the date of the auction, the amount of a security to be auctioned, its issue and maturity dates, terms and conditions, eligible participants, and deadlines for competitive and noncompetitive bids. Noncompetitive bids guarantee the bidder will receive the desired amount of the auctioned security at a price set by competitive bidders in the auction. Noncompetitive bids are limited to $10 million. Competitive bids specify the expected discount rate, yield, or spread for a security and may only be filled in part, or not at all. Most individual investors make noncompetitive bids, while competitive bids typically come from financial institutions. The second step of the auction process is the auction itself. On the auction date, the Treasury reviews all bids received for compliance with applicable rules. Compliant noncompetitive bids must be received by the close time stated in the auction announcement. The final step of the auction process is the issuance of the securities. Securities are deposited to investor accounts, and payment is delivered to the Treasury. Buying Treasuries at Auction: TreasuryDirect vs. Brokers You can buy Treasuries at auction from online brokers for the same price as at TreasuryDirect. Some brokers may charge a fee for this service whereas others do not. In addition, there is a difference in the settlement process. TreasuryDirect takes your payment on the day the securities are issued, which is usually several days after the auction date. Some online brokers, on the other hand, may require payment before the issue date. Finally, you can instruct TreasuryDirect to handle the rollover of funds from a maturing security into the purchase of another. Some brokers offer such automatic rollovers but you should check with yours for the details, including any fee charged for the service. Transferring Treasuries Through TreasuryDirect Treasuries can be held until they mature or sold before that time. To sell Treasuries held in your account at TreasuryDirect, first, you must transfer them to an account you have with a bank, broker, or dealer, and then place an order to sell them. A Transfer Request Form must be completed online or on paper to transfer Treasuries out of your TreasuryDirect account. This form should indicate the correct routing number, bank name, and any special handling instructions for your transfer. To redeem a savings bond electronically, click the "Redeem" button found near the bottom of the "Current Holdings" page. You will need to specify whether it is a partial or full redemption and furnish the payment destination where you want the redemption proceeds deposited. The redeem button will not appear on the holdings page if there are no bonds eligible for online redemption in your account. You can redeem paper bonds at most local financial institutions, such as your bank. That is the easiest and quickest way to get access to your money. Other Ways to Buy Treasuries Some of the other ways to buy Treasuries include ETFs, money market accounts, and the secondary market. Buying Treasuries as ETFs It is possible to buy Treasuries through ETFs at most brokerages. ETFs are bought and sold like stocks, and many qualify for commission-free trades. Investors can choose from government bond ETFs focused on short-term Treasuries, long-term Treasuries, TIPS, and FRNs. Treasury ETFs can be held in IRAs and other tax-advantaged retirement accounts. Many Treasury ETFs have modest fees. Some of the largest funds offer expense ratios as low as 0.15% annually, making them a very affordable investment option. Buying Treasury Bills Through the Money Market You can also buy Treasury bills by investing in a Treasury money market mutual fund. Such funds typically have low fees and low yields limited by rates on the shortest-term Treasury bills. The U.S. Treasury's Office of Financial Research tracks the investments of U.S. money market mutual funds in the aggregate and by financial institution. Buying Treasuries in the Secondary Market Buying Treasuries in the secondary market is easier than most people think. Many brokerages give their customers full access to the bond market, but fees vary. If buying and selling Treasuries is important to you, many of the best brokerages offer free trading for Treasury bonds. Even better, you completely avoid the annual fees of ETFs and the money market. Buying standard U.S. government bonds is easier than buying most other bonds because all you need to know is the time to maturity. TIPS can be trickier to trade. When you buy bonds on the secondary market through a broker, you can hold them in an IRA or another tax-free retirement account. Buying on the secondary market also makes it easier to sell Treasury bonds at a later date. We recommend the best products through an independent review process, and advertisers do not influence our picks. We may receive compensation if you visit partners we recommend. Read our advertiser disclosure for more info. Compare the Best Online Brokers Company Category Investopedia Rating Account Minimum Basic Fee Fidelity Investments Best Overall and Best for Low Costs 4.8 $0 $0 for stock/ETF trades, $0 plus $0.65/contract for options trade TD Ameritrade Best for Beginners and Best Mobile App 4.5 $0 $0 for stock/ETF trades, $0 plus $0.65/contract for options trade Tastytrade Best for Options 3.8 $0 $0 stock/ETF trades, $1.00 to open options trades and $0 to close Interactive Brokers Best for Advanced Traders and Best for International Trading 4.6 $0 $0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value Charles Schwab Best for ETFs 4.7 $0 $0 for stock/ETF trades, $0 plus $0.65/contract for options trade How Do You Buy and Sell Short Term Treasury Bills? You can buy short-term Treasury bills on TreasuryDirect, the U.S. government's portal for buying U.S. Treasuries. Short-term Treasury bills can also be bought and sold through a bank or broker. If you do not wish to hold your Treasuries until maturity, the only way to sell them is through a bank or broker. How Many Treasury Bills Can You Buy? The maximum amount of Treasury bills that you can buy in a single auction is $10 million if the bids are noncompetitive, or 35% of the offering amount for competitive bids. How Do You Buy T-Bills Online? You can buy T-bills online directly from the U.S. government at TreasuryDirect. Alternatively, you can also buy T-bills at auction or on the secondary market through a bank or broker. Bills are issued weekly through an auction bidding process. How Do You Buy Canadian Treasury Bills? You can buy Canadian Treasury bills from a financial institution or from a broker. The minimum investment for purchasing a Canadian Treasury bill is CA$1,000. The Bottom Line Treasuries are a great way to diversify your investment portfolio and reduce its risk since U.S. Treasuries are backed by the full faith and credit of the U.S. government. Treasuries are an important part of a retirement portfolio for many savers because they are liquid, low-risk, and provide an income stream.	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https://www.investopedia.com/terms/c/combinedratio.asp	Combined Ratio: Definition, What It Measures, Formula, 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-the-combined-ratio"></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 Combined Ratio? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> The combined ratio, also called "the combined ratio after policyholder dividends ratio," is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/earnedpremium.asp">earned premium</a>. </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-the-formula-for-the-combined-ratio-is"></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"> The Formula for the Combined Ratio Is </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> <span data-value="\begin{aligned} &\text{Combined Ratio} = \frac{ \text{Incurred Losses} + \text{Expenses} }{ \text{Earned Premium} } \\ \end{aligned}"><span class="katex"><span class="katex-mathml"> <math> <semantics> <mrow> <mtable> <mtr> <mtd> <mstyle> <mrow></mrow> </mstyle> </mtd> <mtd> <mstyle> <mrow> <mrow></mrow> <mtext> Combined Ratio </mtext> <mo> = </mo> <mfrac> <mrow> <mtext> Incurred Losses </mtext> <mo> + </mo> <mtext> Expenses </mtext> </mrow> <mrow> <mtext> Earned Premium </mtext> </mrow> </mfrac> </mrow> </mstyle> </mtd> </mtr> </mtable> </mrow> <annotation encoding="application/x-tex"> \begin{aligned} &\text{Combined Ratio} = \frac{ \text{Incurred Losses} + \text{Expenses} }{ \text{Earned Premium} } \\ \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><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 text"><span class="mord mathrm">Combined Ratio</span></span><span class="mrel">=</span><span class="mord"><span class="mopen nulldelimiter"></span><span class="mfrac"><span class="vlist-t vlist-t2"><span class="vlist-r"><span class="vlist"><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord mathrm">Earned Premium</span></span></span></span><span class=""><span class="pstrut"></span><span class="frac-line"></span></span><span class=""><span class="pstrut"></span><span class="mord"><span class="mord text"><span class="mord mathrm">Incurred Losses</span></span><span class="mbin">+</span><span class="mord text"><span class="mord mathrm">Expenses</span></span></span></span></span><span class="vlist-s"></span></span><span class="vlist-r"><span class="vlist"></span></span></span></span><span class="mclose nulldelimiter"></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_6-0"></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_7-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:67.5%;"> <img alt="Combined Ratio: A measure of profitability used by insurance companies." class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/D4neIzrKh7zKIiYeCdha_RRKk98=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/D4neIzrKh7zKIiYeCdha_RRKk98=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png" data-srcset="https://www.investopedia.com/thmb/TKTiU1HPkzOwSSyKwLk7VXWrruw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png 750w" data-tracking-container="true" height="2700" id="mntl-sc-block-image_1-0" width="4000"/> <noscript> <img alt="Combined Ratio: A measure of profitability used by insurance companies." class="img--noscript universal-image__image" height="2700" sizes="750px" src="https://www.investopedia.com/thmb/D4neIzrKh7zKIiYeCdha_RRKk98=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png" srcset="https://www.investopedia.com/thmb/TKTiU1HPkzOwSSyKwLk7VXWrruw=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png 750w" width="4000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Julie Bang</p></span> </figcaption></figure> <span class="heading-toc" id="toc-what-does-the-combined-ratio-tell-you"></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"> What Does the Combined Ratio Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The combined ratio measures the money flowing out of an insurance company in the form of dividends, expenses, and losses. Losses indicate the insurer's discipline in underwriting policies. The expense ratio gauges the efficiency of an insurer and how well it uses its resources to drive top-line growth. The combined ratio is arguably the most important of these three ratios because it provides a comprehensive measure of an insurer's profitability. </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 combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underwriting.asp">underwriting</a> profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income. </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"> Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management. This is important to note since a portion of dividends will be invested in equities, bonds, and other securities. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/investment-income-ratio.asp">investment income ratio</a> (investment income divided by net premiums earned) takes investment income into account and is used in the calculation of the overall operating ratio. </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-whatyouneedtoknow" 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_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 combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations.</li><li>The combined ratio is typically expressed as a percentage. </li><li>A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. </li><li>Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management.</li></ul></div></div></div> <span class="heading-toc" id="toc-examples-of-the-combined-ratio"></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"> Examples of the Combined Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> As a hypothetical example, if an insurer collects $1,000 in policy premiums and pays out $800 in claims and claim-related expenses, plus another $150 in operating expenses, it would have a combined ratio of (800 + 150) / 1,000 = 95%. </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"> Let's take another example: insurance company ZYX has incurred underwriting expenses of $10 million, incurred losses and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loss-adjustment-expense-lae.asp">loss adjustment expenses</a> of $15 million, net written premiums of $30 million and earned premiums of $25 million. We can calculate ZYX's financial basis combined ratio by adding the incurred losses and loss adjustment expenses with the incurred underwriting expenses. The financial basis combined ratio is 1, or 100% (($10 million + $15 million) / $25 million). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The financial basis gives a snapshot of the current year's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/statutory-audit.asp">statutory financial statements</a>. We can also calculate the combined ratio on a trade basis, where you divide the incurred losses and loss adjustment expenses by earned premiums and add to the incurred underwriting expenses divided by net written premiums. The trade basis combined ratio of insurance company XYZ is 0.93, or 93% = ($15 million / $25 million + $10 million / $30 million). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_23-0"></div> <span class="heading-toc" id="toc-the-difference-between-the-combined-ratio-and-the-loss-ratio"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> The Difference Between the Combined Ratio and the Loss Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> The loss ratio measures the total incurred losses in relation to the total collected insurance premiums, while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums. The combined ratio is essentially <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/what-difference-between-loss-ratio-and-combined-ratio.asp">calculated</a> by adding the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loss-ratio.asp">loss ratio</a> and expense ratio. </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 loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums. The lower the ratio, the more profitable the insurance company and vice versa. If the loss ratio is above 1, or 100%, the insurance company is likely to be unprofitable and may be in poor financial health because it is paying out more in claims than it is receiving in premiums. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-limitations-of-the-combined-ratio"></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"> Limitations of the Combined Ratio </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> The components of the combined ratio each tell a story and should be examined both together and separately in order to understand what is driving the insurer to be profitable or unprofitable. Policy dividends are generated from the premiums generated from the insurer’s underwriting activities. </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 loss and loss-adjustment ratio demonstrate how much it costs the insurer to offer one dollar of protection. The expense ratio shows how expensive it is to generate new business since it takes into account commissions, salaries, overhead, benefits, and operating costs. (For related reading, see "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/042315/how-do-i-calculate-combined-ratio.asp">How Do I Calculate the Combined Ratio?</a>") </p></div>	## What Is the Combined Ratio? The combined ratio, also called "the combined ratio after policyholder dividends ratio," is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the [earned premium](https://www.investopedia.com/terms/e/earnedpremium.asp). ## The Formula for the Combined Ratio Is Combined Ratio = Incurred Losses + Expenses Earned Premium \begin{aligned} &\text{Combined Ratio} = \frac{ \text{Incurred Losses} + \text{Expenses} }{ \text{Earned Premium} } \\ \end{aligned} Combined Ratio=Earned PremiumIncurred Losses+Expenses ![Combined Ratio: A measure of profitability used by insurance companies.]() ![Combined Ratio: A measure of profitability used by insurance companies.](https://www.investopedia.com/thmb/D4neIzrKh7zKIiYeCdha_RRKk98=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/combinedratio.asp-final-90d3b1a5d0cf455eb998651d813d71e5.png) Investopedia / Julie Bang ## What Does the Combined Ratio Tell You? The combined ratio measures the money flowing out of an insurance company in the form of dividends, expenses, and losses. Losses indicate the insurer's discipline in underwriting policies. The expense ratio gauges the efficiency of an insurer and how well it uses its resources to drive top-line growth. The combined ratio is arguably the most important of these three ratios because it provides a comprehensive measure of an insurer's profitability. The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income. Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management. This is important to note since a portion of dividends will be invested in equities, bonds, and other securities. The [investment income ratio](https://www.investopedia.com/terms/i/investment-income-ratio.asp) (investment income divided by net premiums earned) takes investment income into account and is used in the calculation of the overall operating ratio. ### Key Takeaways * The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. * The combined ratio is typically expressed as a percentage. * A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. * Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management. ## Examples of the Combined Ratio As a hypothetical example, if an insurer collects $1,000 in policy premiums and pays out $800 in claims and claim-related expenses, plus another $150 in operating expenses, it would have a combined ratio of (800 + 150) / 1,000 = 95%. Let's take another example: insurance company ZYX has incurred underwriting expenses of $10 million, incurred losses and [loss adjustment expenses](https://www.investopedia.com/terms/l/loss-adjustment-expense-lae.asp) of $15 million, net written premiums of $30 million and earned premiums of $25 million. We can calculate ZYX's financial basis combined ratio by adding the incurred losses and loss adjustment expenses with the incurred underwriting expenses. The financial basis combined ratio is 1, or 100% (($10 million + $15 million) / $25 million). The financial basis gives a snapshot of the current year's [statutory financial statements](https://www.investopedia.com/terms/s/statutory-audit.asp). We can also calculate the combined ratio on a trade basis, where you divide the incurred losses and loss adjustment expenses by earned premiums and add to the incurred underwriting expenses divided by net written premiums. The trade basis combined ratio of insurance company XYZ is 0.93, or 93% = ($15 million / $25 million + $10 million / $30 million). ## The Difference Between the Combined Ratio and the Loss Ratio The loss ratio measures the total incurred losses in relation to the total collected insurance premiums, while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums. The combined ratio is essentially [calculated](https://www.investopedia.com/ask/answers/042315/what-difference-between-loss-ratio-and-combined-ratio.asp) by adding the [loss ratio](https://www.investopedia.com/terms/l/loss-ratio.asp) and expense ratio. The loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums. The lower the ratio, the more profitable the insurance company and vice versa. If the loss ratio is above 1, or 100%, the insurance company is likely to be unprofitable and may be in poor financial health because it is paying out more in claims than it is receiving in premiums. ## Limitations of the Combined Ratio The components of the combined ratio each tell a story and should be examined both together and separately in order to understand what is driving the insurer to be profitable or unprofitable. Policy dividends are generated from the premiums generated from the insurer’s underwriting activities. The loss and loss-adjustment ratio demonstrate how much it costs the insurer to offer one dollar of protection. The expense ratio shows how expensive it is to generate new business since it takes into account commissions, salaries, overhead, benefits, and operating costs. (For related reading, see "[How Do I Calculate the Combined Ratio?](https://www.investopedia.com/ask/answers/042315/how-do-i-calculate-combined-ratio.asp)")	What Is the Combined Ratio? The combined ratio, also called "the combined ratio after policyholder dividends ratio," is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the earned premium. The Formula for the Combined Ratio Is Combined Ratio = Incurred Losses + Expenses Earned Premium \begin{aligned} &\text{Combined Ratio} = \frac{ \text{Incurred Losses} + \text{Expenses} }{ \text{Earned Premium} } \\ \end{aligned} Combined Ratio=Earned PremiumIncurred Losses+Expenses Investopedia / Julie Bang What Does the Combined Ratio Tell You? The combined ratio measures the money flowing out of an insurance company in the form of dividends, expenses, and losses. Losses indicate the insurer's discipline in underwriting policies. The expense ratio gauges the efficiency of an insurer and how well it uses its resources to drive top-line growth. The combined ratio is arguably the most important of these three ratios because it provides a comprehensive measure of an insurer's profitability. The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income. Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management. This is important to note since a portion of dividends will be invested in equities, bonds, and other securities. The investment income ratio (investment income divided by net premiums earned) takes investment income into account and is used in the calculation of the overall operating ratio. Key Takeaways The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations.The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. Many insurance companies believe that the combined ratio is the best way to measure success because it does not include investment income and only includes profit earned through efficient management. Examples of the Combined Ratio As a hypothetical example, if an insurer collects $1,000 in policy premiums and pays out $800 in claims and claim-related expenses, plus another $150 in operating expenses, it would have a combined ratio of (800 + 150) / 1,000 = 95%. Let's take another example: insurance company ZYX has incurred underwriting expenses of $10 million, incurred losses and loss adjustment expenses of $15 million, net written premiums of $30 million and earned premiums of $25 million. We can calculate ZYX's financial basis combined ratio by adding the incurred losses and loss adjustment expenses with the incurred underwriting expenses. The financial basis combined ratio is 1, or 100% (($10 million + $15 million) / $25 million). The financial basis gives a snapshot of the current year's statutory financial statements. We can also calculate the combined ratio on a trade basis, where you divide the incurred losses and loss adjustment expenses by earned premiums and add to the incurred underwriting expenses divided by net written premiums. The trade basis combined ratio of insurance company XYZ is 0.93, or 93% = ($15 million / $25 million + $10 million / $30 million). The Difference Between the Combined Ratio and the Loss Ratio The loss ratio measures the total incurred losses in relation to the total collected insurance premiums, while the combined ratio measures the incurred losses and expenses in relation to the total collected premiums. The combined ratio is essentially calculated by adding the loss ratio and expense ratio. The loss ratio is calculated by dividing the total incurred losses by the total collected insurance premiums. The lower the ratio, the more profitable the insurance company and vice versa. If the loss ratio is above 1, or 100%, the insurance company is likely to be unprofitable and may be in poor financial health because it is paying out more in claims than it is receiving in premiums. Limitations of the Combined Ratio The components of the combined ratio each tell a story and should be examined both together and separately in order to understand what is driving the insurer to be profitable or unprofitable. Policy dividends are generated from the premiums generated from the insurer’s underwriting activities. The loss and loss-adjustment ratio demonstrate how much it costs the insurer to offer one dollar of protection. The expense ratio shows how expensive it is to generate new business since it takes into account commissions, salaries, overhead, benefits, and operating costs. (For related reading, see "How Do I Calculate the Combined Ratio?")	[ [ "earned premium", "https://www.investopedia.com/terms/e/earnedpremium.asp" ], [ "Combined Ratio: A measure of profitability used by insurance companies.", "https://www.investopedia.com/thmb/D4neIzrKh7zKIiYeCdha_RRKk98=/1500x0/filters:no_upscale(" ], [ "underwriting", "https://www.investopedia.com/terms/u/underwriting.asp" ], [ "investment income ratio", "https://www.investopedia.com/terms/i/investment-income-ratio.asp" ], [ "loss adjustment expenses", "https://www.investopedia.com/terms/l/loss-adjustment-expense-lae.asp" ], [ "statutory financial statements", "https://www.investopedia.com/terms/s/statutory-audit.asp" ], [ "calculated", "https://www.investopedia.com/ask/answers/042315/what-difference-between-loss-ratio-and-combined-ratio.asp" ], [ "loss ratio", "https://www.investopedia.com/terms/l/loss-ratio.asp" ], [ "How Do I Calculate the Combined Ratio?", "https://www.investopedia.com/ask/answers/042315/how-do-i-calculate-combined-ratio.asp" ] ]
https://www.investopedia.com/terms/a/altered-check.asp	Altered Check: Definition, Example, Liability	<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-altered-check"></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 Altered Check? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> An altered check is a check or another <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/negotiable-instrument.asp">negotiable instrument</a> that has been materially and maliciously altered to effect a fraud. Usually, either the name of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/payee.asp">payee</a>, the amount of the check, or the date is changed. </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 altered check is a form of check fraud that includes an altered check in the form of malicious changes. </li><li>Such changes that constitute an altered check include changes in the amount and payee name. </li><li>Generally, the fraud must be reported by the customer within a year to ensure recovery of the loss. </li><li>Banks can refuse to honor a check if it believes it has been altered. </li><li>To help prevent check altering, the Office of the Comptroller of the Currency (OCC) suggests not leaving large spaces in the number and amount lines.<span class="ql-inline-citation" data-cite="1"></span> </li></ul></div></div></div> <span class="heading-toc" id="toc-how-an-altered-check-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 Altered Check Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> An altered check is one of four common types of check fraud, the other three being forgeries (imitated signature), counterfeit checks (fake), and remote checks (instead of a signature, there is a bogus statement that the account holder has authorized a check). Altered checks are specifically addressed in the<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uniform-commercial-code.asp"> Uniform Commercial Code</a> (UCC) Section 3-407. The term "alteration" is defined as either: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> <li>An unauthorized change in an instrument that purports to modify in any respect the obligation of a party.</li><li>The unauthorized addition of words or numbers or another change to an incomplete instrument relating to the obligation of a party.<span class="ql-inline-citation" data-cite="2"></span></li> </ol> <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"> Under the UCC, the liability for an altered check can reside with the various parties involved, including the customer drawing the check, the bank on which the check is drawn, and the bank that presents the check, depending on the evident negligence. Sometimes the liability of an altered check falls with the drawer of the check and other times it's the drawee or depository banks. A drawee bank can refuse to accept the loss in certain circumstances, such as customer negligence or if the fraud was perpetrated by a repeat wrongdoer. </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"> Ordinarily, a customer needs to examine their <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bank-statement.asp">bank statement</a> and report the loss within 30 days. Regardless of any negligence by the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/drawee.asp">drawee</a> bank, a customer will be barred from recovery if they do not report the loss within one year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp">Office of Comptroller of the Currency</a> (OCC) of the U.S. Department of Treasury makes suggestions to protect against this type of fraud. First, customers should avoid leaving large blank spaces in the number or amount lines when they write checks; second, they should report to the drawee or payer financial institution when their checks are stolen.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_17-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Financial institutions should review checks to ensure that the handwriting of letters or numbers is consistent throughout and that there are no visible signs of erasure or alteration. </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"> Banks, credit unions, and other financial institutions can use automatic systems called <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/positive-pay.asp">positive pay</a> to match checks to the issuing companies. If a bank believes a check has been altered, it can refuse to honor it. </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-an-altered-check"></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 an Altered Check </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> An altered check is usually changes made to the name or amount. For example, the dollar amount of a check can be changed from $100 to $1,000. Dollar amount changes are easier than changes made to names. </p></div>	## What Is an Altered Check? An altered check is a check or another [negotiable instrument](https://www.investopedia.com/terms/n/negotiable-instrument.asp) that has been materially and maliciously altered to effect a fraud. Usually, either the name of the [payee](https://www.investopedia.com/terms/p/payee.asp), the amount of the check, or the date is changed. ### Key Takeaways * An altered check is a form of check fraud that includes an altered check in the form of malicious changes. * Such changes that constitute an altered check include changes in the amount and payee name. * Generally, the fraud must be reported by the customer within a year to ensure recovery of the loss. * Banks can refuse to honor a check if it believes it has been altered. * To help prevent check altering, the Office of the Comptroller of the Currency (OCC) suggests not leaving large spaces in the number and amount lines. ## How an Altered Check Works An altered check is one of four common types of check fraud, the other three being forgeries (imitated signature), counterfeit checks (fake), and remote checks (instead of a signature, there is a bogus statement that the account holder has authorized a check). Altered checks are specifically addressed in the [Uniform Commercial Code](https://www.investopedia.com/terms/u/uniform-commercial-code.asp) (UCC) Section 3-407. The term "alteration" is defined as either: 1. An unauthorized change in an instrument that purports to modify in any respect the obligation of a party. 2. The unauthorized addition of words or numbers or another change to an incomplete instrument relating to the obligation of a party. Under the UCC, the liability for an altered check can reside with the various parties involved, including the customer drawing the check, the bank on which the check is drawn, and the bank that presents the check, depending on the evident negligence. Sometimes the liability of an altered check falls with the drawer of the check and other times it's the drawee or depository banks. A drawee bank can refuse to accept the loss in certain circumstances, such as customer negligence or if the fraud was perpetrated by a repeat wrongdoer. Ordinarily, a customer needs to examine their [bank statement](https://www.investopedia.com/terms/b/bank-statement.asp) and report the loss within 30 days. Regardless of any negligence by the [drawee](https://www.investopedia.com/terms/d/drawee.asp) bank, a customer will be barred from recovery if they do not report the loss within one year. ## Special Considerations The [Office of Comptroller of the Currency](https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp) (OCC) of the U.S. Department of Treasury makes suggestions to protect against this type of fraud. First, customers should avoid leaving large blank spaces in the number or amount lines when they write checks; second, they should report to the drawee or payer financial institution when their checks are stolen. Financial institutions should review checks to ensure that the handwriting of letters or numbers is consistent throughout and that there are no visible signs of erasure or alteration. Banks, credit unions, and other financial institutions can use automatic systems called [positive pay](https://www.investopedia.com/terms/p/positive-pay.asp) to match checks to the issuing companies. If a bank believes a check has been altered, it can refuse to honor it. ## Example of an Altered Check An altered check is usually changes made to the name or amount. For example, the dollar amount of a check can be changed from $100 to $1,000. Dollar amount changes are easier than changes made to names.	What Is an Altered Check? An altered check is a check or another negotiable instrument that has been materially and maliciously altered to effect a fraud. Usually, either the name of the payee, the amount of the check, or the date is changed. Key Takeaways An altered check is a form of check fraud that includes an altered check in the form of malicious changes. Such changes that constitute an altered check include changes in the amount and payee name. Generally, the fraud must be reported by the customer within a year to ensure recovery of the loss. Banks can refuse to honor a check if it believes it has been altered. To help prevent check altering, the Office of the Comptroller of the Currency (OCC) suggests not leaving large spaces in the number and amount lines. How an Altered Check Works An altered check is one of four common types of check fraud, the other three being forgeries (imitated signature), counterfeit checks (fake), and remote checks (instead of a signature, there is a bogus statement that the account holder has authorized a check). Altered checks are specifically addressed in the Uniform Commercial Code (UCC) Section 3-407. The term "alteration" is defined as either: An unauthorized change in an instrument that purports to modify in any respect the obligation of a party.The unauthorized addition of words or numbers or another change to an incomplete instrument relating to the obligation of a party. Under the UCC, the liability for an altered check can reside with the various parties involved, including the customer drawing the check, the bank on which the check is drawn, and the bank that presents the check, depending on the evident negligence. Sometimes the liability of an altered check falls with the drawer of the check and other times it's the drawee or depository banks. A drawee bank can refuse to accept the loss in certain circumstances, such as customer negligence or if the fraud was perpetrated by a repeat wrongdoer. Ordinarily, a customer needs to examine their bank statement and report the loss within 30 days. Regardless of any negligence by the drawee bank, a customer will be barred from recovery if they do not report the loss within one year. Special Considerations The Office of Comptroller of the Currency (OCC) of the U.S. Department of Treasury makes suggestions to protect against this type of fraud. First, customers should avoid leaving large blank spaces in the number or amount lines when they write checks; second, they should report to the drawee or payer financial institution when their checks are stolen. Financial institutions should review checks to ensure that the handwriting of letters or numbers is consistent throughout and that there are no visible signs of erasure or alteration. Banks, credit unions, and other financial institutions can use automatic systems called positive pay to match checks to the issuing companies. If a bank believes a check has been altered, it can refuse to honor it. Example of an Altered Check An altered check is usually changes made to the name or amount. For example, the dollar amount of a check can be changed from $100 to $1,000. Dollar amount changes are easier than changes made to names.	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https://www.investopedia.com/bitcoin-s-on-a-tear-but-not-all-crypto-is-booming-8379526	Bitcoin's On A Tear But Not All Crypto Is Booming	<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 bitcoin price crossed $35,000 for the first time since May 2022, as market speculators anticipate the impending approval of a spot bitcoin ETF in the U.S.</li> <li>More than $250 million in bitcoin short positions were liquidated in the past three days.</li> <li>According to Deutsche Digital Assets Head of Research André Dragosch, a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortsqueeze.asp">short squeeze</a> was a key contributing factor to the recent bitcoin price spike.</li> <li>The Bitcoin Dominance Index as calculated by TradingView, also reached 54.26%, which is its highest level since April 2021.</li> <li>As bitcoin's dominance over the crypto market increases, a report from Kaiko indicates crypto asset delistings from exchanges are happening at the fastest rate in history.</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"> Bitcoin's price briefly surged past the $35,000 mark this week and some analysts think that growing small-investor participation may bode well in the coming weeks, but the rise in the cryptocurrency hasn't helped the rest of the market. </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"> Trading related to the news of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/bitcoin-briefly-crosses-usd30k-on-etf-optimism-8364430">potential approval of a spot bitcoin exchange-traded fund</a> (ETF) intensified, pushing up the price above $30,000 and squeezing shorts, according to Deutsche Digital Assets Head of Research André Dragosch.<span class="ql-inline-citation" data-cite="5"></span> The <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortsqueeze.asp">short squeeze</a> led to more than $250 million liquidation of short positions over the past three days, according to data from Coinglass.<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_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> At the same time, the Bitcoin Dominance Index (BDI)—a measure of bitcoin's share of the overall crypto market—reached heights not seen since April 2021.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <span class="heading-toc" id="toc-bitcoin-dominance-index-at-highest-levels-in-two-years"></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"> Bitcoin Dominance Index at Highest Levels in Two Years </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> While a rising bitcoin tends to lift all crypto assets, the rest of the market has not been able to keep up with bitcoin this week. In fact, this has been the trend for nearly a year, as the BDI has seen a steady increase since the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-went-wrong-with-ftx-6828447">collapse of crypto exchange FTX</a> in November 2022. Today, BDI is about 54.4%— its highest level since April 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-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_12-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:60.8%;"> <img alt="Bitcoin Dominance Index" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/TcYQVbKsRzeIWrBlo2RLnW9ZNnI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/TcYQVbKsRzeIWrBlo2RLnW9ZNnI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png" data-srcset="https://www.investopedia.com/thmb/VJP83iwu3Z67AYftJfD6rBJB_d4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png 750w" data-tracking-container="true" height="1282" id="mntl-sc-block-image_1-0" width="2108"/> <noscript> <img alt="Bitcoin Dominance Index" class="img--noscript universal-image__image" height="1282" sizes="750px" src="https://www.investopedia.com/thmb/TcYQVbKsRzeIWrBlo2RLnW9ZNnI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png" srcset="https://www.investopedia.com/thmb/VJP83iwu3Z67AYftJfD6rBJB_d4=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png 750w" width="2108"/> </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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Indeed, the darlings of the previous crypto bull market have not fared well relative to bitcoin over the past year. For example, the native crypto asset of Ethereum, ether, is up only 14% in the past year as opposed to a roughly 66% gain for bitcoin. </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"> At the same time, <em>Bloomberg</em> reported that crypto tokens are being delisted from exchanges at a rate never before seen in the industry's history, according to data from Kaiko.<span class="ql-inline-citation" data-cite="2"></span> Nearly 3,500 crypto token delistings have either already taken place or are expected to take place in 2023, and Coinbase (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=coin">COIN</a>), which is <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669">currently being sued by the U.S. Securities and Exchange Commission</a>, is said to have delisted 80 trading pairs this month alone. </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-small-investors-laying-groundwork-for-bitcoin-bull-market"></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"> Small Investors Laying Groundwork For Bitcoin Bull Market? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Dragosch observed increased bitcoin wallet activity for both small and large invetsors, but there was one number that stood out. An increase in "median value of transfer volumes on the Bitcoin blockchain"—an indicator of small-investor participation—could hold some clues about the price direction for bitcoin. </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"> "Small-investor participation is a necessary condition for a sustained bull market in crypto assets," Dragosch wrote.<span class="ql-inline-citation" data-cite="5"></span><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 bitcoin price crossed $35,000 for the first time since May 2022, as market speculators anticipate the impending approval of a spot bitcoin ETF in the U.S. * More than $250 million in bitcoin short positions were liquidated in the past three days. * According to Deutsche Digital Assets Head of Research André Dragosch, a [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp) was a key contributing factor to the recent bitcoin price spike. * The Bitcoin Dominance Index as calculated by TradingView, also reached 54.26%, which is its highest level since April 2021. * As bitcoin's dominance over the crypto market increases, a report from Kaiko indicates crypto asset delistings from exchanges are happening at the fastest rate in history. Bitcoin's price briefly surged past the $35,000 mark this week and some analysts think that growing small-investor participation may bode well in the coming weeks, but the rise in the cryptocurrency hasn't helped the rest of the market. Trading related to the news of a [potential approval of a spot bitcoin exchange-traded fund](https://www.investopedia.com/bitcoin-briefly-crosses-usd30k-on-etf-optimism-8364430) (ETF) intensified, pushing up the price above $30,000 and squeezing shorts, according to Deutsche Digital Assets Head of Research André Dragosch. The [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp) led to more than $250 million liquidation of short positions over the past three days, according to data from Coinglass. At the same time, the Bitcoin Dominance Index (BDI)—a measure of bitcoin's share of the overall crypto market—reached heights not seen since April 2021. ## Bitcoin Dominance Index at Highest Levels in Two Years While a rising bitcoin tends to lift all crypto assets, the rest of the market has not been able to keep up with bitcoin this week. In fact, this has been the trend for nearly a year, as the BDI has seen a steady increase since the [collapse of crypto exchange FTX](https://www.investopedia.com/what-went-wrong-with-ftx-6828447) in November 2022. Today, BDI is about 54.4%— its highest level since April 2021. ![Bitcoin Dominance Index]() ![Bitcoin Dominance Index](https://www.investopedia.com/thmb/TcYQVbKsRzeIWrBlo2RLnW9ZNnI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/BTC.D_2023-10-25_14-19-27-32a9ec5379de46cd9b0019f14289f1af.png) TradingView Indeed, the darlings of the previous crypto bull market have not fared well relative to bitcoin over the past year. For example, the native crypto asset of Ethereum, ether, is up only 14% in the past year as opposed to a roughly 66% gain for bitcoin. At the same time, Bloomberg reported that crypto tokens are being delisted from exchanges at a rate never before seen in the industry's history, according to data from Kaiko. Nearly 3,500 crypto token delistings have either already taken place or are expected to take place in 2023, and Coinbase ([COIN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=coin)), which is [currently being sued by the U.S. Securities and Exchange Commission](https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669), is said to have delisted 80 trading pairs this month alone. ## Small Investors Laying Groundwork For Bitcoin Bull Market? Dragosch observed increased bitcoin wallet activity for both small and large invetsors, but there was one number that stood out. An increase in "median value of transfer volumes on the Bitcoin blockchain"—an indicator of small-investor participation—could hold some clues about the price direction for bitcoin. "Small-investor participation is a necessary condition for a sustained bull market in crypto assets," Dragosch wrote. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	KEY TAKEAWAYS The bitcoin price crossed $35,000 for the first time since May 2022, as market speculators anticipate the impending approval of a spot bitcoin ETF in the U.S. More than $250 million in bitcoin short positions were liquidated in the past three days. According to Deutsche Digital Assets Head of Research André Dragosch, a short squeeze was a key contributing factor to the recent bitcoin price spike. The Bitcoin Dominance Index as calculated by TradingView, also reached 54.26%, which is its highest level since April 2021. As bitcoin's dominance over the crypto market increases, a report from Kaiko indicates crypto asset delistings from exchanges are happening at the fastest rate in history. Bitcoin's price briefly surged past the $35,000 mark this week and some analysts think that growing small-investor participation may bode well in the coming weeks, but the rise in the cryptocurrency hasn't helped the rest of the market. Trading related to the news of a potential approval of a spot bitcoin exchange-traded fund (ETF) intensified, pushing up the price above $30,000 and squeezing shorts, according to Deutsche Digital Assets Head of Research André Dragosch. The short squeeze led to more than $250 million liquidation of short positions over the past three days, according to data from Coinglass. At the same time, the Bitcoin Dominance Index (BDI)—a measure of bitcoin's share of the overall crypto market—reached heights not seen since April 2021. Bitcoin Dominance Index at Highest Levels in Two Years While a rising bitcoin tends to lift all crypto assets, the rest of the market has not been able to keep up with bitcoin this week. In fact, this has been the trend for nearly a year, as the BDI has seen a steady increase since the collapse of crypto exchange FTX in November 2022. Today, BDI is about 54.4%— its highest level since April 2021. TradingView Indeed, the darlings of the previous crypto bull market have not fared well relative to bitcoin over the past year. For example, the native crypto asset of Ethereum, ether, is up only 14% in the past year as opposed to a roughly 66% gain for bitcoin. At the same time, Bloomberg reported that crypto tokens are being delisted from exchanges at a rate never before seen in the industry's history, according to data from Kaiko. Nearly 3,500 crypto token delistings have either already taken place or are expected to take place in 2023, and Coinbase (COIN), which is currently being sued by the U.S. Securities and Exchange Commission, is said to have delisted 80 trading pairs this month alone. Small Investors Laying Groundwork For Bitcoin Bull Market? Dragosch observed increased bitcoin wallet activity for both small and large invetsors, but there was one number that stood out. An increase in "median value of transfer volumes on the Bitcoin blockchain"—an indicator of small-investor participation—could hold some clues about the price direction for bitcoin. "Small-investor participation is a necessary condition for a sustained bull market in crypto assets," Dragosch wrote. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "short squeeze", "https://www.investopedia.com/terms/s/shortsqueeze.asp" ], [ "potential approval of a spot bitcoin exchange-traded fund", "https://www.investopedia.com/bitcoin-briefly-crosses-usd30k-on-etf-optimism-8364430" ], [ "short squeeze", "https://www.investopedia.com/terms/s/shortsqueeze.asp" ], [ "collapse of crypto exchange FTX", "https://www.investopedia.com/what-went-wrong-with-ftx-6828447" ], [ "Bitcoin Dominance Index", "https://www.investopedia.com/thmb/TcYQVbKsRzeIWrBlo2RLnW9ZNnI=/1500x0/filters:no_upscale(" ], [ "COIN", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=coin" ], [ "currently being sued by the U.S. Securities and Exchange Commission", "https://www.investopedia.com/sec-sues-coinbase-for-operating-an-unregistered-exchange-7508669" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/articles/06/water.asp	Water Investments: How to Invest in Water	<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"> We know water is the source of life. But it can also be a source for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio d</a><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">iversification</a>. Like gold and oil, water is a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/commodity.asp">commodity</a>—and it happens to be rather scarce nowadays. So, as with any other <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/scarcity.asp">scarcity</a>, the water shortage creates investment opportunities.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Water is arguably the most important resource on planet earth.</li><li>Shortages of water can lead to social, political, and economic disruption.</li><li>Water is increasingly scarce, due to climate change, pollution, and increasing demand.</li><li>Because of its importance, investors can diversify their portfolios by acquiring water-related assets and investments.</li><li>There are multiple indexes, mutual funds, and ETFs that allow retail investors to gain exposure to water-related securities.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-water-investments"></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 Water Investments </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The investment case for water is simple: water is one of the most important resources, and it is likely to become a lot scarcer. About 70% of the earth's surface is covered in water, but over 97% is saltwater. Saltwater cannot be used for drinking, crop irrigation, or most industrial uses. Of the remaining 3% of the world's water resources, only about 1% is readily available for human consumption.<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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_8-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/sb52o/1/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Global Water Supply"></iframe></div> <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"> Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced a lack of H<sub>2</sub>O include China, Egypt, India, Israel, Pakistan, Mexico, most of Africa, and the United States (Arizona, New Mexico, California, and West Texas), to name but a few.<span class="ql-inline-citation" data-cite="18"></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_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Pollution also highlights the need for clean water. The dead zone off the Gulf Coast highlights the impact of fertilizer runoff, and methyl tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in well water from California to Maryland.<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_13-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Overseas, highly publicized incidents in Russia, China, and elsewhere demonstrate that pollution isn't limited to the West. Of course, fouled water supplies further restrict the amount of fresh water available for human use. </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">$55 Billion Investment in Clean Water</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>On November 15, 2021, President Biden signed into law the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/infrastructure-investment-jobs-act-5209581#citation-1">Infrastructure Investment and Jobs Act</a>. The bipartisan infrastructure bill authorizes $1.2 trillion in spending, which includes $55 billion allocated to create clean drinking water, $65 billion in clean energy, and $21 billion to clean up hazardous, polluted sites.<br/>The legislation is good news to clean water advocates since it will expand access to clean drinking water for households, businesses, schools, and child care centers in cities and rural areas. The legislation will also invest in water infrastructure to eliminate lead service pipes.<span class="ql-inline-citation" data-cite="19"></span></p></div></div></div> <span class="heading-toc" id="toc-water-investment-indexes"></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"> Water Investment Indexes </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Here are some of the more popular <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index.asp">indexes</a> designed to track various water-related investment opportunities: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> <li><strong>The Dow Jones U.S. Water Index</strong> is composed of approximately 29 stocks; it is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/barometer.asp">barometer</a> consisting of many international and domestic companies that are affiliated with the water business and have a minimum <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketcapitalization.asp">market capitalization</a> of $150 million.</li> <li><strong>The ISE Clean Edge Water Index</strong> was launched in December 2000, and this index represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks.<span class="ql-inline-citation" data-cite="20"></span></li> <li><strong>The S&P 1500 Water Utilities Index</strong><em> </em>is a sub-sector of the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp.asp">Standard & Poor's</a> 1500 Utilities Index; this index comprises just two companies, American States Water (NYSE: <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=awr">AWR</a>) and Aqua America (NYSE: <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=wtr">WTR</a>).</li> <li><strong>The S&P Global Water Index</strong> is an index that began in 2001 that contains 50 companies worldwide; their water-related businesses fall into two areas: water <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/utilities_sector.asp">utilities</a> and <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/infrastructure.asp">infrastructure</a> and water equipment and materials.<span class="ql-inline-citation" data-cite="16"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services.<span class="ql-inline-citation" data-cite="6"></span> There are also a variety of utility indexes that include some water stocks. </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_3-0">2.3 billion</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>2.3 billion people live in "water-stressed" countries, according to the United Nations, meaning that they use up more than 25% of their fresh water resources every year. 700 million people could be displaced due to water scarcity by 2030.<span class="ql-inline-citation" data-cite="24"></span></p></div></div></div> <span class="heading-toc" id="toc-how-to-invest-in-water-securities"></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 Invest in Water Securities </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Firms seeking to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms, and equipment makers, such as those that provide pumps, valves, and desalination units. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A look at the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/holdings.asp">holdings</a> of any of these water indexes provides an easy way to start looking for suitable investment opportunities. Companies from <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bluechip.asp">blue-chip</a> <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stalwart.asp">stalwart</a> General Electric to <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/small-cap.asp">small-cap</a> Layne Christensen are all seeking a piece of the water market. In addition to direct stock purchases, some of the larger firms offer <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp">dividend reinvestment plans</a>. </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 it comes to bottled water, the market is growing internationally. Demand is rising from China to Mexico, following the spike in U.S. consumer demand. Estimates suggest that from 2010 to 2020, American <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/percapita.asp">per-capita</a> consumption of bottled water increased 61%–in fact, the average American drinks approximately 45 gallons of bottled water a year.<span class="ql-inline-citation" data-cite="7"></span> According to a 2018 UN study, 177 countries rely on desalination for at least part of their freshwater consumption needs.<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_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/valueinvesting.asp">stock picking</a> doesn't interest you, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">ETFs</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/u/uit.asp">unit investment trusts</a> (UITs) also provide plenty of opportunities to invest in water. The Invesco Water Resource Portfolio ETF (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=pho">PHO</a>) is the largest, with a U.S.-centric basket of 38 holdings (as of Feb. 2022) that tilts toward mid- and smaller-cap companies.<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"> The iShares U.S. Utilities ETF (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=idu">IDU</a>) provides some exposure to water-related stocks.<span class="ql-inline-citation" data-cite="10"></span> Other alternatives include the Invesco Global Water Portfolio ETF (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=pio">PIO</a>), which tracks the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nasdaq.asp">Nasdaq</a> OMX Global Water Index, and the First Trust ISE Water Index Fund (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=fiw">FIW</a>).<span class="ql-inline-citation" data-cite="12"></span><span class="ql-inline-citation" data-cite="11"></span> Based on popularity, new alternatives are slowly emerging. Benchmarked to the MSCI ACWI Index, the <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/101515/top-5-natural-resources-mutual-funds.asp">Allianz Global Water Fund</a> invests in improving the supply, quality, and efficiency of water resource management. </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-how-do-you-invest-in-water-as-a-commodity"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Invest in Water as a Commodity?</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/c/cme.asp">Chicago Mercantile Exchange</a> has tradeable water futures that are tied to water prices in California. These futures contracts allow investors to bet on the future value of the Nasdaq Veles California Water Index, effectively betting on the future price of water.<span class="ql-inline-citation" data-cite="23"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-how-is-michael-burry-investing-in-water"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Is Michael Burry Investing in Water?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>At the conclusion of <em>The Big Short, </em>it is revealed that Scion Capital founder Michael Burry followed up his successful short trade with investments in water. In later interviews, Burry explained that "food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas." Farmland in high-precipitation areas is effectively a bet on water's future value. However, for retail investors, it may be easier to focus on water stocks.<span class="ql-inline-citation" data-cite="22"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-how-do-you-invest-in-water-stocks"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Invest in Water Stocks?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Water stocks are stocks of companies whose business is closely tied to irrigation, utilities, water treatment, or other water-related industries. One can invest in these by buying the stocks of individual companies, or by investing in a mutual fund or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/water-etfs-how-they-work-8426968">ETF with high exposure to water stocks</a>.</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"> Recent years have seen an upswing in demand for investments that profit from the need for fresh, clean water. If the trend continues, investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. </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"> There are currently numerous ways to add water exposure to your portfolio; most simply require a bit of research. Opportunities to invest in this scarce resource are flowing freely. </p></div>	We know water is the source of life. But it can also be a source for [portfolio d](https://www.investopedia.com/terms/p/portfolio.asp)[iversification](https://www.investopedia.com/terms/d/diversification.asp). Like gold and oil, water is a [commodity](https://www.investopedia.com/terms/c/commodity.asp)—and it happens to be rather scarce nowadays. So, as with any other [scarcity](https://www.investopedia.com/terms/s/scarcity.asp), the water shortage creates investment opportunities. ### Key Takeaways * Water is arguably the most important resource on planet earth. * Shortages of water can lead to social, political, and economic disruption. * Water is increasingly scarce, due to climate change, pollution, and increasing demand. * Because of its importance, investors can diversify their portfolios by acquiring water-related assets and investments. * There are multiple indexes, mutual funds, and ETFs that allow retail investors to gain exposure to water-related securities. ## Understanding Water Investments The investment case for water is simple: water is one of the most important resources, and it is likely to become a lot scarcer. About 70% of the earth's surface is covered in water, but over 97% is saltwater. Saltwater cannot be used for drinking, crop irrigation, or most industrial uses. Of the remaining 3% of the world's water resources, only about 1% is readily available for human consumption. Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced a lack of H2O include China, Egypt, India, Israel, Pakistan, Mexico, most of Africa, and the United States (Arizona, New Mexico, California, and West Texas), to name but a few. Pollution also highlights the need for clean water. The dead zone off the Gulf Coast highlights the impact of fertilizer runoff, and methyl tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in well water from California to Maryland. Overseas, highly publicized incidents in Russia, China, and elsewhere demonstrate that pollution isn't limited to the West. Of course, fouled water supplies further restrict the amount of fresh water available for human use. ### $55 Billion Investment in Clean Water On November 15, 2021, President Biden signed into law the [Infrastructure Investment and Jobs Act](https://www.investopedia.com/infrastructure-investment-jobs-act-5209581#citation-1). The bipartisan infrastructure bill authorizes $1.2 trillion in spending, which includes $55 billion allocated to create clean drinking water, $65 billion in clean energy, and $21 billion to clean up hazardous, polluted sites. The legislation is good news to clean water advocates since it will expand access to clean drinking water for households, businesses, schools, and child care centers in cities and rural areas. The legislation will also invest in water infrastructure to eliminate lead service pipes. ## Water Investment Indexes Here are some of the more popular [indexes](https://www.investopedia.com/terms/i/index.asp) designed to track various water-related investment opportunities: * The Dow Jones U.S. Water Index is composed of approximately 29 stocks; it is a [barometer](https://www.investopedia.com/terms/b/barometer.asp) consisting of many international and domestic companies that are affiliated with the water business and have a minimum [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) of $150 million. * The ISE Clean Edge Water Index was launched in December 2000, and this index represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks. * The S&P 1500 Water Utilities Indexis a sub-sector of the [Standard & Poor's](https://www.investopedia.com/terms/s/sp.asp) 1500 Utilities Index; this index comprises just two companies, American States Water (NYSE: [AWR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=awr)) and Aqua America (NYSE: [WTR](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wtr)). * The S&P Global Water Index is an index that began in 2001 that contains 50 companies worldwide; their water-related businesses fall into two areas: water [utilities](https://www.investopedia.com/terms/u/utilities_sector.asp) and [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) and water equipment and materials. The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services. There are also a variety of utility indexes that include some water stocks. ### 2.3 billion 2.3 billion people live in "water-stressed" countries, according to the United Nations, meaning that they use up more than 25% of their fresh water resources every year. 700 million people could be displaced due to water scarcity by 2030. ## How to Invest in Water Securities Firms seeking to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms, and equipment makers, such as those that provide pumps, valves, and desalination units. A look at the [holdings](https://www.investopedia.com/terms/h/holdings.asp) of any of these water indexes provides an easy way to start looking for suitable investment opportunities. Companies from [blue-chip](https://www.investopedia.com/terms/b/bluechip.asp) [stalwart](https://www.investopedia.com/terms/s/stalwart.asp) General Electric to [small-cap](https://www.investopedia.com/terms/s/small-cap.asp) Layne Christensen are all seeking a piece of the water market. In addition to direct stock purchases, some of the larger firms offer [dividend reinvestment plans](https://www.investopedia.com/terms/d/dividendreinvestmentplan.asp). When it comes to bottled water, the market is growing internationally. Demand is rising from China to Mexico, following the spike in U.S. consumer demand. Estimates suggest that from 2010 to 2020, American [per-capita](https://www.investopedia.com/terms/p/percapita.asp) consumption of bottled water increased 61%–in fact, the average American drinks approximately 45 gallons of bottled water a year. According to a 2018 UN study, 177 countries rely on desalination for at least part of their freshwater consumption needs. If [stock picking](https://www.investopedia.com/terms/v/valueinvesting.asp) doesn't interest you, [ETFs](https://www.investopedia.com/terms/e/etf.asp), [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), and [unit investment trusts](https://www.investopedia.com/terms/u/uit.asp) (UITs) also provide plenty of opportunities to invest in water. The Invesco Water Resource Portfolio ETF ([PHO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pho)) is the largest, with a U.S.-centric basket of 38 holdings (as of Feb. 2022) that tilts toward mid- and smaller-cap companies. The iShares U.S. Utilities ETF ([IDU](https://www.investopedia.com/markets/quote?tvwidgetsymbol=idu)) provides some exposure to water-related stocks. Other alternatives include the Invesco Global Water Portfolio ETF ([PIO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pio)), which tracks the [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp) OMX Global Water Index, and the First Trust ISE Water Index Fund ([FIW](https://www.investopedia.com/markets/quote?tvwidgetsymbol=fiw)). Based on popularity, new alternatives are slowly emerging. Benchmarked to the MSCI ACWI Index, the [Allianz Global Water Fund](https://www.investopedia.com/articles/investing/101515/top-5-natural-resources-mutual-funds.asp) invests in improving the supply, quality, and efficiency of water resource management. ## How Do You Invest in Water as a Commodity? The [Chicago Mercantile Exchange](https://www.investopedia.com/terms/c/cme.asp) has tradeable water futures that are tied to water prices in California. These futures contracts allow investors to bet on the future value of the Nasdaq Veles California Water Index, effectively betting on the future price of water. ## How Is Michael Burry Investing in Water? At the conclusion of The Big Short, it is revealed that Scion Capital founder Michael Burry followed up his successful short trade with investments in water. In later interviews, Burry explained that "food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas." Farmland in high-precipitation areas is effectively a bet on water's future value. However, for retail investors, it may be easier to focus on water stocks. ## How Do You Invest in Water Stocks? Water stocks are stocks of companies whose business is closely tied to irrigation, utilities, water treatment, or other water-related industries. One can invest in these by buying the stocks of individual companies, or by investing in a mutual fund or [ETF with high exposure to water stocks](https://www.investopedia.com/water-etfs-how-they-work-8426968). ## The Bottom Line Recent years have seen an upswing in demand for investments that profit from the need for fresh, clean water. If the trend continues, investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. There are currently numerous ways to add water exposure to your portfolio; most simply require a bit of research. Opportunities to invest in this scarce resource are flowing freely.	We know water is the source of life. But it can also be a source for portfolio diversification. Like gold and oil, water is a commodity—and it happens to be rather scarce nowadays. So, as with any other scarcity, the water shortage creates investment opportunities. Key Takeaways Water is arguably the most important resource on planet earth.Shortages of water can lead to social, political, and economic disruption.Water is increasingly scarce, due to climate change, pollution, and increasing demand.Because of its importance, investors can diversify their portfolios by acquiring water-related assets and investments.There are multiple indexes, mutual funds, and ETFs that allow retail investors to gain exposure to water-related securities. Understanding Water Investments The investment case for water is simple: water is one of the most important resources, and it is likely to become a lot scarcer. About 70% of the earth's surface is covered in water, but over 97% is saltwater. Saltwater cannot be used for drinking, crop irrigation, or most industrial uses. Of the remaining 3% of the world's water resources, only about 1% is readily available for human consumption. Rapid industrialization and increasing agricultural use have contributed to worldwide water shortages. Areas that have experienced a lack of H2O include China, Egypt, India, Israel, Pakistan, Mexico, most of Africa, and the United States (Arizona, New Mexico, California, and West Texas), to name but a few. Pollution also highlights the need for clean water. The dead zone off the Gulf Coast highlights the impact of fertilizer runoff, and methyl tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in well water from California to Maryland. Overseas, highly publicized incidents in Russia, China, and elsewhere demonstrate that pollution isn't limited to the West. Of course, fouled water supplies further restrict the amount of fresh water available for human use. $55 Billion Investment in Clean Water On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act. The bipartisan infrastructure bill authorizes $1.2 trillion in spending, which includes $55 billion allocated to create clean drinking water, $65 billion in clean energy, and $21 billion to clean up hazardous, polluted sites.The legislation is good news to clean water advocates since it will expand access to clean drinking water for households, businesses, schools, and child care centers in cities and rural areas. The legislation will also invest in water infrastructure to eliminate lead service pipes. Water Investment Indexes Here are some of the more popular indexes designed to track various water-related investment opportunities: The Dow Jones U.S. Water Index is composed of approximately 29 stocks; it is a barometer consisting of many international and domestic companies that are affiliated with the water business and have a minimum market capitalization of $150 million. The ISE Clean Edge Water Index was launched in December 2000, and this index represents water distribution, water filtration, flow technology, and other companies specializing in water-related solutions. It contains 35 stocks. The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor's 1500 Utilities Index; this index comprises just two companies, American States Water (NYSE: AWR) and Aqua America (NYSE: WTR). The S&P Global Water Index is an index that began in 2001 that contains 50 companies worldwide; their water-related businesses fall into two areas: water utilities and infrastructure and water equipment and materials. The MSCI Global Sustainable Water Index provides another look at the water industry from an international perspective. The index focuses on developed and emerging companies that earn at least 50% of their revenue from sustainable water products and services. There are also a variety of utility indexes that include some water stocks. 2.3 billion 2.3 billion people live in "water-stressed" countries, according to the United Nations, meaning that they use up more than 25% of their fresh water resources every year. 700 million people could be displaced due to water scarcity by 2030. How to Invest in Water Securities Firms seeking to profit from water-related businesses include beverage providers, utilities, water treatment/purification firms, and equipment makers, such as those that provide pumps, valves, and desalination units. A look at the holdings of any of these water indexes provides an easy way to start looking for suitable investment opportunities. Companies from blue-chip stalwart General Electric to small-cap Layne Christensen are all seeking a piece of the water market. In addition to direct stock purchases, some of the larger firms offer dividend reinvestment plans. When it comes to bottled water, the market is growing internationally. Demand is rising from China to Mexico, following the spike in U.S. consumer demand. Estimates suggest that from 2010 to 2020, American per-capita consumption of bottled water increased 61%–in fact, the average American drinks approximately 45 gallons of bottled water a year. According to a 2018 UN study, 177 countries rely on desalination for at least part of their freshwater consumption needs. If stock picking doesn't interest you, ETFs, mutual funds, and unit investment trusts (UITs) also provide plenty of opportunities to invest in water. The Invesco Water Resource Portfolio ETF (PHO) is the largest, with a U.S.-centric basket of 38 holdings (as of Feb. 2022) that tilts toward mid- and smaller-cap companies. The iShares U.S. Utilities ETF (IDU) provides some exposure to water-related stocks. Other alternatives include the Invesco Global Water Portfolio ETF (PIO), which tracks the Nasdaq OMX Global Water Index, and the First Trust ISE Water Index Fund (FIW). Based on popularity, new alternatives are slowly emerging. Benchmarked to the MSCI ACWI Index, the Allianz Global Water Fund invests in improving the supply, quality, and efficiency of water resource management. How Do You Invest in Water as a Commodity? The Chicago Mercantile Exchange has tradeable water futures that are tied to water prices in California. These futures contracts allow investors to bet on the future value of the Nasdaq Veles California Water Index, effectively betting on the future price of water. How Is Michael Burry Investing in Water? At the conclusion of The Big Short, it is revealed that Scion Capital founder Michael Burry followed up his successful short trade with investments in water. In later interviews, Burry explained that "food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas." Farmland in high-precipitation areas is effectively a bet on water's future value. However, for retail investors, it may be easier to focus on water stocks. How Do You Invest in Water Stocks? Water stocks are stocks of companies whose business is closely tied to irrigation, utilities, water treatment, or other water-related industries. One can invest in these by buying the stocks of individual companies, or by investing in a mutual fund or ETF with high exposure to water stocks. The Bottom Line Recent years have seen an upswing in demand for investments that profit from the need for fresh, clean water. If the trend continues, investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. There are currently numerous ways to add water exposure to your portfolio; most simply require a bit of research. Opportunities to invest in this scarce resource are flowing freely.	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https://www.investopedia.com/mortgage/mortgage-rates/housing-market/	How Interest Rates Affect the Housing 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"> Mortgage loans come in two primary forms—fixed rate and adjustable rate—with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help you make financially sound mortgage decisions. Such decisions include choosing between a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-rates/fixed-versus-adjustable-rate/">fixed-rate mortgage and an adjustable-rate mortgage</a> (ARM) or deciding whether to refinance out of an ARM. <br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Understanding interest rates is key to making financially sound mortgage decisions.</li><li>The interest rate is the amount a borrower is charged for the privilege of being loaned money.</li><li>Interest rates on mortgages are determined by a number of factors, including the state of the general economy and your personal circumstances.</li><li>Mortgage lenders often peg their interest rates to the 10-year Treasury bond yield.</li><li>Looking at the shape of the yield curve can help when trying to forecast interest rate changes on ARMs.</li></ul></div></div></div> <span class="heading-toc" id="toc-how-are-interest-rates-determined"></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 Are Interest Rates Determined? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> 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> is the amount charged on top of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/principal.asp">principal</a> by a lender to a borrower for the use of assets. The interest rate charged by banks is determined by a number of factors, such as the state of the economy. A country's central bank sets the interest rate, which each bank uses to determine the range of <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rates (APRs)</a> they offer. </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"> Central banks tend to raise interest rates when <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</a> is high because higher interest rates increase the cost of debt, which discourages borrowing and slows consumer demand. </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-the-mortgage-production-line"></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"> The Mortgage Production Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator, and the investor. </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"> The Mortgage Originator </span> </h3> <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/m/mortgage_originator.asp">mortgage originator</a> is the lender. Lenders come in several forms, like credit unions and banks. Mortgage originators introduce, market, and sell loans to consumers and compete with each other based on the interest rates, fees, and service levels that they offer. The interest rates and fees they charge determine their <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/profitmargin.asp">profit margins</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"> Most mortgage originators do not “portfolio” loans (meaning that they do not retain the loan asset). Instead, they often sell the mortgage into the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/secondary_mortgage_market.asp">secondary mortgage market</a>. The interest rates that they charge consumers are determined by their profit margins and the price at which they can sell the mortgage into the secondary mortgage market. </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 Aggregator </span> </h3> <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/terms/a/aggregator.asp">aggregator</a> buys newly originated mortgages from other institutions. They are part of the secondary mortgage market and most of them are also mortgage originators. Aggregators pool many similar mortgages together to form <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 (MBS)</a>—a process known as <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/securitization.asp">securitization</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"> An MBS is a bond backed by an underlying pool of mortgages. MBSs are sold to investors. The price at which they can be sold to investors determines the price that aggregators will pay for newly originated mortgages from other lenders and the interest rates that they offer to consumers for their own mortgage originations. </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"> The Investor </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> There are many investors in MBSs, including pension funds, mutual funds, banks, hedge funds, foreign governments, insurance companies, and <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gse.asp">government-sponsored enterprises</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/economics/08/fannie-mae-freddie-mac-credit-crisis.asp">Freddie Mac and Fannie Mae</a>.<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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> As investors try to maximize returns, they frequently run relative value analyses between MBSs and other <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixedincome.asp">fixed-income</a> investments such as corporate bonds. As with all financial securities, investor demand for MBSs determines the price they will pay for these securities. </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-investors-impact-on-mortgage-rates"></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"> Investors' Impact on Mortgage Rates </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> To a large degree, MBSs investors determine <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/mortgage-rates/">mortgage rates</a> offered to consumers. As explained above, the mortgage production line ends in the form of an MBS purchased by an investor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The free market determines the market <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/clearingprice.asp">clearing prices</a> investors will pay for MBSs. These prices wind their way back through the mortgage industry to determine the interest rates you'll be offered when you buy your house. </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-fixed-interest-rate-mortgages"></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"> Fixed Interest Rate Mortgages </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> The interest rate on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp">fixed-rate mortgage</a> is fixed for the life of the mortgage; however, on average, 30-year fixed-rate mortgages have a shorter lifespan, due to customers moving or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/refinance.asp">refinancing</a> their mortgages. </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 rule of thumb used to be that homeowners stayed in their homes an average of seven years; however, that<strong> </strong>figure has been rising. The median length of homeownership in 1985 was five years, in 2005 it was six years, in 2010 it inched up to eight years, in 2015 it was 11 years, and in 2021 it was 13 years.<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_37-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> MBS prices are highly correlated with the prices of U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/treasurybond.asp">Treasury bonds</a>. Usually, the price of an MBS backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/duration.asp">duration</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> In practice, a 30-year mortgage’s duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bond-yield.asp">bond’s yield</a> is a function of its <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> and price. Economic expectations determine the price and yield of U.S. Treasury bonds. A bond’s worst enemy is inflation, which erodes the value of future bond payments—both coupon payments and the repayment of principal. Therefore, when inflation is high or expected to rise, bond prices fall, which means their yields rise—there is an inverse relationship between a bond’s price and its yield. </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"> The Fed’s Role </span> </h3> <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/terms/f/federalreservebank.asp">Federal Reserve</a> (Fed) plays a large role in inflation expectations. This is because the bond market’s perception of how well the Fed is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S. Treasury 10-year bond. In other words, the Fed sets current short-term interest rates, which the market interprets to determine long-term interest rates, such as the yield on the U.S. Treasury 10-year bond.<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_46-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_47-0"> Remember, the interest rates on 30-year mortgages are highly correlated with the yield of the U.S. Treasury 10-year bond. If you’re trying to forecast what 30-year fixed-rate mortgage interest rates will do in the future, watch and understand the yield on the U.S. Treasury 10-year bond (or the five-year note) and follow what the market is saying about Fed <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/monetarypolicy.asp">monetary policy</a>. </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-adjustable-rate-mortgages-arms"></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"> Adjustable-Rate Mortgages (ARMs) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> The interest rate on an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/arm.asp">adjustable-rate mortgage (ARM)</a> might change monthly, every six months, annually, or less often, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fullyindexedinterestrate.asp">fully indexed interest rate</a>. It is usually rounded to one-eighth of a percentage point. </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 index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_53-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_54-0"><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_55-0"><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>With an ARM, homebuyers need to be aware that the monthly cost of their mortgage payments can increase if interest rates increase, and that they should ensure that they can still afford the payments if this happens.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The interest rate on an ARM is tied to an index. There are several different <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mortgageindex.asp">mortgage indexes</a> used for different ARMs, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan, or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. </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"> Most mortgage indexes are considered short-term indexes. “Short-term” or “term” refers to the term of the securities, loans, or deposits used to construct the index. Typically, any security, loan, or deposit that has a term of one year or less is considered short-term. Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate known as 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>.<span class="ql-inline-citation" data-cite="6"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <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"> Forecasting Changes </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_61-0"> If you’re trying to forecast interest rate changes on ARMs, look at the shape of 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>. The yield curve represents the yields on U.S. Treasury bonds with maturities from three months to 30 years.<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_62-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_63-0"> When the shape of the curve is flat or downward sloping, it means that the market expects the Fed to keep short-term interest rates steady or move them lower. Conversely, when the shape of the curve is upward sloping, the market expects the Fed to move short-term interest rates higher. </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"> The steepness of the curve in either direction is an indication of how much the market expects the Fed to raise or lower short-term interest rates. The price of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fed-funds-futures.asp">Fed funds futures</a> is also an indication of market expectations for future short-term interest rates. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <span class="heading-toc" id="toc-how-rates-impact-the-housing-market"></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"> How Rates Impact the Housing Market </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_68-0"> In general, when interest rates are higher or increasing, the housing market slows down. When interest rates are going up, the cost of owning a home becomes more expensive due to the higher interest rate, which reduces demand. This reduction in demand then results in a drop in home prices. </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"> When the Fed increases rates to slow down the economy, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/correlation-inflation-houses.asp">particularly in times of inflation</a>, the above goal is what it's looking for; a reduction in consumer spending that results in a drop in prices. </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"> Conversely, when interest rates drop, the cost of buying a house becomes cheaper, which increases the demand for housing. Lower interest rates go hand in hand with a bustling housing market. This increase in demand then slowly increases home prices. </p> <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-why-are-interest-rates-important-to-the-housing-market"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why Are Interest Rates Important to the Housing Market?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Interest rates are important to the housing market for several reasons. They determine how much consumers will have to pay to borrow money to buy a property, and they <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/031915/what-are-risks-reits.asp">influence the value of real estate</a>. Low-interest rates tend to increase demand for property, driving up prices, while high interest rates generally do the opposite.</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-which-factors-influence-how-interest-rates-on-mortgages-are-set"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Factors Influence How Interest Rates on Mortgages Are Set?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are many factors that impact how much mortgages cost. Lenders will first consider the general cost of borrowing in the economy, which is based on the state of the economy and government monetary policy. Personal factors, such as <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>, income, and the type and size of the loan you are after, will then come into play to determine how much you'll be charged to get a loan to buy a house.</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-am-i-better-off-with-a-fixed-rate-or-adjustable-rate-mortgage-arm"></span> <h2 class="mntl-sc-block-questionandanswer__question">Am I Better Off With a Fixed-Rate or Adjustable-Rate Mortgage (ARM)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Generally speaking, an ARM makes more sense when interest rates are high and expected to fall. Conversely, if predictable payments are important to you and interest rates are relatively stable or climbing, a fixed-rate mortgage might be your best option.</p><p>Popular methods to potentially gauge the future direction of interest rates include studying the yield curve, keeping tabs on the 10-year Treasury bond yield, and paying close attention to Fed monetary policy.<br/></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"> An understanding of what influences current and future fixed and adjustable mortgage rates can help you make financially sound mortgage decisions. For example, it can inform your decision about choosing an ARM over a fixed-rate mortgage and help you decide when it makes sense to refinance out of an ARM. </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"> Don’t believe everything you hear on TV. It’s not always “a good time to refinance out of your adjustable-rate mortgage before the interest rate rises further.” Interest rates might rise further moving forward—or they might drop. Find out what the yield curve is doing.<br/> </p></div>	Mortgage loans come in two primary forms—fixed rate and adjustable rate—with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help you make financially sound mortgage decisions. Such decisions include choosing between a [fixed-rate mortgage and an adjustable-rate mortgage](https://www.investopedia.com/mortgage/mortgage-rates/fixed-versus-adjustable-rate/) (ARM) or deciding whether to refinance out of an ARM. ### Key Takeaways * Understanding interest rates is key to making financially sound mortgage decisions. * The interest rate is the amount a borrower is charged for the privilege of being loaned money. * Interest rates on mortgages are determined by a number of factors, including the state of the general economy and your personal circumstances. * Mortgage lenders often peg their interest rates to the 10-year Treasury bond yield. * Looking at the shape of the yield curve can help when trying to forecast interest rate changes on ARMs. ## How Are Interest Rates Determined? The [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) is the amount charged on top of the [principal](https://www.investopedia.com/terms/p/principal.asp) by a lender to a borrower for the use of assets. The interest rate charged by banks is determined by a number of factors, such as the state of the economy. A country's central bank sets the interest rate, which each bank uses to determine the range of [annual percentage rates (APRs)](https://www.investopedia.com/terms/a/apr.asp) they offer. Central banks tend to raise interest rates when [inflation](https://www.investopedia.com/terms/i/inflation.asp) is high because higher interest rates increase the cost of debt, which discourages borrowing and slows consumer demand. ## The Mortgage Production Line The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator, and the investor. ### The Mortgage Originator The [mortgage originator](https://www.investopedia.com/terms/m/mortgage_originator.asp) is the lender. Lenders come in several forms, like credit unions and banks. Mortgage originators introduce, market, and sell loans to consumers and compete with each other based on the interest rates, fees, and service levels that they offer. The interest rates and fees they charge determine their [profit margins](https://www.investopedia.com/terms/p/profitmargin.asp). Most mortgage originators do not “portfolio” loans (meaning that they do not retain the loan asset). Instead, they often sell the mortgage into the [secondary mortgage market](https://www.investopedia.com/terms/s/secondary_mortgage_market.asp). The interest rates that they charge consumers are determined by their profit margins and the price at which they can sell the mortgage into the secondary mortgage market. ### The Aggregator The [aggregator](https://www.investopedia.com/terms/a/aggregator.asp) buys newly originated mortgages from other institutions. They are part of the secondary mortgage market and most of them are also mortgage originators. Aggregators pool many similar mortgages together to form [mortgage-backed securities (MBS)](https://www.investopedia.com/terms/m/mbs.asp)—a process known as [securitization](https://www.investopedia.com/terms/s/securitization.asp). An MBS is a bond backed by an underlying pool of mortgages. MBSs are sold to investors. The price at which they can be sold to investors determines the price that aggregators will pay for newly originated mortgages from other lenders and the interest rates that they offer to consumers for their own mortgage originations. ### The Investor There are many investors in MBSs, including pension funds, mutual funds, banks, hedge funds, foreign governments, insurance companies, and [government-sponsored enterprises](https://www.investopedia.com/terms/g/gse.asp), [Freddie Mac and Fannie Mae](https://www.investopedia.com/articles/economics/08/fannie-mae-freddie-mac-credit-crisis.asp). As investors try to maximize returns, they frequently run relative value analyses between MBSs and other [fixed-income](https://www.investopedia.com/terms/f/fixedincome.asp) investments such as corporate bonds. As with all financial securities, investor demand for MBSs determines the price they will pay for these securities. ## Investors' Impact on Mortgage Rates To a large degree, MBSs investors determine [mortgage rates](https://www.investopedia.com/mortgage/mortgage-rates/) offered to consumers. As explained above, the mortgage production line ends in the form of an MBS purchased by an investor. The free market determines the market [clearing prices](https://www.investopedia.com/terms/c/clearingprice.asp) investors will pay for MBSs. These prices wind their way back through the mortgage industry to determine the interest rates you'll be offered when you buy your house. ## Fixed Interest Rate Mortgages The interest rate on a [fixed-rate mortgage](https://www.investopedia.com/terms/f/fixed-rate_mortgage.asp) is fixed for the life of the mortgage; however, on average, 30-year fixed-rate mortgages have a shorter lifespan, due to customers moving or [refinancing](https://www.investopedia.com/terms/r/refinance.asp) their mortgages. The rule of thumb used to be that homeowners stayed in their homes an average of seven years; however, thatfigure has been rising. The median length of homeownership in 1985 was five years, in 2005 it was six years, in 2010 it inched up to eight years, in 2015 it was 11 years, and in 2021 it was 13 years. MBS prices are highly correlated with the prices of U.S. [Treasury bonds](https://www.investopedia.com/terms/t/treasurybond.asp). Usually, the price of an MBS backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as [duration](https://www.investopedia.com/terms/d/duration.asp). In practice, a 30-year mortgage’s duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. A [bond’s yield](https://www.investopedia.com/terms/b/bond-yield.asp) is a function of its [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp) and price. Economic expectations determine the price and yield of U.S. Treasury bonds. A bond’s worst enemy is inflation, which erodes the value of future bond payments—both coupon payments and the repayment of principal. Therefore, when inflation is high or expected to rise, bond prices fall, which means their yields rise—there is an inverse relationship between a bond’s price and its yield. ### The Fed’s Role The [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) (Fed) plays a large role in inflation expectations. This is because the bond market’s perception of how well the Fed is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S. Treasury 10-year bond. In other words, the Fed sets current short-term interest rates, which the market interprets to determine long-term interest rates, such as the yield on the U.S. Treasury 10-year bond. Remember, the interest rates on 30-year mortgages are highly correlated with the yield of the U.S. Treasury 10-year bond. If you’re trying to forecast what 30-year fixed-rate mortgage interest rates will do in the future, watch and understand the yield on the U.S. Treasury 10-year bond (or the five-year note) and follow what the market is saying about Fed [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp). ## Adjustable-Rate Mortgages (ARMs) The interest rate on an [adjustable-rate mortgage (ARM)](https://www.investopedia.com/terms/a/arm.asp) might change monthly, every six months, annually, or less often, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the [fully indexed interest rate](https://www.investopedia.com/terms/f/fullyindexedinterestrate.asp). It is usually rounded to one-eighth of a percentage point. The index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%. ### With an ARM, homebuyers need to be aware that the monthly cost of their mortgage payments can increase if interest rates increase, and that they should ensure that they can still afford the payments if this happens. The interest rate on an ARM is tied to an index. There are several different [mortgage indexes](https://www.investopedia.com/terms/m/mortgageindex.asp) used for different ARMs, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan, or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. Most mortgage indexes are considered short-term indexes. “Short-term” or “term” refers to the term of the securities, loans, or deposits used to construct the index. Typically, any security, loan, or deposit that has a term of one year or less is considered short-term. Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate known as the [federal funds rate](https://www.investopedia.com/terms/f/federalfundsrate.asp). ### Forecasting Changes If you’re trying to forecast interest rate changes on ARMs, look at the shape of the [yield curve](https://www.investopedia.com/terms/y/yieldcurve.asp). The yield curve represents the yields on U.S. Treasury bonds with maturities from three months to 30 years. When the shape of the curve is flat or downward sloping, it means that the market expects the Fed to keep short-term interest rates steady or move them lower. Conversely, when the shape of the curve is upward sloping, the market expects the Fed to move short-term interest rates higher. The steepness of the curve in either direction is an indication of how much the market expects the Fed to raise or lower short-term interest rates. The price of [Fed funds futures](https://www.investopedia.com/terms/f/fed-funds-futures.asp) is also an indication of market expectations for future short-term interest rates. ## How Rates Impact the Housing Market In general, when interest rates are higher or increasing, the housing market slows down. When interest rates are going up, the cost of owning a home becomes more expensive due to the higher interest rate, which reduces demand. This reduction in demand then results in a drop in home prices. When the Fed increases rates to slow down the economy, [particularly in times of inflation](https://www.investopedia.com/ask/answers/correlation-inflation-houses.asp), the above goal is what it's looking for; a reduction in consumer spending that results in a drop in prices. Conversely, when interest rates drop, the cost of buying a house becomes cheaper, which increases the demand for housing. Lower interest rates go hand in hand with a bustling housing market. This increase in demand then slowly increases home prices. ## Why Are Interest Rates Important to the Housing Market? Interest rates are important to the housing market for several reasons. They determine how much consumers will have to pay to borrow money to buy a property, and they [influence the value of real estate](https://www.investopedia.com/articles/investing/031915/what-are-risks-reits.asp). Low-interest rates tend to increase demand for property, driving up prices, while high interest rates generally do the opposite. ## Which Factors Influence How Interest Rates on Mortgages Are Set? There are many factors that impact how much mortgages cost. Lenders will first consider the general cost of borrowing in the economy, which is based on the state of the economy and government monetary policy. Personal factors, such as [credit history](https://www.investopedia.com/terms/c/credit-history.asp), income, and the type and size of the loan you are after, will then come into play to determine how much you'll be charged to get a loan to buy a house. ## Am I Better Off With a Fixed-Rate or Adjustable-Rate Mortgage (ARM)? Generally speaking, an ARM makes more sense when interest rates are high and expected to fall. Conversely, if predictable payments are important to you and interest rates are relatively stable or climbing, a fixed-rate mortgage might be your best option. Popular methods to potentially gauge the future direction of interest rates include studying the yield curve, keeping tabs on the 10-year Treasury bond yield, and paying close attention to Fed monetary policy. ## The Bottom Line An understanding of what influences current and future fixed and adjustable mortgage rates can help you make financially sound mortgage decisions. For example, it can inform your decision about choosing an ARM over a fixed-rate mortgage and help you decide when it makes sense to refinance out of an ARM. Don’t believe everything you hear on TV. It’s not always “a good time to refinance out of your adjustable-rate mortgage before the interest rate rises further.” Interest rates might rise further moving forward—or they might drop. Find out what the yield curve is doing.	Mortgage loans come in two primary forms—fixed rate and adjustable rate—with some hybrid combinations and multiple derivatives of each. A basic understanding of interest rates and the economic influences that determine the future course of interest rates can help you make financially sound mortgage decisions. Such decisions include choosing between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) or deciding whether to refinance out of an ARM. Key Takeaways Understanding interest rates is key to making financially sound mortgage decisions.The interest rate is the amount a borrower is charged for the privilege of being loaned money.Interest rates on mortgages are determined by a number of factors, including the state of the general economy and your personal circumstances.Mortgage lenders often peg their interest rates to the 10-year Treasury bond yield.Looking at the shape of the yield curve can help when trying to forecast interest rate changes on ARMs. How Are Interest Rates Determined? The interest rate is the amount charged on top of the principal by a lender to a borrower for the use of assets. The interest rate charged by banks is determined by a number of factors, such as the state of the economy. A country's central bank sets the interest rate, which each bank uses to determine the range of annual percentage rates (APRs) they offer. Central banks tend to raise interest rates when inflation is high because higher interest rates increase the cost of debt, which discourages borrowing and slows consumer demand. The Mortgage Production Line The mortgage industry has three primary parts or businesses: the mortgage originator, the aggregator, and the investor. The Mortgage Originator The mortgage originator is the lender. Lenders come in several forms, like credit unions and banks. Mortgage originators introduce, market, and sell loans to consumers and compete with each other based on the interest rates, fees, and service levels that they offer. The interest rates and fees they charge determine their profit margins. Most mortgage originators do not “portfolio” loans (meaning that they do not retain the loan asset). Instead, they often sell the mortgage into the secondary mortgage market. The interest rates that they charge consumers are determined by their profit margins and the price at which they can sell the mortgage into the secondary mortgage market. The Aggregator The aggregator buys newly originated mortgages from other institutions. They are part of the secondary mortgage market and most of them are also mortgage originators. Aggregators pool many similar mortgages together to form mortgage-backed securities (MBS)—a process known as securitization. An MBS is a bond backed by an underlying pool of mortgages. MBSs are sold to investors. The price at which they can be sold to investors determines the price that aggregators will pay for newly originated mortgages from other lenders and the interest rates that they offer to consumers for their own mortgage originations. The Investor There are many investors in MBSs, including pension funds, mutual funds, banks, hedge funds, foreign governments, insurance companies, and government-sponsored enterprises, Freddie Mac and Fannie Mae. As investors try to maximize returns, they frequently run relative value analyses between MBSs and other fixed-income investments such as corporate bonds. As with all financial securities, investor demand for MBSs determines the price they will pay for these securities. Investors' Impact on Mortgage Rates To a large degree, MBSs investors determine mortgage rates offered to consumers. As explained above, the mortgage production line ends in the form of an MBS purchased by an investor. The free market determines the market clearing prices investors will pay for MBSs. These prices wind their way back through the mortgage industry to determine the interest rates you'll be offered when you buy your house. Fixed Interest Rate Mortgages The interest rate on a fixed-rate mortgage is fixed for the life of the mortgage; however, on average, 30-year fixed-rate mortgages have a shorter lifespan, due to customers moving or refinancing their mortgages. The rule of thumb used to be that homeowners stayed in their homes an average of seven years; however, that figure has been rising. The median length of homeownership in 1985 was five years, in 2005 it was six years, in 2010 it inched up to eight years, in 2015 it was 11 years, and in 2021 it was 13 years. MBS prices are highly correlated with the prices of U.S. Treasury bonds. Usually, the price of an MBS backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as duration. In practice, a 30-year mortgage’s duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark. This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. A bond’s yield is a function of its coupon rate and price. Economic expectations determine the price and yield of U.S. Treasury bonds. A bond’s worst enemy is inflation, which erodes the value of future bond payments—both coupon payments and the repayment of principal. Therefore, when inflation is high or expected to rise, bond prices fall, which means their yields rise—there is an inverse relationship between a bond’s price and its yield. The Fed’s Role The Federal Reserve (Fed) plays a large role in inflation expectations. This is because the bond market’s perception of how well the Fed is controlling inflation through the administration of short-term interest rates determines longer-term interest rates, such as the yield of the U.S. Treasury 10-year bond. In other words, the Fed sets current short-term interest rates, which the market interprets to determine long-term interest rates, such as the yield on the U.S. Treasury 10-year bond. Remember, the interest rates on 30-year mortgages are highly correlated with the yield of the U.S. Treasury 10-year bond. If you’re trying to forecast what 30-year fixed-rate mortgage interest rates will do in the future, watch and understand the yield on the U.S. Treasury 10-year bond (or the five-year note) and follow what the market is saying about Fed monetary policy. Adjustable-Rate Mortgages (ARMs) The interest rate on an adjustable-rate mortgage (ARM) might change monthly, every six months, annually, or less often, depending on the terms of the mortgage. The interest rate consists of an index value plus a margin. This is known as the fully indexed interest rate. It is usually rounded to one-eighth of a percentage point. The index value is variable, while the margin is fixed for the life of the mortgage. For example, if the current index value is 6.83% and the margin is 3%, rounding to the nearest eighth of a percentage point would make the fully indexed interest rate 9.83%. If the index dropped to 6.1%, the fully indexed interest rate would be 9.1%. With an ARM, homebuyers need to be aware that the monthly cost of their mortgage payments can increase if interest rates increase, and that they should ensure that they can still afford the payments if this happens. The interest rate on an ARM is tied to an index. There are several different mortgage indexes used for different ARMs, each of which is constructed using the interest rates on either a type of actively traded financial security, a type of bank loan, or a type of bank deposit. All of the different mortgage indexes are broadly correlated with each other. In other words, they move in the same direction, up or down, as economic conditions change. Most mortgage indexes are considered short-term indexes. “Short-term” or “term” refers to the term of the securities, loans, or deposits used to construct the index. Typically, any security, loan, or deposit that has a term of one year or less is considered short-term. Most short-term interest rates, including those used to construct mortgage indexes, are closely correlated with an interest rate known as the federal funds rate. Forecasting Changes If you’re trying to forecast interest rate changes on ARMs, look at the shape of the yield curve. The yield curve represents the yields on U.S. Treasury bonds with maturities from three months to 30 years. When the shape of the curve is flat or downward sloping, it means that the market expects the Fed to keep short-term interest rates steady or move them lower. Conversely, when the shape of the curve is upward sloping, the market expects the Fed to move short-term interest rates higher. The steepness of the curve in either direction is an indication of how much the market expects the Fed to raise or lower short-term interest rates. The price of Fed funds futures is also an indication of market expectations for future short-term interest rates. How Rates Impact the Housing Market In general, when interest rates are higher or increasing, the housing market slows down. When interest rates are going up, the cost of owning a home becomes more expensive due to the higher interest rate, which reduces demand. This reduction in demand then results in a drop in home prices. When the Fed increases rates to slow down the economy, particularly in times of inflation, the above goal is what it's looking for; a reduction in consumer spending that results in a drop in prices. Conversely, when interest rates drop, the cost of buying a house becomes cheaper, which increases the demand for housing. Lower interest rates go hand in hand with a bustling housing market. This increase in demand then slowly increases home prices. Why Are Interest Rates Important to the Housing Market? Interest rates are important to the housing market for several reasons. They determine how much consumers will have to pay to borrow money to buy a property, and they influence the value of real estate. Low-interest rates tend to increase demand for property, driving up prices, while high interest rates generally do the opposite. Which Factors Influence How Interest Rates on Mortgages Are Set? There are many factors that impact how much mortgages cost. Lenders will first consider the general cost of borrowing in the economy, which is based on the state of the economy and government monetary policy. Personal factors, such as credit history, income, and the type and size of the loan you are after, will then come into play to determine how much you'll be charged to get a loan to buy a house. Am I Better Off With a Fixed-Rate or Adjustable-Rate Mortgage (ARM)? Generally speaking, an ARM makes more sense when interest rates are high and expected to fall. Conversely, if predictable payments are important to you and interest rates are relatively stable or climbing, a fixed-rate mortgage might be your best option.Popular methods to potentially gauge the future direction of interest rates include studying the yield curve, keeping tabs on the 10-year Treasury bond yield, and paying close attention to Fed monetary policy. The Bottom Line An understanding of what influences current and future fixed and adjustable mortgage rates can help you make financially sound mortgage decisions. For example, it can inform your decision about choosing an ARM over a fixed-rate mortgage and help you decide when it makes sense to refinance out of an ARM. Don’t believe everything you hear on TV. It’s not always “a good time to refinance out of your adjustable-rate mortgage before the interest rate rises further.” Interest rates might rise further moving forward—or they might drop. Find out what the yield curve is doing.	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https://www.investopedia.com/ask/answers/040315/what-difference-between-passive-and-active-portfolio-management.asp	Passive vs. Active Portfolio Management: What's the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-passive-vs-active-portfolio-management-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Passive vs. Active Portfolio Management: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Investors have two main investment strategies that can be used to generate a return on their investment accounts: active portfolio management and passive portfolio management. As the names imply, active portfolio management usually involves more frequent trades than passive management. </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"> Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor's 500 Index. The performance can be measured using <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/mutualfund/07/active-share.asp">Active Share</a> and by comparing portfolio holdings to the benchmark. </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"> Passive portfolio management mimics the investment holdings of a particular index in order to achieve similar results. </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"> An investor may use a portfolio manager to carry out either strategy or may adopt either approach as an independent investor. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_9-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_10-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_11-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index.</li><li>Passive management replicates a specific benchmark or index in order to match its performance. </li><li>Active management portfolios strive for superior returns but take greater risks and entail larger fees.</li></ul></div></div></div> <span class="heading-toc" id="toc-active-portfolio-management"></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"> Active Portfolio Management </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> The investor who follows an active portfolio management strategy buys and sells stocks in an attempt to outperform a specific index, such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp.asp">Standard & Poor's 500</a> Index or the Russell 1000 Index. </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"> An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers all making investment decisions for the fund. The success of the fund depends on in-depth research, market forecasting, and the expertise of the management team. </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"> Portfolio managers engaged in active investing follow market trends, shifts in the economy, changes to the political landscape, and any other factors that may affect specific companies. This data is used to time the purchase or sale of assets. </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"> Proponents of active management claim that these processes will result in higher returns than can be achieved by simply mimicking the stocks listed on an 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"> Since the objective of a portfolio manager in an actively managed fund is to beat the market, this strategy requires taking on greater <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketrisk.asp">market risk</a> than is required for passive portfolio management. </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>Passive portfolio management is also known as index fund management.</p></div></div></div> <span class="heading-toc" id="toc-passive-portfolio-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"> Passive Portfolio Management </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Passive portfolio management can be referred to as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index fund</a> management. This is because a passive portfolio is typically designed to parallel the returns of a particular <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketindex.asp">market index</a> or benchmark as closely as possible. For example, each stock listed on an index is weighted. That is, it represents a percentage of the index that is commensurate with its size and influence in the real world. The creator of an index portfolio will use the same weights. </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 purpose of passive portfolio management is to generate a return that is the same as the chosen index. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> A passive strategy does not have a management team making investment decisions and can be structured as an exchange-traded fund (ETF), a mutual fund, or a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/uit.asp">unit investment trust</a> (UIT). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Index funds are branded as passively managed rather than unmanaged because each has a portfolio manager who is in charge of replicating the index. Because this investment strategy is not proactive, the management fees assessed on passive portfolios or funds are often far lower than active management strategies. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_35-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>Index mutual funds are easy to understand and offer a relatively safe approach to investing in broad segments of the market.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> <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>	## Passive vs. Active Portfolio Management: An Overview Investors have two main investment strategies that can be used to generate a return on their investment accounts: active portfolio management and passive portfolio management. As the names imply, active portfolio management usually involves more frequent trades than passive management. Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor's 500 Index. The performance can be measured using [Active Share](https://www.investopedia.com/articles/mutualfund/07/active-share.asp) and by comparing portfolio holdings to the benchmark. Passive portfolio management mimics the investment holdings of a particular index in order to achieve similar results. An investor may use a portfolio manager to carry out either strategy or may adopt either approach as an independent investor. ### Key Takeaways * Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index. * Passive management replicates a specific benchmark or index in order to match its performance. * Active management portfolios strive for superior returns but take greater risks and entail larger fees. ## Active Portfolio Management The investor who follows an active portfolio management strategy buys and sells stocks in an attempt to outperform a specific index, such as the [Standard & Poor's 500](https://www.investopedia.com/terms/s/sp.asp) Index or the Russell 1000 Index. An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers all making investment decisions for the fund. The success of the fund depends on in-depth research, market forecasting, and the expertise of the management team. Portfolio managers engaged in active investing follow market trends, shifts in the economy, changes to the political landscape, and any other factors that may affect specific companies. This data is used to time the purchase or sale of assets. Proponents of active management claim that these processes will result in higher returns than can be achieved by simply mimicking the stocks listed on an index. Since the objective of a portfolio manager in an actively managed fund is to beat the market, this strategy requires taking on greater [market risk](https://www.investopedia.com/terms/m/marketrisk.asp) than is required for passive portfolio management. ### Passive portfolio management is also known as index fund management. ## Passive Portfolio Management Passive portfolio management can be referred to as [index fund](https://www.investopedia.com/terms/i/indexfund.asp) management. This is because a passive portfolio is typically designed to parallel the returns of a particular [market index](https://www.investopedia.com/terms/m/marketindex.asp) or benchmark as closely as possible. For example, each stock listed on an index is weighted. That is, it represents a percentage of the index that is commensurate with its size and influence in the real world. The creator of an index portfolio will use the same weights. The purpose of passive portfolio management is to generate a return that is the same as the chosen index. A passive strategy does not have a management team making investment decisions and can be structured as an exchange-traded fund (ETF), a mutual fund, or a [unit investment trust](https://www.investopedia.com/terms/u/uit.asp) (UIT). Index funds are branded as passively managed rather than unmanaged because each has a portfolio manager who is in charge of replicating the index. Because this investment strategy is not proactive, the management fees assessed on passive portfolios or funds are often far lower than active management strategies. ### Index mutual funds are easy to understand and offer a relatively safe approach to investing in broad segments of the market. 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.	Passive vs. Active Portfolio Management: An Overview Investors have two main investment strategies that can be used to generate a return on their investment accounts: active portfolio management and passive portfolio management. As the names imply, active portfolio management usually involves more frequent trades than passive management. Active portfolio management focuses on outperforming the market in comparison to a specific benchmark such as the Standard & Poor's 500 Index. The performance can be measured using Active Share and by comparing portfolio holdings to the benchmark. Passive portfolio management mimics the investment holdings of a particular index in order to achieve similar results. An investor may use a portfolio manager to carry out either strategy or may adopt either approach as an independent investor. Key Takeaways Active management requires frequent buying and selling in an effort to outperform a specific benchmark or index.Passive management replicates a specific benchmark or index in order to match its performance. Active management portfolios strive for superior returns but take greater risks and entail larger fees. Active Portfolio Management The investor who follows an active portfolio management strategy buys and sells stocks in an attempt to outperform a specific index, such as the Standard & Poor's 500 Index or the Russell 1000 Index. An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers all making investment decisions for the fund. The success of the fund depends on in-depth research, market forecasting, and the expertise of the management team. Portfolio managers engaged in active investing follow market trends, shifts in the economy, changes to the political landscape, and any other factors that may affect specific companies. This data is used to time the purchase or sale of assets. Proponents of active management claim that these processes will result in higher returns than can be achieved by simply mimicking the stocks listed on an index. Since the objective of a portfolio manager in an actively managed fund is to beat the market, this strategy requires taking on greater market risk than is required for passive portfolio management. Passive portfolio management is also known as index fund management. Passive Portfolio Management Passive portfolio management can be referred to as index fund management. This is because a passive portfolio is typically designed to parallel the returns of a particular market index or benchmark as closely as possible. For example, each stock listed on an index is weighted. That is, it represents a percentage of the index that is commensurate with its size and influence in the real world. The creator of an index portfolio will use the same weights. The purpose of passive portfolio management is to generate a return that is the same as the chosen index. A passive strategy does not have a management team making investment decisions and can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust (UIT). Index funds are branded as passively managed rather than unmanaged because each has a portfolio manager who is in charge of replicating the index. Because this investment strategy is not proactive, the management fees assessed on passive portfolios or funds are often far lower than active management strategies. Index mutual funds are easy to understand and offer a relatively safe approach to investing in broad segments of the market. 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/best-brokers-for-day-trading-4587880	Best Day Trading Platforms	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="24" data-sc-ad-track-spacing="100" data-sc-breakpoint="50em" data-sc-content-positions="[300,600,900,1200,1500,1800,2100]" data-sc-load-immediate="1" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="60" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> The search for the best day trading platforms and brokers is an important part of any serious trader’s process. Speed, reliability, costs, customer service, and charting tools are all key elements of day trading platforms that these highly active investors tend to value the most. Moreover, for traders who implement systematic strategies, backtesting capabilities have gained greater importance as well. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> As day traders allocate more time and capital to their endeavors, it is important for online brokerages to provide them with the tools that they need, at a cost that doesn’t eat into their profits. Additionally, the reliability of data is paramount, as is the ability to test trading ideas prior to deployment. We’ll look at several brokers who strike the right balance between day trading tools and competitive pricing. </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-best-day-trading-platforms-of-2023"></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"> Best Day Trading Platforms of 2023: </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> <li>Best Online Broker for Day Trading: <a 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"><strong>Interactive Brokers</strong></a></li> <li>Best Broker for Advanced Day Traders: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow"><strong>Interactive Brokers</strong></a></li> <li>Best Charting Platform for Day Traders: <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" rel="sponsored nofollow"><strong>Interactive Brokers</strong></a></li> <li>Best Low-Cost Day Trading Platform: <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://www.webull.com/activity?source=Investopedia-Per" rel="sponsored nofollow"><strong>Webull</strong></a></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <span class="heading-toc" id="toc-interactive-brokers-best-online-broker-for-day-trading-best-broker-for-advanced-day-traders--best-charting-platform-for-day-traders"></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"> Interactive Brokers: Best Online Broker for Day Trading, Best Broker for Advanced Day Traders, & Best Charting Platform for Day Traders </span> </h2> <div class="comp mntl-sc-block finance-sc-block-starrating mntl-block" id="mntl-sc-block_9-0"><div aria-label="4.2 out of 5 stars" class="comp mntl-sc-block mntl-sc-block-starrating" id="mntl-sc-block_10-0"><div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 20%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <span class="mntl-sc-block__label mntl-sc-block-starrating__label">4.2</span></div></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 finance-sc-block-review mntl-sc-block-review" id="mntl-sc-block_12-0"> <div class="mntl-sc-block__header-link mntl-sc-block-review__header-link"> <a href="https://www.investopedia.com/interactive-brokers-review-4587904" rel="nocaes" target="_blank"><img height="0" src="https://www.investopedia.com/thmb/Jlqwe9PIU2-1CgoUVti1ZBdVI5g=/4200x0/filters:no_upscale():max_bytes(150000):strip_icc()/interactive_brokers_productcard-5c61eec746e0fb0001f25462.png" width="4200"/></a> </div> <div class="loc entity-link"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-tracking-container="true" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" id="mntl-sc-block-review__entity-link_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open an Account</span></a> </div> <div class="mntl-sc-block__quick-facts mntl-sc-block-review__quick-facts"> <ul class="mntl-sc-block__quick-list mntl-sc-block-review__quick-list"> <li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item"> <strong>Account Minimum:</strong> $0.00 </li> <li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item"> <strong>Fees: </strong>$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. </li> </ul> <div class="loc article-link"><a class="mntl-sc-block-review__article-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/interactive-brokers-review-4587904" id="mntl-sc-block-review__article-link_1-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Read full review</span></a> </div> </div> <div class="loc entity-link mntl-sc-block__trailing-links mntl-sc-block-review__trailing-links"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-tracking-container="true" href="https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php" id="mntl-sc-block-review__entity-link_1-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open an Account</span></a> </div></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-interactive-brokers-best-online-broker-for-day-trading"></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"> Interactive Brokers: Best Online Broker for Day Trading </span> </h2> <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"> Why We Chose It </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Interactive Brokers (IBKR) remains firmly entrenched as our overall pick as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-brokers-for-beginners-4587873">Best Online Broker</a> for <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/trading/05/011705.asp">Day Trading</a> because it offers among the widest ranges of assets available to trade while charging some of the lowest commissions and margin rates in the industry.<br/> </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"> Pros & Cons </span> </h3> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_21-0"> <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>Wide range and depth of supported assets</p></li> <li><p>Low commissions and margin interest rates</p></li> <li><p>Multiple scanners across asset classes</p></li> <li><p>Education portal within platform</p></li> <li><p>Intraday news updates within the platform</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>Steep learning curve for Traders Workstation</p></li> <li><p>Complicated pricing tiers</p></li> </ul> </div> </div></div> <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"> Overview </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Founded in 1978, Interactive Brokers holds $13.3 billion in equity capital. Headquartered in Greenwich, CT, IBKR has over 2,900 employees across the globe and has offices in Europe as well as Asia. In 2021, IBKR added support for U.S. spot gold trading. In 2022, Interactive Brokers expanded its cryptocurrency trading offered through Paxos Trust Company.<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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The strength of IBKR’s platform in terms of day trading has a lot to do with its Trader Workstation (TWS) platform. Giving access to a wide selection of assets, TWS offers reliable pricing, fast order flow, sophisticated charting tools, and automation capabilities. Moreover, users are able to customize their TWS workstation to their liking while also monitoring newsflow.<span class="ql-inline-citation" data-cite="8"></span> Traders on the go will be able to access IBKR via its mobile app, which is available for both Android and iPhone users. You’ll find many of the same capabilities on the app as you will on the desktop, particularly as it relates to setting up watchlists and placing orders. Charting capabilities, however, are more robust on the desktop platform. </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"> While IBKR can work for both the casual and the more serious trader, TWS has a professional feel that seasoned traders will appreciate. The options analytics tool allows users to view how shifts in the options Greeks will impact the options pricing for the asset in question.<span class="ql-inline-citation" data-cite="9"></span> The reach of Interactive Brokers in terms of markets and assets also allows traders to set up direct trades playing off global market dynamics. </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 order flow, IBKR Pro users’ orders are submitted to IBKR’s high-speed, best execution order routing system, SmartRouter. This enables traders to receive optimized pricing and transaction speed. Users of IBKR Lite are routed to select market makers with whom IBKR may have payment for order flow agreements. The impact of this is that IBKR Lite users may be subject to a reduction in price improvement on trade executions.<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_31-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> Although IBKR Pro has upfront costs, it will likely be the choice of most day traders looking for fine control over order execution. Whether Lite or Pro, Interactive Brokers also gives traders access to the industry’s lowest margin rates to leverage up and amplify the returns on positions. </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-interactive-brokers-best-broker-for-advanced-day-traders"></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"> Interactive Brokers: Best Broker for Advanced Day Traders </span> </h2> <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"> Why We Chose It </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_36-0"> Interactive Brokers continues to be our top pick for advanced day traders, as well. Its speed and efficiency specific to order execution complements its low rates on margin trading and provides advanced traders with a strong option to execute their strategies. IBKR has also continued to add tools to an already powerful arsenal, along with tradable assets and other key capabilities.<br> </br></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"> Pros & Cons </span> </h3> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_39-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_40-0"> <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>Superior order execution</p></li> <li><p>Contingent orders for every situation</p></li> <li><p>Low margin interest rates</p></li> <li><p>A plethora of tradable assets</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>Backtesting strategies is cumbersome</p></li> <li><p>SmartRouter only for Pro customers</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Overview </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> IBKR continues a long run as our pick for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">Best Broker</a> for Advanced Day Traders because it fulfills the needs of seasoned traders across multiple asset classes. Traders will find a wide selection of assets to choose from, as well as rapid and efficient order execution.<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"> We expect most advanced traders will take advantage of the IBKR Pro offering in order to access SmartRouter. In doing so, traders can avoid the potential for order execution to be compromised by <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paymentoforderflow.asp">payment for order flow (PFOF)</a>, as may happen to Lite users. Additional features that push Interactive Brokers to the top for advanced traders are its robust selection of assets, a wide selection of stocks on the easy-to-borrow list, and advanced charting tools. Trades can be placed directly via the chart itself and TWS is highly customizable in terms of standard analysis and displaying trading opportunities. </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"> Mobile users, of Android and iOS, will be able to take advantage of IBKR’s mobile app. In addition to rapid order execution, traders can use the mobile application to review equity fundamentals, monitor valuations, and check <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>ratings. Within the mobile app, traders on the go can trade options, view <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/order-book.asp">order books</a>, and implement exit strategies directly from the app. Advanced traders will, of course, be working on Traders Workstation whenever it is feasible as the trading environment is more expansive than even the most robust mobile translation. While the broker has filled a major gap with the introduction of cryptocurrency trading, the lack of a user-friendly backtesting environment will still bother some more advanced traders. </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-interactive-brokers-best-charting-platform-for-day-traders"></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"> Interactive Brokers: Best Charting Platform for Day Traders </span> </h2> <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"> Why We Chose It </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> There are a lot of competing platforms that have robust charting built into the trading interface, but none have what it takes to dethrone Interactive Brokers as our pick as the Best Charting Platform for Day Traders. Although IBKR holds its own in terms of charting functionality and the easy application of customized views and indicators, the robust selection of assets, the ability to both chart and trade within one platform, and the breadth of technical tools available to users all combine to keep IBKR firmly in the top spot. </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"> Pros & Cons </span> </h3> <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">Pros</span> <ul class="mntl-sc-block__list mntl-sc-block-comparisonlist__list"> <li><p>Trades can be placed directly from customizable charts</p></li> <li><p>Ability to chart and trade assets from multiple markets in one platform</p></li> <li><p>Robust offering of technical tools</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>TWS takes time to fully customize</p></li> <li><p>DIY backtesting feature is available to IBKR PRO users only</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> <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"> Overview </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Intra-day traders will quickly find that IBKR provides them with valuable tools, robust asset selection, efficient order execution, and competitive costs. Day traders who are practitioners of technical analysis will feel at home when applying studies and indicators to a wide variety of assets across markets. There is a bevy of tools to choose from, and it’s unlikely that users will find themselves needing to go elsewhere for indicators or analysis.<span class="ql-inline-citation" data-cite="12"></span> Furthermore, those who do not lean on technical analysis primarily will still find more than enough tools to fulfill their trading needs by identifying tradable events and fundamental data. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> The challenge won’t be whether the tool exists on IBKR’s platform as much as it will be deciding which tools not to make use of. The standard relative strength index (RSI), Bollinger Band, and stochastic cocktail of tools are available, as are more nuanced ones such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/demarkerindicator.asp">DeMark indicators</a>, Connors RSI, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/donchianchannels.asp">Donchian channels</a>. The ability to apply statistical bands to the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/v/vwap.asp">volume-weighted average price (VWAP)</a> study is another feature that signals IBKR’s commitment to helping traders identify price inefficiencies. </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"> Mobile users can make use of the same tools and indicators that are available on the desktop version, although they may find it more challenging on the mobile platform, which is not uncommon across the industry. Finally, traders can trade directly from the charts themselves via IBKR’s Chart Trader option. </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"> All told, day traders will find tools, reliability, low cost, and speed with IBKR’s charting platform. This is, of course, in addition to all the other bells and whistles that won IBKR both the overall and best for advanced day traders categories. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <span class="heading-toc" id="toc-webull-best-low-cost-day-trading-platform"></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"> Webull: Best Low-Cost Day Trading Platform </span> </h2> <div class="comp mntl-sc-block finance-sc-block-starrating mntl-block" id="mntl-sc-block_67-0"><div aria-label="3 out of 5 stars" class="comp mntl-sc-block mntl-sc-block-starrating" id="mntl-sc-block_68-0"><div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 100%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 0%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <div class="mntl-sc-block__wrapper mntl-sc-block-starrating__wrapper"> <div class="mntl-sc-block__background mntl-sc-block-starrating__background"></div> <div class="mntl-sc-block__bar mntl-sc-block-starrating__bar" style="width: 0%;"></div> <svg class="icon icon-star mntl-sc-block__svg mntl-sc-block-starrating__svg"> <use xlink:href="#icon-star" xmlns:xlink="http://www.w3.org/1999/xlink"></use> </svg> </div> <span class="mntl-sc-block__label mntl-sc-block-starrating__label">3</span></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-review mntl-sc-block-review" id="mntl-sc-block_70-0"> <div class="mntl-sc-block__header-link mntl-sc-block-review__header-link"> <a href="https://www.investopedia.com/webull-review-5201033" rel="nocaes" target="_blank"><img height="0" src="https://www.investopedia.com/thmb/3TFjP_KdPG7nouBdGq9pbVqUVfQ=/971x0/filters:no_upscale():max_bytes(150000):strip_icc()/WebullLogo-0728cf59141c4d76aa3c3e3ae1945d40.jpg" width="971"/></a> </div> <div class="loc entity-link"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-tracking-container="true" href="https://www.webull.com/activity?source=Investopedia-Per" id="mntl-sc-block-review__entity-link_3-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open an Account</span></a> </div> <div class="mntl-sc-block__quick-facts mntl-sc-block-review__quick-facts"> <ul class="mntl-sc-block__quick-list mntl-sc-block-review__quick-list"> <li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item"> <strong>Account Minimum</strong>: $0 </li> <li class="mntl-sc-block__quick-list__item mntl-sc-block-review__quick-list__item"> <strong>Fees</strong>: $0 commissions for stock, ETF, and options </li> </ul> <div class="loc article-link"><a class="mntl-sc-block-review__article-link mntl-text-link" data-tracking-container="true" href="https://www.investopedia.com/webull-review-5201033" id="mntl-sc-block-review__article-link_3-0" rel="noopener nocaes" target="_blank"><span class="link__wrapper">Read full review</span></a> </div> </div> <div class="loc entity-link mntl-sc-block__trailing-links mntl-sc-block-review__trailing-links"><a class="mntl-sc-block-review__entity-link mntl-text-link" data-tracking-container="true" href="https://www.webull.com/activity?source=Investopedia-Per" id="mntl-sc-block-review__entity-link_3-0" rel="noopener nofollow sponsored nocaes" target="_blank"><span class="link__wrapper">Open an Account</span></a> </div></div> <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"> Why We Chose It </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_74-0"> Webull is our top selection for the best low-cost day trading platform because it provides impressive platform features while levying no direct costs on its users. </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"> Pros & Cons </span> </h3> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_77-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_78-0"> <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>Quick and easy account setup</p></li> <li><p>No fees or minimums</p></li> <li><p>Extended hours trading</p></li> <li><p>Robust desktop and mobile trading platforms</p></li> <li><p>Available paper trading</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>Limited selection of assets</p></li> <li><p>Payment for order flow can lead to slower execution speeds</p></li> <li><p>Below average customer support</p></li> <li><p>Limited educational materials</p></li> <li><p>No income on excess cash</p></li> </ul> </div> </div></div> <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"> Overview </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_81-0"> Where many brokers claim to be low-cost brokers, Webull essentially has zero (direct) costs. Users of Webull will enjoy commission-free trading of stocks and ETFs, along with no account minimums or deposit requirements.<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_82-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_83-0"> Founded in 2018, Webull is a Chinese-owned broker and trading platform headquartered in New York City.<span class="ql-inline-citation" data-cite="14"></span> Webull labels itself as a financial company driven by technology. Webull offers a strong low-cost platform for day traders looking to focus primarily on equities and ETFs. Traders who are looking to access managed futures, forex, fixed income, or advanced options capabilities will not find any at Webull. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_84-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> As is the case with some other discount brokers, there is a price to pay for Webull’s low-cost structure. This is primarily due to Webull receiving payment for order flow, which presents the potential for lags in transaction execution.<span class="ql-inline-citation" data-cite="15"></span> In addition, the social tools offered by Webull and many other online brokers can promote overtrading through <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gamification.asp">gamification</a>. Still, Webull users have access to all U.S.-listed stocks, ETFs, and options on a platform that is quite solid overall. Day traders who wish to establish short positions have access to stocks on Webull’s easy-to-borrow list. </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"> The Webull trading platform has fairly impressive charting capabilities for a discount broker, with many popular technical indicators available, in addition to stock screeners and newly added options screeners.<span class="ql-inline-citation" data-cite="16"></span> Those who wish to convert those screens to watchlists are able to do so with ease. For trading, users can set only basic market, limit, stop, and stop limit orders for order entry and exit. Paper trading is also enabled for those who wish to try their ideas out without risking capital.<span class="ql-inline-citation" data-cite="17"></span> Users are provided with up-to-date news flow, and the Webull platform keeps a running tally of best-performing industries and the most popular ETFs. Some of the drawbacks that traders may find are the inability to backtest or automate trading strategies, as well as a lack of some more advanced trading tools. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <span class="heading-toc" id="toc-final-verdict"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_89-0"> <span class="mntl-sc-block-heading__text"> Final Verdict </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_90-0"> IBKR has many rivals that can challenge it in specific areas. TradeStation has better backtesting, tastyworks from tastytrade has a better all-around options trading experience, and Webull is cheaper. In this industry’s current state, however, no one broker can compete point-for-point with IBKR. It has the tools, asset range, speed, and global reach that make it a day trader’s dream in terms of constantly finding new price inefficiencies to exploit across markets and asset classes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_91-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_92-0"> Of course, there is also Webull, which offers a surprisingly robust platform for its no (direct) cost approach. If you are looking to day trade on the cheap, Webull lets you get into the market for essentially nothing upfront. As you evolve as a trader, however, the allure of IBKR’s more expansive offering will become ever stronger. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_93-0"></div> <div class="comp mntl-sc-block finance-sc-block-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_94-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/LVSzo/2/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="1"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_95-0"></div> <div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_96-0"><div class="comp mntl-sc-block-inlinevideo__video-container mntl-block" id="mntl-sc-block-inlinevideo__video-container_1-0"><div class="comp mntl-sc-block-inlinevideo__video mntl-jwplayer mm-video lazyload aspectratio-16:9" data-bgset="https://cdn.jwplayer.com/v2/media/pizsSJMQ/poster.jpg?width=720" data-sizes="auto" id="mntl-sc-block-inlinevideo__video_1-0"></div></div> <h4 class="comp mntl-sc-block-inlinevideo__title mntl-text-block" id="mntl-sc-block-inlinevideo__title_1-0">Everything You Need to Know About Brokerage Accounts</h4> <div class="comp mntl-sc-block-inlinevideo__feature-link-wrapper mntl-block" id="mntl-sc-block-inlinevideo__feature-link-wrapper_1-0"><span class="comp mntl-sc-block-inlinevideo__feature-link mntl-text-link mntl-sc-block-inlinevideo__feature-link mntl-text-link" id="mntl-sc-block-inlinevideo__feature-link_1-0"></span></div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_97-0"></div> <span class="heading-toc" id="toc-frequently-asked-questions"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_98-0"> <span class="mntl-sc-block-heading__text"> Frequently Asked Questions </span> </h2> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_99-0"><span class="heading-toc" id="toc-what-are-the-risks-of-day-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Risks of Day Trading?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>One of the most significant risks for retail day traders is the lack of a level playing field, as they often compete against a stacked field of professionals with the resources (e.g., speed, trading capital, technology, and software) to succeed. </p><p>Another notable risk is that day traders often use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/071114/guide-day-trading-margin.asp">leverage</a> to enter positions, which means they can lose more than they risk on any given trade. This can be especially devastating with <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/shortselling.asp">short trades</a>—where the trader sells "high" in the hopes of buying to cover "low" at a profit—which have virtually <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unlimitedrisk.asp">unlimited risk</a> since prices can continue to climb indefinitely. Traders who don't have enough trading capital also risk being undercapitalized, meaning they can burn through their accounts quickly. What's more, traders who fund their accounts with anything but <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskcapital.asp">risk capital</a> stand to lose more than their trading accounts.</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-how-do-day-traders-use-online-brokers"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do Day Traders Use Online Brokers?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Day traders use brokers to do things like enter orders quickly, customize the size of trades, place multiple orders simultaneously, designate which trading venue will handle the order, and customize trading defaults. They may place their trades manually, often from a chart, or set up an automated system that generates orders on their behalf.</p><p>Day traders often prefer brokers who charge per share (rather than per trade). Traders also need real-time margin and buying power updates, as well as the ability to monitor price quotes, price volatility, liquidity, trading volume, and breaking news.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_102-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_103-0"><span class="heading-toc" id="toc-what-should-you-consider-when-choosing-a-day-trading-platform"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Should You Consider When Choosing a Day Trading Platform?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A key consideration for day traders is trading platform quality, which can impact execution speed and price quotes. Commissions, margin rates, and other expenses are also top concerns for day traders because, even if a day trader can consistently beat the market, the profit from those positions must exceed the cost of commissions.</p><p>Additionally, day traders should consider a broker's customer service record and financial stability. You can even look at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://brokercheck.finra.org/">The Financial Industry Regulatory Authority's BrokerCheck page</a> before signing on with a small firm to ensure it has not had claims filed against it for misdeeds or financial instability.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_105-0"><span class="heading-toc" id="toc-why-do-you-need-25k-to-day-trade"></span> <h2 class="mntl-sc-block-questionandanswer__question">Why do you need 25k to day trade?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The U.S. Securities and Exchange Commission (SEC) requires all <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/patterndaytrader.asp">pattern day traders</a> to have $25,000 or more in their account. Pattern day traders are those who make four or more day trades, which account for six percent of the total trades in their account, within five business days. If a trader's account falls below this amount they will no longer be able to day trade until they restore the minimum balance.<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_106-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_107-0"><span class="heading-toc" id="toc-do-day-traders-pay-taxes"></span> <h2 class="mntl-sc-block-questionandanswer__question">Do day traders pay taxes?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Yes, day traders are required to pay taxes. The taxes you pay may be different if your day trading qualifies as a business however, if not, you are taxed as an investor. Investors must report capital gains and losses on the U.S. Internal Revenue Service's (IRS) form <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/forms-pubs/about-schedule-d-form-1040">Schedule D (Form 1040), Capital Gains and Losses</a>, and on <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.irs.gov/forms-pubs/about-form-8949">Form 8949, Sales and Other Dispositions of Capital Assets</a>. Currently, individuals are usually not taxed higher than 15% in capital gains, however, some exceptions allow for a rate as high as 20% to 28%.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="4"></span></p></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>	The search for the best day trading platforms and brokers is an important part of any serious trader’s process. Speed, reliability, costs, customer service, and charting tools are all key elements of day trading platforms that these highly active investors tend to value the most. Moreover, for traders who implement systematic strategies, backtesting capabilities have gained greater importance as well. As day traders allocate more time and capital to their endeavors, it is important for online brokerages to provide them with the tools that they need, at a cost that doesn’t eat into their profits. Additionally, the reliability of data is paramount, as is the ability to test trading ideas prior to deployment. We’ll look at several brokers who strike the right balance between day trading tools and competitive pricing. ## Best Day Trading Platforms of 2023: * Best Online Broker for Day Trading: [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) * Best Broker for Advanced Day Traders: [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) * Best Charting Platform for Day Traders: [Interactive Brokers](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) * Best Low-Cost Day Trading Platform: [Webull](https://www.webull.com/activity?source=Investopedia-Per) ## Interactive Brokers: Best Online Broker for Day Trading, Best Broker for Advanced Day Traders, & Best Charting Platform for Day Traders 4.2 [![](https://www.investopedia.com/thmb/Jlqwe9PIU2-1CgoUVti1ZBdVI5g=/4200x0/filters:no_upscale():max_bytes(150000):strip_icc()/interactive_brokers_productcard-5c61eec746e0fb0001f25462.png)](https://www.investopedia.com/interactive-brokers-review-4587904) [Open an Account](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) * Account Minimum: $0.00 * Fees:$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. [Read full review](https://www.investopedia.com/interactive-brokers-review-4587904) [Open an Account](https://www.interactivebrokers.com/mkt/?src=investopedia98a&url=%2Fen%2Fwhyib%2Foverview.php) ## Interactive Brokers: Best Online Broker for Day Trading ### Why We Chose It Interactive Brokers (IBKR) remains firmly entrenched as our overall pick as [Best Online Broker](https://www.investopedia.com/best-brokers-for-beginners-4587873) for [Day Trading](https://www.investopedia.com/articles/trading/05/011705.asp) because it offers among the widest ranges of assets available to trade while charging some of the lowest commissions and margin rates in the industry. ### Pros & Cons Pros * Wide range and depth of supported assets * Low commissions and margin interest rates * Multiple scanners across asset classes * Education portal within platform * Intraday news updates within the platform Cons * Steep learning curve for Traders Workstation * Complicated pricing tiers ### Overview Founded in 1978, Interactive Brokers holds $13.3 billion in equity capital. Headquartered in Greenwich, CT, IBKR has over 2,900 employees across the globe and has offices in Europe as well as Asia. In 2021, IBKR added support for U.S. spot gold trading. In 2022, Interactive Brokers expanded its cryptocurrency trading offered through Paxos Trust Company. The strength of IBKR’s platform in terms of day trading has a lot to do with its Trader Workstation (TWS) platform. Giving access to a wide selection of assets, TWS offers reliable pricing, fast order flow, sophisticated charting tools, and automation capabilities. Moreover, users are able to customize their TWS workstation to their liking while also monitoring newsflow. Traders on the go will be able to access IBKR via its mobile app, which is available for both Android and iPhone users. You’ll find many of the same capabilities on the app as you will on the desktop, particularly as it relates to setting up watchlists and placing orders. Charting capabilities, however, are more robust on the desktop platform. While IBKR can work for both the casual and the more serious trader, TWS has a professional feel that seasoned traders will appreciate. The options analytics tool allows users to view how shifts in the options Greeks will impact the options pricing for the asset in question. The reach of Interactive Brokers in terms of markets and assets also allows traders to set up direct trades playing off global market dynamics. For order flow, IBKR Pro users’ orders are submitted to IBKR’s high-speed, best execution order routing system, SmartRouter. This enables traders to receive optimized pricing and transaction speed. Users of IBKR Lite are routed to select market makers with whom IBKR may have payment for order flow agreements. The impact of this is that IBKR Lite users may be subject to a reduction in price improvement on trade executions. Although IBKR Pro has upfront costs, it will likely be the choice of most day traders looking for fine control over order execution. Whether Lite or Pro, Interactive Brokers also gives traders access to the industry’s lowest margin rates to leverage up and amplify the returns on positions. ## Interactive Brokers: Best Broker for Advanced Day Traders ### Why We Chose It Interactive Brokers continues to be our top pick for advanced day traders, as well. Its speed and efficiency specific to order execution complements its low rates on margin trading and provides advanced traders with a strong option to execute their strategies. IBKR has also continued to add tools to an already powerful arsenal, along with tradable assets and other key capabilities. ### Pros & Cons Pros * Superior order execution * Contingent orders for every situation * Low margin interest rates * A plethora of tradable assets Cons * Backtesting strategies is cumbersome * SmartRouter only for Pro customers ### Overview IBKR continues a long run as our pick for [Best Broker](https://www.investopedia.com/best-online-brokers-4587872) for Advanced Day Traders because it fulfills the needs of seasoned traders across multiple asset classes. Traders will find a wide selection of assets to choose from, as well as rapid and efficient order execution. We expect most advanced traders will take advantage of the IBKR Pro offering in order to access SmartRouter. In doing so, traders can avoid the potential for order execution to be compromised by [payment for order flow (PFOF)](https://www.investopedia.com/terms/p/paymentoforderflow.asp), as may happen to Lite users. Additional features that push Interactive Brokers to the top for advanced traders are its robust selection of assets, a wide selection of stocks on the easy-to-borrow list, and advanced charting tools. Trades can be placed directly via the chart itself and TWS is highly customizable in terms of standard analysis and displaying trading opportunities. Mobile users, of Android and iOS, will be able to take advantage of IBKR’s mobile app. In addition to rapid order execution, traders can use the mobile application to review equity fundamentals, monitor valuations, and check [environmental, social, and governance (ESG)](https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) ratings. Within the mobile app, traders on the go can trade options, view [order books](https://www.investopedia.com/terms/o/order-book.asp), and implement exit strategies directly from the app. Advanced traders will, of course, be working on Traders Workstation whenever it is feasible as the trading environment is more expansive than even the most robust mobile translation. While the broker has filled a major gap with the introduction of cryptocurrency trading, the lack of a user-friendly backtesting environment will still bother some more advanced traders. ## Interactive Brokers: Best Charting Platform for Day Traders ### Why We Chose It There are a lot of competing platforms that have robust charting built into the trading interface, but none have what it takes to dethrone Interactive Brokers as our pick as the Best Charting Platform for Day Traders. Although IBKR holds its own in terms of charting functionality and the easy application of customized views and indicators, the robust selection of assets, the ability to both chart and trade within one platform, and the breadth of technical tools available to users all combine to keep IBKR firmly in the top spot. ### Pros & Cons Pros * Trades can be placed directly from customizable charts * Ability to chart and trade assets from multiple markets in one platform * Robust offering of technical tools Cons * TWS takes time to fully customize * DIY backtesting feature is available to IBKR PRO users only ### Overview Intra-day traders will quickly find that IBKR provides them with valuable tools, robust asset selection, efficient order execution, and competitive costs. Day traders who are practitioners of technical analysis will feel at home when applying studies and indicators to a wide variety of assets across markets. There is a bevy of tools to choose from, and it’s unlikely that users will find themselves needing to go elsewhere for indicators or analysis. Furthermore, those who do not lean on technical analysis primarily will still find more than enough tools to fulfill their trading needs by identifying tradable events and fundamental data. The challenge won’t be whether the tool exists on IBKR’s platform as much as it will be deciding which tools not to make use of. The standard relative strength index (RSI), Bollinger Band, and stochastic cocktail of tools are available, as are more nuanced ones such as [DeMark indicators](https://www.investopedia.com/terms/d/demarkerindicator.asp), Connors RSI, and [Donchian channels](https://www.investopedia.com/terms/d/donchianchannels.asp). The ability to apply statistical bands to the [volume-weighted average price (VWAP)](https://www.investopedia.com/terms/v/vwap.asp) study is another feature that signals IBKR’s commitment to helping traders identify price inefficiencies. Mobile users can make use of the same tools and indicators that are available on the desktop version, although they may find it more challenging on the mobile platform, which is not uncommon across the industry. Finally, traders can trade directly from the charts themselves via IBKR’s Chart Trader option. All told, day traders will find tools, reliability, low cost, and speed with IBKR’s charting platform. This is, of course, in addition to all the other bells and whistles that won IBKR both the overall and best for advanced day traders categories. ## Webull: Best Low-Cost Day Trading Platform 3 [![](https://www.investopedia.com/thmb/3TFjP_KdPG7nouBdGq9pbVqUVfQ=/971x0/filters:no_upscale():max_bytes(150000):strip_icc()/WebullLogo-0728cf59141c4d76aa3c3e3ae1945d40.jpg)](https://www.investopedia.com/webull-review-5201033) [Open an Account](https://www.webull.com/activity?source=Investopedia-Per) * Account Minimum: $0 * Fees: $0 commissions for stock, ETF, and options [Read full review](https://www.investopedia.com/webull-review-5201033) [Open an Account](https://www.webull.com/activity?source=Investopedia-Per) ### Why We Chose It Webull is our top selection for the best low-cost day trading platform because it provides impressive platform features while levying no direct costs on its users. ### Pros & Cons Pros * Quick and easy account setup * No fees or minimums * Extended hours trading * Robust desktop and mobile trading platforms * Available paper trading Cons * Limited selection of assets * Payment for order flow can lead to slower execution speeds * Below average customer support * Limited educational materials * No income on excess cash ### Overview Where many brokers claim to be low-cost brokers, Webull essentially has zero (direct) costs. Users of Webull will enjoy commission-free trading of stocks and ETFs, along with no account minimums or deposit requirements. Founded in 2018, Webull is a Chinese-owned broker and trading platform headquartered in New York City. Webull labels itself as a financial company driven by technology. Webull offers a strong low-cost platform for day traders looking to focus primarily on equities and ETFs. Traders who are looking to access managed futures, forex, fixed income, or advanced options capabilities will not find any at Webull. As is the case with some other discount brokers, there is a price to pay for Webull’s low-cost structure. This is primarily due to Webull receiving payment for order flow, which presents the potential for lags in transaction execution. In addition, the social tools offered by Webull and many other online brokers can promote overtrading through [gamification](https://www.investopedia.com/terms/g/gamification.asp). Still, Webull users have access to all U.S.-listed stocks, ETFs, and options on a platform that is quite solid overall. Day traders who wish to establish short positions have access to stocks on Webull’s easy-to-borrow list. The Webull trading platform has fairly impressive charting capabilities for a discount broker, with many popular technical indicators available, in addition to stock screeners and newly added options screeners. Those who wish to convert those screens to watchlists are able to do so with ease. For trading, users can set only basic market, limit, stop, and stop limit orders for order entry and exit. Paper trading is also enabled for those who wish to try their ideas out without risking capital. Users are provided with up-to-date news flow, and the Webull platform keeps a running tally of best-performing industries and the most popular ETFs. Some of the drawbacks that traders may find are the inability to backtest or automate trading strategies, as well as a lack of some more advanced trading tools. ## Final Verdict IBKR has many rivals that can challenge it in specific areas. TradeStation has better backtesting, tastyworks from tastytrade has a better all-around options trading experience, and Webull is cheaper. In this industry’s current state, however, no one broker can compete point-for-point with IBKR. It has the tools, asset range, speed, and global reach that make it a day trader’s dream in terms of constantly finding new price inefficiencies to exploit across markets and asset classes. Of course, there is also Webull, which offers a surprisingly robust platform for its no (direct) cost approach. If you are looking to day trade on the cheap, Webull lets you get into the market for essentially nothing upfront. As you evolve as a trader, however, the allure of IBKR’s more expansive offering will become ever stronger. #### Everything You Need to Know About Brokerage Accounts ## Frequently Asked Questions ## What Are the Risks of Day Trading? One of the most significant risks for retail day traders is the lack of a level playing field, as they often compete against a stacked field of professionals with the resources (e.g., speed, trading capital, technology, and software) to succeed. Another notable risk is that day traders often use [leverage](https://www.investopedia.com/articles/active-trading/071114/guide-day-trading-margin.asp) to enter positions, which means they can lose more than they risk on any given trade. This can be especially devastating with [short trades](https://www.investopedia.com/terms/s/shortselling.asp)—where the trader sells "high" in the hopes of buying to cover "low" at a profit—which have virtually [unlimited risk](https://www.investopedia.com/terms/u/unlimitedrisk.asp) since prices can continue to climb indefinitely. Traders who don't have enough trading capital also risk being undercapitalized, meaning they can burn through their accounts quickly. What's more, traders who fund their accounts with anything but [risk capital](https://www.investopedia.com/terms/r/riskcapital.asp) stand to lose more than their trading accounts. ## How Do Day Traders Use Online Brokers? Day traders use brokers to do things like enter orders quickly, customize the size of trades, place multiple orders simultaneously, designate which trading venue will handle the order, and customize trading defaults. They may place their trades manually, often from a chart, or set up an automated system that generates orders on their behalf. Day traders often prefer brokers who charge per share (rather than per trade). Traders also need real-time margin and buying power updates, as well as the ability to monitor price quotes, price volatility, liquidity, trading volume, and breaking news. ## What Should You Consider When Choosing a Day Trading Platform? A key consideration for day traders is trading platform quality, which can impact execution speed and price quotes. Commissions, margin rates, and other expenses are also top concerns for day traders because, even if a day trader can consistently beat the market, the profit from those positions must exceed the cost of commissions. Additionally, day traders should consider a broker's customer service record and financial stability. You can even look at [The Financial Industry Regulatory Authority's BrokerCheck page](https://brokercheck.finra.org/) before signing on with a small firm to ensure it has not had claims filed against it for misdeeds or financial instability. ## Why do you need 25k to day trade? The U.S. Securities and Exchange Commission (SEC) requires all [pattern day traders](https://www.investopedia.com/terms/p/patterndaytrader.asp) to have $25,000 or more in their account. Pattern day traders are those who make four or more day trades, which account for six percent of the total trades in their account, within five business days. If a trader's account falls below this amount they will no longer be able to day trade until they restore the minimum balance. ## Do day traders pay taxes? Yes, day traders are required to pay taxes. The taxes you pay may be different if your day trading qualifies as a business however, if not, you are taxed as an investor. Investors must report capital gains and losses on the U.S. Internal Revenue Service's (IRS) form [Schedule D (Form 1040), Capital Gains and Losses](https://www.irs.gov/forms-pubs/about-schedule-d-form-1040), and on [Form 8949, Sales and Other Dispositions of Capital Assets](https://www.irs.gov/forms-pubs/about-form-8949). Currently, individuals are usually not taxed higher than 15% in capital gains, however, some exceptions allow for a rate as high as 20% to 28%.	The search for the best day trading platforms and brokers is an important part of any serious trader’s process. Speed, reliability, costs, customer service, and charting tools are all key elements of day trading platforms that these highly active investors tend to value the most. Moreover, for traders who implement systematic strategies, backtesting capabilities have gained greater importance as well. As day traders allocate more time and capital to their endeavors, it is important for online brokerages to provide them with the tools that they need, at a cost that doesn’t eat into their profits. Additionally, the reliability of data is paramount, as is the ability to test trading ideas prior to deployment. We’ll look at several brokers who strike the right balance between day trading tools and competitive pricing. Best Day Trading Platforms of 2023: Best Online Broker for Day Trading: Interactive Brokers Best Broker for Advanced Day Traders: Interactive Brokers Best Charting Platform for Day Traders: Interactive Brokers Best Low-Cost Day Trading Platform: Webull Interactive Brokers: Best Online Broker for Day Trading, Best Broker for Advanced Day Traders, & Best Charting Platform for Day Traders 4.2 Open an Account Account Minimum: $0.00 Fees: $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. Read full review Open an Account Interactive Brokers: Best Online Broker for Day Trading Why We Chose It Interactive Brokers (IBKR) remains firmly entrenched as our overall pick as Best Online Broker for Day Trading because it offers among the widest ranges of assets available to trade while charging some of the lowest commissions and margin rates in the industry. Pros & Cons Pros Wide range and depth of supported assets Low commissions and margin interest rates Multiple scanners across asset classes Education portal within platform Intraday news updates within the platform Cons Steep learning curve for Traders Workstation Complicated pricing tiers Overview Founded in 1978, Interactive Brokers holds $13.3 billion in equity capital. Headquartered in Greenwich, CT, IBKR has over 2,900 employees across the globe and has offices in Europe as well as Asia. In 2021, IBKR added support for U.S. spot gold trading. In 2022, Interactive Brokers expanded its cryptocurrency trading offered through Paxos Trust Company. The strength of IBKR’s platform in terms of day trading has a lot to do with its Trader Workstation (TWS) platform. Giving access to a wide selection of assets, TWS offers reliable pricing, fast order flow, sophisticated charting tools, and automation capabilities. Moreover, users are able to customize their TWS workstation to their liking while also monitoring newsflow. Traders on the go will be able to access IBKR via its mobile app, which is available for both Android and iPhone users. You’ll find many of the same capabilities on the app as you will on the desktop, particularly as it relates to setting up watchlists and placing orders. Charting capabilities, however, are more robust on the desktop platform. While IBKR can work for both the casual and the more serious trader, TWS has a professional feel that seasoned traders will appreciate. The options analytics tool allows users to view how shifts in the options Greeks will impact the options pricing for the asset in question. The reach of Interactive Brokers in terms of markets and assets also allows traders to set up direct trades playing off global market dynamics. For order flow, IBKR Pro users’ orders are submitted to IBKR’s high-speed, best execution order routing system, SmartRouter. This enables traders to receive optimized pricing and transaction speed. Users of IBKR Lite are routed to select market makers with whom IBKR may have payment for order flow agreements. The impact of this is that IBKR Lite users may be subject to a reduction in price improvement on trade executions. Although IBKR Pro has upfront costs, it will likely be the choice of most day traders looking for fine control over order execution. Whether Lite or Pro, Interactive Brokers also gives traders access to the industry’s lowest margin rates to leverage up and amplify the returns on positions. Interactive Brokers: Best Broker for Advanced Day Traders Why We Chose It Interactive Brokers continues to be our top pick for advanced day traders, as well. Its speed and efficiency specific to order execution complements its low rates on margin trading and provides advanced traders with a strong option to execute their strategies. IBKR has also continued to add tools to an already powerful arsenal, along with tradable assets and other key capabilities. Pros & Cons Pros Superior order execution Contingent orders for every situation Low margin interest rates A plethora of tradable assets Cons Backtesting strategies is cumbersome SmartRouter only for Pro customers Overview IBKR continues a long run as our pick for Best Broker for Advanced Day Traders because it fulfills the needs of seasoned traders across multiple asset classes. Traders will find a wide selection of assets to choose from, as well as rapid and efficient order execution. We expect most advanced traders will take advantage of the IBKR Pro offering in order to access SmartRouter. In doing so, traders can avoid the potential for order execution to be compromised by payment for order flow (PFOF), as may happen to Lite users. Additional features that push Interactive Brokers to the top for advanced traders are its robust selection of assets, a wide selection of stocks on the easy-to-borrow list, and advanced charting tools. Trades can be placed directly via the chart itself and TWS is highly customizable in terms of standard analysis and displaying trading opportunities. Mobile users, of Android and iOS, will be able to take advantage of IBKR’s mobile app. In addition to rapid order execution, traders can use the mobile application to review equity fundamentals, monitor valuations, and check environmental, social, and governance (ESG) ratings. Within the mobile app, traders on the go can trade options, view order books, and implement exit strategies directly from the app. Advanced traders will, of course, be working on Traders Workstation whenever it is feasible as the trading environment is more expansive than even the most robust mobile translation. While the broker has filled a major gap with the introduction of cryptocurrency trading, the lack of a user-friendly backtesting environment will still bother some more advanced traders. Interactive Brokers: Best Charting Platform for Day Traders Why We Chose It There are a lot of competing platforms that have robust charting built into the trading interface, but none have what it takes to dethrone Interactive Brokers as our pick as the Best Charting Platform for Day Traders. Although IBKR holds its own in terms of charting functionality and the easy application of customized views and indicators, the robust selection of assets, the ability to both chart and trade within one platform, and the breadth of technical tools available to users all combine to keep IBKR firmly in the top spot. Pros & Cons Pros Trades can be placed directly from customizable charts Ability to chart and trade assets from multiple markets in one platform Robust offering of technical tools Cons TWS takes time to fully customize DIY backtesting feature is available to IBKR PRO users only Overview Intra-day traders will quickly find that IBKR provides them with valuable tools, robust asset selection, efficient order execution, and competitive costs. Day traders who are practitioners of technical analysis will feel at home when applying studies and indicators to a wide variety of assets across markets. There is a bevy of tools to choose from, and it’s unlikely that users will find themselves needing to go elsewhere for indicators or analysis. Furthermore, those who do not lean on technical analysis primarily will still find more than enough tools to fulfill their trading needs by identifying tradable events and fundamental data. The challenge won’t be whether the tool exists on IBKR’s platform as much as it will be deciding which tools not to make use of. The standard relative strength index (RSI), Bollinger Band, and stochastic cocktail of tools are available, as are more nuanced ones such as DeMark indicators, Connors RSI, and Donchian channels. The ability to apply statistical bands to the volume-weighted average price (VWAP) study is another feature that signals IBKR’s commitment to helping traders identify price inefficiencies. Mobile users can make use of the same tools and indicators that are available on the desktop version, although they may find it more challenging on the mobile platform, which is not uncommon across the industry. Finally, traders can trade directly from the charts themselves via IBKR’s Chart Trader option. All told, day traders will find tools, reliability, low cost, and speed with IBKR’s charting platform. This is, of course, in addition to all the other bells and whistles that won IBKR both the overall and best for advanced day traders categories. Webull: Best Low-Cost Day Trading Platform 3 Open an Account Account Minimum: $0 Fees: $0 commissions for stock, ETF, and options Read full review Open an Account Why We Chose It Webull is our top selection for the best low-cost day trading platform because it provides impressive platform features while levying no direct costs on its users. Pros & Cons Pros Quick and easy account setup No fees or minimums Extended hours trading Robust desktop and mobile trading platforms Available paper trading Cons Limited selection of assets Payment for order flow can lead to slower execution speeds Below average customer support Limited educational materials No income on excess cash Overview Where many brokers claim to be low-cost brokers, Webull essentially has zero (direct) costs. Users of Webull will enjoy commission-free trading of stocks and ETFs, along with no account minimums or deposit requirements. Founded in 2018, Webull is a Chinese-owned broker and trading platform headquartered in New York City. Webull labels itself as a financial company driven by technology. Webull offers a strong low-cost platform for day traders looking to focus primarily on equities and ETFs. Traders who are looking to access managed futures, forex, fixed income, or advanced options capabilities will not find any at Webull. As is the case with some other discount brokers, there is a price to pay for Webull’s low-cost structure. This is primarily due to Webull receiving payment for order flow, which presents the potential for lags in transaction execution. In addition, the social tools offered by Webull and many other online brokers can promote overtrading through gamification. Still, Webull users have access to all U.S.-listed stocks, ETFs, and options on a platform that is quite solid overall. Day traders who wish to establish short positions have access to stocks on Webull’s easy-to-borrow list. The Webull trading platform has fairly impressive charting capabilities for a discount broker, with many popular technical indicators available, in addition to stock screeners and newly added options screeners. Those who wish to convert those screens to watchlists are able to do so with ease. For trading, users can set only basic market, limit, stop, and stop limit orders for order entry and exit. Paper trading is also enabled for those who wish to try their ideas out without risking capital. Users are provided with up-to-date news flow, and the Webull platform keeps a running tally of best-performing industries and the most popular ETFs. Some of the drawbacks that traders may find are the inability to backtest or automate trading strategies, as well as a lack of some more advanced trading tools. Final Verdict IBKR has many rivals that can challenge it in specific areas. TradeStation has better backtesting, tastyworks from tastytrade has a better all-around options trading experience, and Webull is cheaper. In this industry’s current state, however, no one broker can compete point-for-point with IBKR. It has the tools, asset range, speed, and global reach that make it a day trader’s dream in terms of constantly finding new price inefficiencies to exploit across markets and asset classes. Of course, there is also Webull, which offers a surprisingly robust platform for its no (direct) cost approach. If you are looking to day trade on the cheap, Webull lets you get into the market for essentially nothing upfront. As you evolve as a trader, however, the allure of IBKR’s more expansive offering will become ever stronger. Everything You Need to Know About Brokerage Accounts Frequently Asked Questions What Are the Risks of Day Trading? One of the most significant risks for retail day traders is the lack of a level playing field, as they often compete against a stacked field of professionals with the resources (e.g., speed, trading capital, technology, and software) to succeed. Another notable risk is that day traders often use leverage to enter positions, which means they can lose more than they risk on any given trade. This can be especially devastating with short trades—where the trader sells "high" in the hopes of buying to cover "low" at a profit—which have virtually unlimited risk since prices can continue to climb indefinitely. Traders who don't have enough trading capital also risk being undercapitalized, meaning they can burn through their accounts quickly. What's more, traders who fund their accounts with anything but risk capital stand to lose more than their trading accounts. How Do Day Traders Use Online Brokers? Day traders use brokers to do things like enter orders quickly, customize the size of trades, place multiple orders simultaneously, designate which trading venue will handle the order, and customize trading defaults. They may place their trades manually, often from a chart, or set up an automated system that generates orders on their behalf.Day traders often prefer brokers who charge per share (rather than per trade). Traders also need real-time margin and buying power updates, as well as the ability to monitor price quotes, price volatility, liquidity, trading volume, and breaking news. What Should You Consider When Choosing a Day Trading Platform? A key consideration for day traders is trading platform quality, which can impact execution speed and price quotes. Commissions, margin rates, and other expenses are also top concerns for day traders because, even if a day trader can consistently beat the market, the profit from those positions must exceed the cost of commissions.Additionally, day traders should consider a broker's customer service record and financial stability. You can even look at The Financial Industry Regulatory Authority's BrokerCheck page before signing on with a small firm to ensure it has not had claims filed against it for misdeeds or financial instability. Why do you need 25k to day trade? The U.S. Securities and Exchange Commission (SEC) requires all pattern day traders to have $25,000 or more in their account. Pattern day traders are those who make four or more day trades, which account for six percent of the total trades in their account, within five business days. If a trader's account falls below this amount they will no longer be able to day trade until they restore the minimum balance. Do day traders pay taxes? Yes, day traders are required to pay taxes. The taxes you pay may be different if your day trading qualifies as a business however, if not, you are taxed as an investor. Investors must report capital gains and losses on the U.S. Internal Revenue Service's (IRS) form Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets. Currently, individuals are usually not taxed higher than 15% in capital gains, however, some exceptions allow for a rate as high as 20% to 28%.	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https://www.investopedia.com/terms/s/swingtrading.asp	Swing Trading: Definition and the Pros and Cons for Investors	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-swing-trading"></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 Swing Trading? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a> to look for trading opportunities. </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"> Swing traders may utilize <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fundamentalanalysis.asp">fundamental analysis</a> in addition to analyzing price trends and patterns. </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>Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move.</li><li>Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following session at a substantially different price.</li><li>Swing traders can take profits utilizing an established risk/reward ratio based on a stop-loss and profit target, or they can take profits or losses based on a technical indicator or price action movements.</li></ul></div></div></div> <div class="comp mntl-sc-block finance-sc-block-inlinevideo mntl-sc-block-inlinevideo mntl-block has-details inline-video" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block-inlinevideo__video-container mntl-block" id="mntl-sc-block-inlinevideo__video-container_1-0"><div class="comp mntl-sc-block-inlinevideo__video mntl-jwplayer mm-video lazyload aspectratio-16:9" data-bgset="https://cdn.jwplayer.com/v2/media/jryuHqKQ/poster.jpg?width=720" data-sizes="auto" id="mntl-sc-block-inlinevideo__video_1-0"></div></div> <h4 class="comp mntl-sc-block-inlinevideo__title mntl-text-block" id="mntl-sc-block-inlinevideo__title_1-0">What is Swing Trading?</h4> <div class="comp mntl-sc-block-inlinevideo__feature-link-wrapper mntl-block" id="mntl-sc-block-inlinevideo__feature-link-wrapper_1-0"><span class="comp mntl-sc-block-inlinevideo__feature-link mntl-text-link mntl-sc-block-inlinevideo__feature-link mntl-text-link" id="mntl-sc-block-inlinevideo__feature-link_1-0"></span></div></div> <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-understanding-swing-trading"></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 Swing Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Typically, swing trading involves holding a position either <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/100314/whats-difference-between-long-and-short-position-market.asp">long or short</a> for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions. </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 goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">asset</a>’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes. </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"> Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity. </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:66.8%;"> <img alt="Swing Trading" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/i7FAX_XJIngkENWcFISKvctDeJU=/1080x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/M4gOV20YkHM90L4QlIWPX-IC5nQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg" data-srcset="https://www.investopedia.com/thmb/jZ5niixlap9smcYTH5DRb7dx5Kc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg 750w" data-tracking-container="true" height="722" id="mntl-sc-block-image_1-0" width="1080"/> <noscript> <img alt="Swing Trading" class="img--noscript universal-image__image" height="722" sizes="750px" src="https://www.investopedia.com/thmb/M4gOV20YkHM90L4QlIWPX-IC5nQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg" srcset="https://www.investopedia.com/thmb/jZ5niixlap9smcYTH5DRb7dx5Kc=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg 750w" width="1080"/> </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>Madelyn Goodnight / Investopedia</p></span> </figcaption></figure> <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>Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis.</p></div></div></div> <span class="heading-toc" id="toc-swing-trading-and-technical-analysis"></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"> Swing Trading and Technical Analysis </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Identifying swing trading opportunities relies heavily on technical analysis techniques. One of the fundamental tools in a swing trader's arsenal is chart analysis, where patterns and trends are studied to anticipate future price movements. Chart patterns such as head and shoulders, double tops and bottoms, triangles, and flags can signal potential swing trading opportunities. We'll talk more about these later. </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"> Another aspect of technical analysis for swing trading is the use of indicators. These mathematical calculations applied to price and volume data help traders gauge the strength and direction of a trend. Popular indicators among swing traders include moving averages, relative strength index (RSI), stochastic oscillator, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/macd.asp">moving average convergence/divergence (MACD)</a>. For example, a swing trader may enter into a position when a stock's MACD hits a certain target, then the trader will sell that position if the MACD hits a different target. </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"> Finally, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/trading/support-and-resistance-basics/">support and resistance</a> levels play a role in identifying swing trading opportunities. Support represents a price level where buying interest is strong enough to prevent the price from declining further, while resistance is a level where selling interest is strong enough to prevent the price from rising further. Swing traders often look for price to bounce off support or break through resistance as confirmation of a potential trade setup. </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-advantages-and-disadvantages-of-swing-trading"></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"> Advantages and Disadvantages of Swing Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Many swing traders assess trades on a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/riskrewardratio.asp">risk/reward</a> basis. By analyzing the chart of an asset, they determine where they will enter, where they will place a <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stop-lossorder.asp">stop-loss order</a>, and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward ratio. On the other hand, risking $1 only to make $0.75 isn’t quite as favorable. </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"> Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bull.asp">bullish</a> setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving. </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"> Swing traders will often look for opportunities on the daily charts and may watch one-hour or 15-minute charts to find precise entry, stop-loss, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/take-profitorder.asp">take-profit</a> levels. </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-comparisonlist mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_35-0"> <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>Swing trading requires less time to trade than day trading.</p></li> <li><p>It maximizes short-term profit potential by capturing the bulk of market swings.</p></li> <li><p>Swing traders can rely exclusively on technical analysis, simplifying the trading process.</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>Swing trade positions are subject to overnight and weekend market risk.</p></li> <li><p>Abrupt market reversals can result in substantial losses.</p></li> <li><p>Swing traders often miss longer-term trends in favor of short-term market moves.</p></li> </ul> </div> </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-day-trading-vs-swing-trading"></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"> Day Trading vs. Swing Trading </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> The distinction between swing trading and day trading is usually the holding time for positions. Swing trading often involves at least an overnight hold, whereas day traders close out positions before the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tradingsession.asp">market closes</a>. To generalize, day trading positions are limited to a single day, while swing trading involves holding for several days to weeks. </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"> By holding overnight, the swing trader incurs the unpredictability of overnight risk, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/gap.asp">gaps</a> up or down against the position. By taking on the overnight <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financialrisk.asp">risk</a>, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/071114/guide-day-trading-margin.asp">day trading margin</a> of 25%.<span class="ql-inline-citation" data-cite="5"></span><span class="ql-inline-citation" data-cite="2"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> Swing traders also have access to a margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_43-0"></div> <span class="heading-toc" id="toc-swing-trading-tactics"></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"> Swing Trading Tactics </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> A swing trader tends to look for multiday chart patterns. Some of the more common patterns involve moving average crossovers, cup and handle patterns, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/head-shoulders.asp">head and shoulders patterns</a>, flags, and triangles. Key reversal <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/candlestick.asp">candlesticks</a> may be used in addition to other indicators to devise a solid <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trading-plan.asp">trading plan</a>. </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"> Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset’s price. This isn’t easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn’t required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win to produce an overall profit over many trades.<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_48-0"></div> <span class="heading-toc" id="toc-real-world-example-of-swing-trading"></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"> Real-World Example of Swing Trading </span> </h2> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_50-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:63.7%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/4AqmmeBqcEweFS42NJvjWjVCvjI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/4AqmmeBqcEweFS42NJvjWjVCvjI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg" data-srcset="https://www.investopedia.com/thmb/HVOE60SfpIC9egFdXjqnaxRXGGM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg 750w" data-tracking-container="true" height="3880" id="mntl-sc-block-image_2-0" width="6084"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="3880" sizes="750px" src="https://www.investopedia.com/thmb/4AqmmeBqcEweFS42NJvjWjVCvjI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg" srcset="https://www.investopedia.com/thmb/HVOE60SfpIC9egFdXjqnaxRXGGM=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg 750w" width="6084"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner"><p>Image by Sabrina Jiang © Investopedia 2020</p></span> </figcaption></figure> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> Using a historical example, the chart above shows a period where Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl">AAPL</a>) had a strong price move higher. This was followed by a small cup and handle pattern, which often signals a continuation of the price rise if the stock moves above the high of the handle. </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"> In this case: </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 price does rise above the handle, triggering a possible buy near $192.70.</li><li>One possible place to put a stop-loss is below the handle, marked by the rectangle, near $187.50.</li><li>Based on the entry and stop-loss, the estimated risk for the trade is $5.20 per share ($192.70 - $187.50).</li><li>If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 + (2 × $5.20) will provide this.</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"> Aside from risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn’t given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share—or, thought of another way, a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months. </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"> Other exit methods could be when the price crosses below a moving average (not shown), or when an indicator such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/stochasticoscillator.asp">stochastic oscillator</a> crosses its <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/signal_line.asp">signal line</a>. </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-what-are-the-swings-in-swing-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the 'Swings' in Swing Trading?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Swing trading tries to identify entry and exit points into a security on the basis of its daily or weekly movements between cycles of optimism and pessimism.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_62-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_63-0"><span class="heading-toc" id="toc-how-does-swing-trading-differ-from-day-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Does Swing Trading Differ from Day Trading?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. Day trading seeks to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/active-trading/012815/top-technical-indicators-scalping-trading-strategy.asp">scalp</a> small profits multiple times a day and close out all positions at the end of the day. Swing traders do not close their positions on a daily basis and instead may hold onto them for weeks, months, or even longer. Swing traders may incorporate both technical and fundamental analysis, whereas a day trader is more likely to focus on using technical analysis.</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-what-are-some-indicators-of-tools-used-by-swing-traders"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Indicators of Tools Used by Swing Traders?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts, momentum indicators, price range tools, and measures of market sentiment. Swing traders are also on the lookout for technical patterns like the head and shoulders or cup and handle.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_66-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_67-0"><span class="heading-toc" id="toc-which-types-of-securities-are-best-suited-for-swing-trading"></span> <h2 class="mntl-sc-block-questionandanswer__question">Which Types of Securities Are Best Suited for Swing Trading?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While a swing trader can enjoy success in any number of securities, the best candidates tend to be large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will often swing between broadly defined high and low points, and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction. Swing trades are also viable in actively traded commodities and forex markets.</p></div> </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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Swing trading refers to a trading style that attempts to exploit short- to medium-term price movements in a security using favorable risk/reward metrics. Swing traders primarily rely on technical analysis to determine suitable entry and exit points, but they may also use fundamental analysis as an added filter. </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"> Large-cap stocks make suitable swing trading candidates, as they often oscillate in well-established, predictable ranges that frequently provide long and short trading opportunities. </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"> Swing trading offers advantages such as maximizing short-term profit potential, minimal time commitment, and flexibility of capital management. Key disadvantages include being subject to overnight and weekend market risk, along with missing longer-term trending price moves.<br/> </p></div>	## What Is Swing Trading? Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp) to look for trading opportunities. Swing traders may utilize [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) in addition to analyzing price trends and patterns. ### Key Takeaways * Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move. * Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following session at a substantially different price. * Swing traders can take profits utilizing an established risk/reward ratio based on a stop-loss and profit target, or they can take profits or losses based on a technical indicator or price action movements. #### What is Swing Trading? ## Understanding Swing Trading Typically, swing trading involves holding a position either [long or short](https://www.investopedia.com/ask/answers/100314/whats-difference-between-long-and-short-position-market.asp) for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions. The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an [asset](https://www.investopedia.com/terms/a/asset.asp)’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes. Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity. ![Swing Trading]() ![Swing Trading](https://www.investopedia.com/thmb/M4gOV20YkHM90L4QlIWPX-IC5nQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Investopedia-terms-swing-trading-b9db461c5db14f2b8fd3a7278578f281.jpg) Madelyn Goodnight / Investopedia ### Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis. ## Swing Trading and Technical Analysis Identifying swing trading opportunities relies heavily on technical analysis techniques. One of the fundamental tools in a swing trader's arsenal is chart analysis, where patterns and trends are studied to anticipate future price movements. Chart patterns such as head and shoulders, double tops and bottoms, triangles, and flags can signal potential swing trading opportunities. We'll talk more about these later. Another aspect of technical analysis for swing trading is the use of indicators. These mathematical calculations applied to price and volume data help traders gauge the strength and direction of a trend. Popular indicators among swing traders include moving averages, relative strength index (RSI), stochastic oscillator, and [moving average convergence/divergence (MACD)](https://www.investopedia.com/terms/m/macd.asp). For example, a swing trader may enter into a position when a stock's MACD hits a certain target, then the trader will sell that position if the MACD hits a different target. Finally, [support and resistance](https://www.investopedia.com/trading/support-and-resistance-basics/) levels play a role in identifying swing trading opportunities. Support represents a price level where buying interest is strong enough to prevent the price from declining further, while resistance is a level where selling interest is strong enough to prevent the price from rising further. Swing traders often look for price to bounce off support or break through resistance as confirmation of a potential trade setup. ## Advantages and Disadvantages of Swing Trading Many swing traders assess trades on a [risk/reward](https://www.investopedia.com/terms/r/riskrewardratio.asp) basis. By analyzing the chart of an asset, they determine where they will enter, where they will place a [stop-loss order](https://www.investopedia.com/terms/s/stop-lossorder.asp), and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward ratio. On the other hand, risking $1 only to make $0.75 isn’t quite as favorable. Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a [bullish](https://www.investopedia.com/terms/b/bull.asp) setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving. Swing traders will often look for opportunities on the daily charts and may watch one-hour or 15-minute charts to find precise entry, stop-loss, and [take-profit](https://www.investopedia.com/terms/t/take-profitorder.asp) levels. Pros * Swing trading requires less time to trade than day trading. * It maximizes short-term profit potential by capturing the bulk of market swings. * Swing traders can rely exclusively on technical analysis, simplifying the trading process. Cons * Swing trade positions are subject to overnight and weekend market risk. * Abrupt market reversals can result in substantial losses. * Swing traders often miss longer-term trends in favor of short-term market moves. ## Day Trading vs. Swing Trading The distinction between swing trading and day trading is usually the holding time for positions. Swing trading often involves at least an overnight hold, whereas day traders close out positions before the [market closes](https://www.investopedia.com/terms/t/tradingsession.asp). To generalize, day trading positions are limited to a single day, while swing trading involves holding for several days to weeks. By holding overnight, the swing trader incurs the unpredictability of overnight risk, such as [gaps](https://www.investopedia.com/terms/g/gap.asp) up or down against the position. By taking on the overnight [risk](https://www.investopedia.com/terms/f/financialrisk.asp), swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a [day trading margin](https://www.investopedia.com/articles/active-trading/071114/guide-day-trading-margin.asp) of 25%. Swing traders also have access to a margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example. ## Swing Trading Tactics A swing trader tends to look for multiday chart patterns. Some of the more common patterns involve moving average crossovers, cup and handle patterns, [head and shoulders patterns](https://www.investopedia.com/terms/h/head-shoulders.asp), flags, and triangles. Key reversal [candlesticks](https://www.investopedia.com/terms/c/candlestick.asp) may be used in addition to other indicators to devise a solid [trading plan](https://www.investopedia.com/terms/t/trading-plan.asp). Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset’s price. This isn’t easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn’t required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win to produce an overall profit over many trades. ## Real-World Example of Swing Trading ![Image]() ![Image](https://www.investopedia.com/thmb/4AqmmeBqcEweFS42NJvjWjVCvjI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Swing_Trading_Definition_and_Tactics_Sep_2020-01-4a6d22bec15342ed8ad60170afda74ca.jpg) Image by Sabrina Jiang © Investopedia 2020 Using a historical example, the chart above shows a period where Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)) had a strong price move higher. This was followed by a small cup and handle pattern, which often signals a continuation of the price rise if the stock moves above the high of the handle. In this case: * The price does rise above the handle, triggering a possible buy near $192.70. * One possible place to put a stop-loss is below the handle, marked by the rectangle, near $187.50. * Based on the entry and stop-loss, the estimated risk for the trade is $5.20 per share ($192.70 - $187.50). * If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 + (2 × $5.20) will provide this. Aside from risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn’t given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share—or, thought of another way, a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months. Other exit methods could be when the price crosses below a moving average (not shown), or when an indicator such as the [stochastic oscillator](https://www.investopedia.com/terms/s/stochasticoscillator.asp) crosses its [signal line](https://www.investopedia.com/terms/s/signal_line.asp). ## What Are the 'Swings' in Swing Trading? Swing trading tries to identify entry and exit points into a security on the basis of its daily or weekly movements between cycles of optimism and pessimism. ## How Does Swing Trading Differ from Day Trading? Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. Day trading seeks to [scalp](https://www.investopedia.com/articles/active-trading/012815/top-technical-indicators-scalping-trading-strategy.asp) small profits multiple times a day and close out all positions at the end of the day. Swing traders do not close their positions on a daily basis and instead may hold onto them for weeks, months, or even longer. Swing traders may incorporate both technical and fundamental analysis, whereas a day trader is more likely to focus on using technical analysis. ## What Are Some Indicators of Tools Used by Swing Traders? Swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts, momentum indicators, price range tools, and measures of market sentiment. Swing traders are also on the lookout for technical patterns like the head and shoulders or cup and handle. ## Which Types of Securities Are Best Suited for Swing Trading? While a swing trader can enjoy success in any number of securities, the best candidates tend to be large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will often swing between broadly defined high and low points, and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction. Swing trades are also viable in actively traded commodities and forex markets. ## The Bottom Line Swing trading refers to a trading style that attempts to exploit short- to medium-term price movements in a security using favorable risk/reward metrics. Swing traders primarily rely on technical analysis to determine suitable entry and exit points, but they may also use fundamental analysis as an added filter. Large-cap stocks make suitable swing trading candidates, as they often oscillate in well-established, predictable ranges that frequently provide long and short trading opportunities. Swing trading offers advantages such as maximizing short-term profit potential, minimal time commitment, and flexibility of capital management. Key disadvantages include being subject to overnight and weekend market risk, along with missing longer-term trending price moves.	What Is Swing Trading? Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. Swing traders may utilize fundamental analysis in addition to analyzing price trends and patterns. Key Takeaways Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move.Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following session at a substantially different price.Swing traders can take profits utilizing an established risk/reward ratio based on a stop-loss and profit target, or they can take profits or losses based on a technical indicator or price action movements. What is Swing Trading? Understanding Swing Trading Typically, swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions. The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes. Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity. Madelyn Goodnight / Investopedia Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis. Swing Trading and Technical Analysis Identifying swing trading opportunities relies heavily on technical analysis techniques. One of the fundamental tools in a swing trader's arsenal is chart analysis, where patterns and trends are studied to anticipate future price movements. Chart patterns such as head and shoulders, double tops and bottoms, triangles, and flags can signal potential swing trading opportunities. We'll talk more about these later. Another aspect of technical analysis for swing trading is the use of indicators. These mathematical calculations applied to price and volume data help traders gauge the strength and direction of a trend. Popular indicators among swing traders include moving averages, relative strength index (RSI), stochastic oscillator, and moving average convergence/divergence (MACD). For example, a swing trader may enter into a position when a stock's MACD hits a certain target, then the trader will sell that position if the MACD hits a different target. Finally, support and resistance levels play a role in identifying swing trading opportunities. Support represents a price level where buying interest is strong enough to prevent the price from declining further, while resistance is a level where selling interest is strong enough to prevent the price from rising further. Swing traders often look for price to bounce off support or break through resistance as confirmation of a potential trade setup. Advantages and Disadvantages of Swing Trading Many swing traders assess trades on a risk/reward basis. By analyzing the chart of an asset, they determine where they will enter, where they will place a stop-loss order, and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward ratio. On the other hand, risking $1 only to make $0.75 isn’t quite as favorable. Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving. Swing traders will often look for opportunities on the daily charts and may watch one-hour or 15-minute charts to find precise entry, stop-loss, and take-profit levels. Pros Swing trading requires less time to trade than day trading. It maximizes short-term profit potential by capturing the bulk of market swings. Swing traders can rely exclusively on technical analysis, simplifying the trading process. Cons Swing trade positions are subject to overnight and weekend market risk. Abrupt market reversals can result in substantial losses. Swing traders often miss longer-term trends in favor of short-term market moves. Day Trading vs. Swing Trading The distinction between swing trading and day trading is usually the holding time for positions. Swing trading often involves at least an overnight hold, whereas day traders close out positions before the market closes. To generalize, day trading positions are limited to a single day, while swing trading involves holding for several days to weeks. By holding overnight, the swing trader incurs the unpredictability of overnight risk, such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a day trading margin of 25%. Swing traders also have access to a margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example. Swing Trading Tactics A swing trader tends to look for multiday chart patterns. Some of the more common patterns involve moving average crossovers, cup and handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan. Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset’s price. This isn’t easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn’t required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win to produce an overall profit over many trades. Real-World Example of Swing Trading Image by Sabrina Jiang © Investopedia 2020 Using a historical example, the chart above shows a period where Apple (AAPL) had a strong price move higher. This was followed by a small cup and handle pattern, which often signals a continuation of the price rise if the stock moves above the high of the handle. In this case: The price does rise above the handle, triggering a possible buy near $192.70.One possible place to put a stop-loss is below the handle, marked by the rectangle, near $187.50.Based on the entry and stop-loss, the estimated risk for the trade is $5.20 per share ($192.70 - $187.50).If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 + (2 × $5.20) will provide this. Aside from risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn’t given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share—or, thought of another way, a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months. Other exit methods could be when the price crosses below a moving average (not shown), or when an indicator such as the stochastic oscillator crosses its signal line. What Are the 'Swings' in Swing Trading? Swing trading tries to identify entry and exit points into a security on the basis of its daily or weekly movements between cycles of optimism and pessimism. How Does Swing Trading Differ from Day Trading? Day trading, as the name suggests, involves making dozens of trades in a single day, based on technical analysis and sophisticated charting systems. Day trading seeks to scalp small profits multiple times a day and close out all positions at the end of the day. Swing traders do not close their positions on a daily basis and instead may hold onto them for weeks, months, or even longer. Swing traders may incorporate both technical and fundamental analysis, whereas a day trader is more likely to focus on using technical analysis. What Are Some Indicators of Tools Used by Swing Traders? Swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts, momentum indicators, price range tools, and measures of market sentiment. Swing traders are also on the lookout for technical patterns like the head and shoulders or cup and handle. Which Types of Securities Are Best Suited for Swing Trading? While a swing trader can enjoy success in any number of securities, the best candidates tend to be large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will often swing between broadly defined high and low points, and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction. Swing trades are also viable in actively traded commodities and forex markets. The Bottom Line Swing trading refers to a trading style that attempts to exploit short- to medium-term price movements in a security using favorable risk/reward metrics. Swing traders primarily rely on technical analysis to determine suitable entry and exit points, but they may also use fundamental analysis as an added filter. Large-cap stocks make suitable swing trading candidates, as they often oscillate in well-established, predictable ranges that frequently provide long and short trading opportunities. Swing trading offers advantages such as maximizing short-term profit potential, minimal time commitment, and flexibility of capital management. Key disadvantages include being subject to overnight and weekend market risk, along with missing longer-term trending price moves.	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https://www.investopedia.com/us-economy-news-today-april-15-8631409	US Economy News Today: An Old Economic Idea is Being Revived—It Could Impact Your Job	<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, a measure of how much consumers spend was far higher than economists expected and homebuilders continue to have a rosy outlook for their corner of the housing market. </p></div> <div class="comp liveblog__content mntl-sc-page mntl-block" data-bind-scroll-on-start="true" data-rail-bp="mntl-bp-md" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[1, 3, 6, 9, 12, 15, 18]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="liveblog__content_1-0"><div class="comp finance-liveblog-content mntl-liveblog-content mntl-block" id="finance-liveblog-content_1-0"><div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_1-0"><span class="heading-toc" id="toc-2024-04-15t195452897z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_1-0"><p><strong>Economists Once Again Underestimated Consumer Spending</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_1-0">April 15, 2024 03:54 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-15-8631409#toc-2024-04-15t195452897z" 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"> Economists on average expected far less spending from consumers in March. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> It's the latest in a string of hotter-than-expected reports on the economy and economists had thoughts on how today's retail sales numbers were so much stronger than they predicted. Below, we've rounded up a few comments from experts. </p> <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-pullquote" 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">Scott Anderson, chief U.S. economist for BMO Capital Markets </h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><p>The March retail sales report shows ongoing strength and resilience of the U.S. consumer despite aggressive monetary tightening and accelerating inflation. This report should reinforce market moves to scale back the number of Fed rate cuts in 2024 and should feed further gains in Treasury yields near-term. A relatively healthy consumer, as revealed in this report, also raises the prospect that U.S. economic growth this year will continue to exceed expectations.</p></div></div></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-pullquote" 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_2-0">Brian Wesbury, chief economist at First Trust Advisors</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p> It’s important to remember that a key driver of overall spending is inflation. While overall retail sales are up 4.0% in the last year and sit at a record high unadjusted for inflation, “real” (inflation-adjusted) retail sales are up just 0.5% in the last year, and have remained stagnant for nearly two years after peaking in April 2022. It has been 40 years since the US had an inflation problem, so investors should be aware that it can distort data.</p></div></div></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-pullquote" 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_3-0">Bank of America analysts</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><p>The retail sales reports for January and February included significant downward revisions to prior months, which pointed to a weakening trajectory for retail spending. By contrast, the March report showed large upward revisions to the January and February data. ...Along with the robust gains in March, these revisions meaningfully alter the narrative around retail spending, which now looks solid for 1Q.</p></div></div></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-pullquote" 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_4-0">Michael Pearce, deputy chief U.S. economist at Oxford Economics</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>The jump in headline sales was driven by a leap in nonstore sales, which could reflect some seasonal adjustment issues, particularly with the new Amazon spring sales event occurring in late March and the earlier timing of Easter, which may have shifted forward some spending. Even accounting for that, the report was undeniably strong</p></div></div></div></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="1" id="mntl-sc-block-adslot_1-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_2-0"><span class="heading-toc" id="toc-2024-04-15t161737321z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_2-0"><p><strong>Good Times Roll On For Homebuilders In April</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_2-0">April 15, 2024 12:17 PM EDT</div> <button aria-label="Copy Link" class="comp mntl-blogpost__copylink mntl-copy-link-button mntl-button" data-link="https://www.investopedia.com/us-economy-news-today-april-15-8631409#toc-2024-04-15t161737321z" id="mntl-blogpost__copylink_2-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> Hardly anyone wants to sell their house—and that suits homebuilders just fine, a measure of builder confidence indicated Monday.<br/><br/>The National Association of Home Builders/Wells Fargo Housing Market Index, which measures market conditions for builders, stayed at 51 in April, the same as in March, the NAHB said Monday.<span class="ql-inline-citation" data-cite="2"></span> The report was in line with forecasts and showed confidence stayed above the “breakeven” point of 50, indicating a favorable market.<br/><br/>New houses are in demand, possibly because high interest rates on mortgages have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-lock-in-effect-8414620">“locked” many homeowners in place</a>. Those with fixed-rate mortgages secured during times of low interest rates are reluctant to give them up as the average rate ticks up closer to 7%.<br/><br/>“The gap between the very low rates that most homeowners locked in from 2020-to-21 has made it prohibitively expensive for many people to move home,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary. “This has allowed homebuilders to grab market share, and the current level of the NAHB Index is consistent with a further uptick in new home sales over the next couple of months.”<br/> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="2" id="mntl-sc-block-adslot_2-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_3-0"><span class="heading-toc" id="toc-2024-04-15t152845876z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_3-0"><p><strong>Business Inventories Expand in February, Meeting Expectations</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_3-0">April 15, 2024 11:28 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-15-8631409#toc-2024-04-15t152845876z" id="mntl-blogpost__copylink_3-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> After coming in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-march-14-8609006#toc-2024-03-14t150128042z">lower than expected last month</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/businessinventories.asp">business inventories</a> in February grew 0.4% to meet economists' expectations. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Data from the Census Bureau showed wholesalers and manufacturers had $2.57 trillion in inventory at the end of February, higher by 1% than the same period last year<span class="ql-inline-citation" data-cite="1"></span> The inventories-to-sale ratio, an indication of how quickly wholesalers can sell their warehoused products, came in at 1.38, a tick better than the February 2023 ratio. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> While inventories grew in February, the rate of change in the first quarter is lower when compared with the final months of 2023, which could weigh on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/">gross domestic product (GDP)</a>, Oxford Economics wrote in a report. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> “It is the change in inventories that matters for growth, so inventories are poised to weigh on Q1 growth to a similar extent as they did in Q4 2023,” wrote Bernard Yaros, lead U.S. economist at Oxford Economics. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> The Census Bureau data comes as U.S. retail sales data released today shows <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">customers continue to spend</a>. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> “Retail inventories posted the fastest gain, followed by wholesalers' stocks,” Yaros wrote. “Manufacturers' inventories increased at their strongest pace since August and ended a two-month streak of declines.” </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> <em>-Terry Lane</em> </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="3" id="mntl-sc-block-adslot_3-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_4-0"><span class="heading-toc" id="toc-2024-04-15t142725308z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_4-0"><p><strong>Consumers Spent More in March Than Expected</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_4-0">April 15, 2024 10:27 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-15-8631409#toc-2024-04-15t142725308z" id="mntl-blogpost__copylink_4-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> March was a month of full shopping carts at shops and online stores, as consumers spent enough money to cause another surge in retail sales. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Sales of food and retail goods rose 0.7% in March from February, the Census Bureau said Monday. That was more than double the 0.3% increase forecasters had expected according to a survey of economists by Dow Jones Newswires and <em>The Wall Street Journal</em>. On top of that, February’s monthly sales increase was upwardly revised to a 0.9% gain from 0.6%. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> The report was the latest in a string of data showing U.S. consumers continue to spend freely despite high prices and high borrowing costs putting pressure on household budgets. Surprisingly resilient consumer spending has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/us-economy-news-today-march-28-8621483">kept the economy growing</a> in recent months, fending off a long-anticipated recession, as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280">a good job market</a> and heavy consumer spending continue to boost one another.<br/><br/>"This report should dispel any thoughts that consumer spending has downshifted,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a commentary. “Given the various stimulus programs have stopped and money from them has been spent, consumer spending now rests firmly on incomes from paychecks, which continue to expand along with the labor market. This means a solid expansion should continue." </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Read more about Monday's retail sales report <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">here</a>. </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="4" id="mntl-sc-block-adslot_4-0"></div> <div class="comp mntl-liveblog-item mntl-block" id="mntl-liveblog-item_5-0"><span class="heading-toc" id="toc-2024-04-15t131609433z"></span> <h2 class="comp mntl-blogpost__headline mntl-text-block" id="mntl-blogpost__headline_5-0"><p><strong>Reduced Workweeks Are An Old Idea—But They're Gaining Traction</strong></p></h2> <div class="comp mntl-blogpost__publishedDate mntl-text-block" id="mntl-blogpost__publishedDate_5-0">April 15, 2024 09:16 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-15-8631409#toc-2024-04-15t131609433z" id="mntl-blogpost__copylink_5-0"> </button> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Ever since the industrial age began, economists have theorized that the introduction of machinery and other labor-saving devices would do just that—save labor, and allow us all to work less while enjoying the same or better standard of living. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> In 1930, economist John Meynard Keynes looked at the astonishingly fast improvement of industrial technology during the 20th century and theorized that in the future, the major economic problem would be keeping busy. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> “We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines,” he said. “But beyond this, we shall endeavor to spread the bread thin on the butter—to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while,” he wrote in an essay. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> This idea is gaining traction in the U.S. once again nearly 100 years later in the form of a four-day workweek. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Today, the prospect of artificial intelligence technology supercharging automation is fueling dreams of a more leisurely work life, whether that arrives by a federal law, or by employers adopting it voluntarily. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Some U.S. companies have adopted four-day workweeks after a successful trial of the concept in Great Britain. Businesses that have adopted the reduced schedule cite numerous benefits including improved recruitment and in some cases improved productivity. Some also point to increased spending on travel and leisure that an extra day off would spur as a benefit to the economy. </p> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Read more about the impact on the economy if the four-day workweek was instated <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/economic-impact-of-four-day-workweek-8630936">here</a>. </p></div> <div class="comp mntl-sc-block-adslot mntl-block" data-item-index="5" id="mntl-sc-block-adslot_5-0"></div></div></div></div> <div class="comp textnote-placeholder mntl-block" id="textnote-placeholder_1-0"></div> <div class="comp textnote mm-ads-gpt-adunit gpt textnote" id="textnote_1-0"> <div class="wrapper" id="textnote"></div> </div> </div>	Welcome to Investopedia's economics live blog, where we explain what the day's news says about the state of the U.S. economy and how that's likely to affect your finances. Here we compile data releases, economic reports, quotes from expert sources and anything else that helps explain economic issues and why they matter to you. Today, a measure of how much consumers spend was far higher than economists expected and homebuilders continue to have a rosy outlook for their corner of the housing market. ## Economists Once Again Underestimated Consumer Spending April 15, 2024 03:54 PM EDT Economists on average expected far less spending from consumers in March. It's the latest in a string of hotter-than-expected reports on the economy and economists had thoughts on how today's retail sales numbers were so much stronger than they predicted. Below, we've rounded up a few comments from experts. ### Scott Anderson, chief U.S. economist for BMO Capital Markets The March retail sales report shows ongoing strength and resilience of the U.S. consumer despite aggressive monetary tightening and accelerating inflation. This report should reinforce market moves to scale back the number of Fed rate cuts in 2024 and should feed further gains in Treasury yields near-term. A relatively healthy consumer, as revealed in this report, also raises the prospect that U.S. economic growth this year will continue to exceed expectations. ### Brian Wesbury, chief economist at First Trust Advisors It’s important to remember that a key driver of overall spending is inflation. While overall retail sales are up 4.0% in the last year and sit at a record high unadjusted for inflation, “real” (inflation-adjusted) retail sales are up just 0.5% in the last year, and have remained stagnant for nearly two years after peaking in April 2022. It has been 40 years since the US had an inflation problem, so investors should be aware that it can distort data. ### Bank of America analysts The retail sales reports for January and February included significant downward revisions to prior months, which pointed to a weakening trajectory for retail spending. By contrast, the March report showed large upward revisions to the January and February data. ...Along with the robust gains in March, these revisions meaningfully alter the narrative around retail spending, which now looks solid for 1Q. ### Michael Pearce, deputy chief U.S. economist at Oxford Economics The jump in headline sales was driven by a leap in nonstore sales, which could reflect some seasonal adjustment issues, particularly with the new Amazon spring sales event occurring in late March and the earlier timing of Easter, which may have shifted forward some spending. Even accounting for that, the report was undeniably strong ## Good Times Roll On For Homebuilders In April April 15, 2024 12:17 PM EDT Hardly anyone wants to sell their house—and that suits homebuilders just fine, a measure of builder confidence indicated Monday. The National Association of Home Builders/Wells Fargo Housing Market Index, which measures market conditions for builders, stayed at 51 in April, the same as in March, the NAHB said Monday. The report was in line with forecasts and showed confidence stayed above the “breakeven” point of 50, indicating a favorable market. New houses are in demand, possibly because high interest rates on mortgages have [“locked” many homeowners in place](https://www.investopedia.com/the-lock-in-effect-8414620). Those with fixed-rate mortgages secured during times of low interest rates are reluctant to give them up as the average rate ticks up closer to 7%. “The gap between the very low rates that most homeowners locked in from 2020-to-21 has made it prohibitively expensive for many people to move home,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary. “This has allowed homebuilders to grab market share, and the current level of the NAHB Index is consistent with a further uptick in new home sales over the next couple of months.” ## Business Inventories Expand in February, Meeting Expectations April 15, 2024 11:28 AM EDT After coming in [lower than expected last month](https://www.investopedia.com/us-economy-news-today-march-14-8609006#toc-2024-03-14t150128042z), [business inventories](https://www.investopedia.com/terms/b/businessinventories.asp) in February grew 0.4% to meet economists' expectations. Data from the Census Bureau showed wholesalers and manufacturers had $2.57 trillion in inventory at the end of February, higher by 1% than the same period last year The inventories-to-sale ratio, an indication of how quickly wholesalers can sell their warehoused products, came in at 1.38, a tick better than the February 2023 ratio. While inventories grew in February, the rate of change in the first quarter is lower when compared with the final months of 2023, which could weigh on [gross domestic product (GDP)](https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/), Oxford Economics wrote in a report. “It is the change in inventories that matters for growth, so inventories are poised to weigh on Q1 growth to a similar extent as they did in Q4 2023,” wrote Bernard Yaros, lead U.S. economist at Oxford Economics. The Census Bureau data comes as U.S. retail sales data released today shows [customers continue to spend](https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449). “Retail inventories posted the fastest gain, followed by wholesalers' stocks,” Yaros wrote. “Manufacturers' inventories increased at their strongest pace since August and ended a two-month streak of declines.” -Terry Lane ## Consumers Spent More in March Than Expected April 15, 2024 10:27 AM EDT March was a month of full shopping carts at shops and online stores, as consumers spent enough money to cause another surge in retail sales. Sales of food and retail goods rose 0.7% in March from February, the Census Bureau said Monday. That was more than double the 0.3% increase forecasters had expected according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. On top of that, February’s monthly sales increase was upwardly revised to a 0.9% gain from 0.6%. The report was the latest in a string of data showing U.S. consumers continue to spend freely despite high prices and high borrowing costs putting pressure on household budgets. Surprisingly resilient consumer spending has [kept the economy growing](https://www.investopedia.com/us-economy-news-today-march-28-8621483) in recent months, fending off a long-anticipated recession, as [a good job market](https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280) and heavy consumer spending continue to boost one another. "This report should dispel any thoughts that consumer spending has downshifted,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a commentary. “Given the various stimulus programs have stopped and money from them has been spent, consumer spending now rests firmly on incomes from paychecks, which continue to expand along with the labor market. This means a solid expansion should continue." Read more about Monday's retail sales report [here](https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449). ## Reduced Workweeks Are An Old Idea—But They're Gaining Traction April 15, 2024 09:16 AM EDT Ever since the industrial age began, economists have theorized that the introduction of machinery and other labor-saving devices would do just that—save labor, and allow us all to work less while enjoying the same or better standard of living. In 1930, economist John Meynard Keynes looked at the astonishingly fast improvement of industrial technology during the 20th century and theorized that in the future, the major economic problem would be keeping busy. “We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines,” he said. “But beyond this, we shall endeavor to spread the bread thin on the butter—to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while,” he wrote in an essay. This idea is gaining traction in the U.S. once again nearly 100 years later in the form of a four-day workweek. Today, the prospect of artificial intelligence technology supercharging automation is fueling dreams of a more leisurely work life, whether that arrives by a federal law, or by employers adopting it voluntarily. Some U.S. companies have adopted four-day workweeks after a successful trial of the concept in Great Britain. Businesses that have adopted the reduced schedule cite numerous benefits including improved recruitment and in some cases improved productivity. Some also point to increased spending on travel and leisure that an extra day off would spur as a benefit to the economy. Read more about the impact on the economy if the four-day workweek was instated [here](https://www.investopedia.com/economic-impact-of-four-day-workweek-8630936).	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, a measure of how much consumers spend was far higher than economists expected and homebuilders continue to have a rosy outlook for their corner of the housing market. Economists Once Again Underestimated Consumer Spending April 15, 2024 03:54 PM EDT Economists on average expected far less spending from consumers in March. It's the latest in a string of hotter-than-expected reports on the economy and economists had thoughts on how today's retail sales numbers were so much stronger than they predicted. Below, we've rounded up a few comments from experts. Scott Anderson, chief U.S. economist for BMO Capital Markets The March retail sales report shows ongoing strength and resilience of the U.S. consumer despite aggressive monetary tightening and accelerating inflation. This report should reinforce market moves to scale back the number of Fed rate cuts in 2024 and should feed further gains in Treasury yields near-term. A relatively healthy consumer, as revealed in this report, also raises the prospect that U.S. economic growth this year will continue to exceed expectations. Brian Wesbury, chief economist at First Trust Advisors It’s important to remember that a key driver of overall spending is inflation. While overall retail sales are up 4.0% in the last year and sit at a record high unadjusted for inflation, “real” (inflation-adjusted) retail sales are up just 0.5% in the last year, and have remained stagnant for nearly two years after peaking in April 2022. It has been 40 years since the US had an inflation problem, so investors should be aware that it can distort data. Bank of America analysts The retail sales reports for January and February included significant downward revisions to prior months, which pointed to a weakening trajectory for retail spending. By contrast, the March report showed large upward revisions to the January and February data. ...Along with the robust gains in March, these revisions meaningfully alter the narrative around retail spending, which now looks solid for 1Q. Michael Pearce, deputy chief U.S. economist at Oxford Economics The jump in headline sales was driven by a leap in nonstore sales, which could reflect some seasonal adjustment issues, particularly with the new Amazon spring sales event occurring in late March and the earlier timing of Easter, which may have shifted forward some spending. Even accounting for that, the report was undeniably strong Good Times Roll On For Homebuilders In April April 15, 2024 12:17 PM EDT Hardly anyone wants to sell their house—and that suits homebuilders just fine, a measure of builder confidence indicated Monday.The National Association of Home Builders/Wells Fargo Housing Market Index, which measures market conditions for builders, stayed at 51 in April, the same as in March, the NAHB said Monday. The report was in line with forecasts and showed confidence stayed above the “breakeven” point of 50, indicating a favorable market.New houses are in demand, possibly because high interest rates on mortgages have “locked” many homeowners in place. Those with fixed-rate mortgages secured during times of low interest rates are reluctant to give them up as the average rate ticks up closer to 7%.“The gap between the very low rates that most homeowners locked in from 2020-to-21 has made it prohibitively expensive for many people to move home,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a commentary. “This has allowed homebuilders to grab market share, and the current level of the NAHB Index is consistent with a further uptick in new home sales over the next couple of months.” Business Inventories Expand in February, Meeting Expectations April 15, 2024 11:28 AM EDT After coming in lower than expected last month, business inventories in February grew 0.4% to meet economists' expectations. Data from the Census Bureau showed wholesalers and manufacturers had $2.57 trillion in inventory at the end of February, higher by 1% than the same period last year The inventories-to-sale ratio, an indication of how quickly wholesalers can sell their warehoused products, came in at 1.38, a tick better than the February 2023 ratio. While inventories grew in February, the rate of change in the first quarter is lower when compared with the final months of 2023, which could weigh on gross domestic product (GDP), Oxford Economics wrote in a report. “It is the change in inventories that matters for growth, so inventories are poised to weigh on Q1 growth to a similar extent as they did in Q4 2023,” wrote Bernard Yaros, lead U.S. economist at Oxford Economics. The Census Bureau data comes as U.S. retail sales data released today shows customers continue to spend. “Retail inventories posted the fastest gain, followed by wholesalers' stocks,” Yaros wrote. “Manufacturers' inventories increased at their strongest pace since August and ended a two-month streak of declines.” -Terry Lane Consumers Spent More in March Than Expected April 15, 2024 10:27 AM EDT March was a month of full shopping carts at shops and online stores, as consumers spent enough money to cause another surge in retail sales. Sales of food and retail goods rose 0.7% in March from February, the Census Bureau said Monday. That was more than double the 0.3% increase forecasters had expected according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. On top of that, February’s monthly sales increase was upwardly revised to a 0.9% gain from 0.6%. The report was the latest in a string of data showing U.S. consumers continue to spend freely despite high prices and high borrowing costs putting pressure on household budgets. Surprisingly resilient consumer spending has kept the economy growing in recent months, fending off a long-anticipated recession, as a good job market and heavy consumer spending continue to boost one another."This report should dispel any thoughts that consumer spending has downshifted,” Robert Frick, corporate economist with Navy Federal Credit Union, wrote in a commentary. “Given the various stimulus programs have stopped and money from them has been spent, consumer spending now rests firmly on incomes from paychecks, which continue to expand along with the labor market. This means a solid expansion should continue." Read more about Monday's retail sales report here. Reduced Workweeks Are An Old Idea—But They're Gaining Traction April 15, 2024 09:16 AM EDT Ever since the industrial age began, economists have theorized that the introduction of machinery and other labor-saving devices would do just that—save labor, and allow us all to work less while enjoying the same or better standard of living. In 1930, economist John Meynard Keynes looked at the astonishingly fast improvement of industrial technology during the 20th century and theorized that in the future, the major economic problem would be keeping busy. “We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines,” he said. “But beyond this, we shall endeavor to spread the bread thin on the butter—to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while,” he wrote in an essay. This idea is gaining traction in the U.S. once again nearly 100 years later in the form of a four-day workweek. Today, the prospect of artificial intelligence technology supercharging automation is fueling dreams of a more leisurely work life, whether that arrives by a federal law, or by employers adopting it voluntarily. Some U.S. companies have adopted four-day workweeks after a successful trial of the concept in Great Britain. Businesses that have adopted the reduced schedule cite numerous benefits including improved recruitment and in some cases improved productivity. Some also point to increased spending on travel and leisure that an extra day off would spur as a benefit to the economy. Read more about the impact on the economy if the four-day workweek was instated here.	[ [ "“locked” many homeowners in place", "https://www.investopedia.com/the-lock-in-effect-8414620" ], [ "lower than expected last month", "https://www.investopedia.com/us-economy-news-today-march-14-8609006#toc-2024-03-14t150128042z" ], [ "business inventories", "https://www.investopedia.com/terms/b/businessinventories.asp" ], [ "gross domestic product (GDP)", "https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/" ], [ "customers continue to spend", "https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449" ], [ "kept the economy growing", "https://www.investopedia.com/us-economy-news-today-march-28-8621483" ], [ "a good job market", "https://www.investopedia.com/employers-hired-far-more-than-expected-in-march-8625280" ], [ "here", "https://www.investopedia.com/consumers-spent-heavily-in-march-fueling-an-already-hot-economy-8631449" ], [ "here", "https://www.investopedia.com/economic-impact-of-four-day-workweek-8630936" ] ]
https://www.investopedia.com/if-company-offers-subpar-401k-5443069	What To Do if Your Company Offers a Subpar 401(k) Option	<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"> Employer-sponsored 401(k) plans can be a great way to save for retirement, but some plans are better (or worse) than others. Though your employer has 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> duty to provide well-chosen investment options for your 401(k),<span class="ql-inline-citation" data-cite="8"></span> and a responsible employer will try to keep the fees you pay to a minimum, some plans have both limited options and high fees.<span class="ql-inline-citation" data-cite="8"></span> In this guide, we'll explain how to assess your <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k) plan</a>, how to try to improve it, and what to do if you're stuck with a less-than-ideal one. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul> <li>401(k) plans vary from company to company in the investment options they offer.</li> <li>A good plan will provide a diverse menu of investment options with reasonable fees.</li> <li>Even if you think your plan falls short, it is probably worth contributing enough to obtain any match that your employer offers.</li> <li>You can also save for retirement through a tax-advantaged <a class="pseudoStyle" 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> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp">health savings account (HSA)</a>, as well as through a regular mutual fund or brokerage account. </li> </ul></div></div></div> <span class="heading-toc" id="toc-how-to-assess-your-401k-options"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_5-0"> <span class="mntl-sc-block-heading__text"> How To Assess Your 401(k) Options </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The first step, if you suspect your company's 401(k) is subpar, is to see if you're right. Initially, <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">focus on the fees you are paying</a>. Fees can make a huge difference in how much money you'll have accumulated in your plan by the time you're ready to retire. </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"> In addition to any administrative fees that your plan charges, each of your investments will carry its own fees. These fees are expressed as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratio</a> and can be found on your annual account statements.<span class="ql-inline-citation" data-cite="7"></span> If you are paying more than 1% a year, especially for standard types of investments like large-cap stock mutual funds, you may have a high-cost plan. </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"> You should also look at the range of investment choices your plan offers. Employers are wary of including too many high-risk options in their 401(k) plans, but some take this too far. If your plan is lacking solid options for standard types of investments, this can also be an indication that your plan is not as good as it could be. </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"> If you find that your plan is not up to scratch after completing this research, your first step should be to talk with your employer or HR department. Be as specific as possible with your criticisms of your 401(k) and ask them to address your concerns. Some employers are open to feedback like this and it may improve the plan for everyone.<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-making-the-most-of-a-bad-401k"></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"> Making the Most of a Bad 401(k) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> If your employer can't or won't improve your 401(k), you may be tempted not to participate at all. However, if your employer offers a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/matchingcontribution.asp">matching contribution</a> as part of your plan, it's almost always worth taking advantage of this. No matter how high the fees on your 401(k) are, it's unlikely they will be more costly than the benefit you'll receive from a matching contribution. Financial planners typically advise contributing at least enough to your plan to get the full employer match. </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"> There are also a number of ways of investing wisely, even in the most limited 401(k) plans: </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>Minimize your fees by choosing low-cost <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index funds</a> if your plan offers them.</li> <li>Diversify outside of your 401(k) plan. In most cases, you should try to build a well-diversified 401(k) portfolio. However, if your 401(k) is missing a good option in a major <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/assetclasses.asp">asset class</a> (foreign stocks, say), you can invest in that elsewhere to achieve the overall balance you want. </li> </ul> <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>Some 401(k) plans now offer a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerage_window.asp">brokerage window</a>. This allows you to invest outside of the options normally available via your 401(k). This opportunity might come with extra fees and costs, though, so be sure to ask.</p></div></div></div> <span class="heading-toc" id="toc-going-beyond-your-401k"></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"> Going Beyond Your 401(k) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> As we've mentioned, even if your 401(k) isn't as good as it could be, you should usually try to contribute enough to maximize your employer's matching contributions by using the best investment options available through your plan. However, you may be lucky enough to be able to save more for retirement, and if your 401(k) is not great, you might want to invest outside of your employer's plan. </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 are several options open to you. The best place to start, for most investors, will be 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>. An IRA offers similar tax advantages to a 401(k) plan, but you'll have much broader options when it comes to choosing your own investments. One drawback is that the contribution limits for IRAs are much lower than those for 401(k) plans. </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 second option could be to fund a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp">health savings account (HSA)</a> if you have a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hdhp.asp">high-deductible health plan</a>. HSAs have similar tax advantages to 401(k)s and IRAs, and while the money must be used for qualified health expenses, you don't have to spend it right away and can use it to cover your health-related costs in retirement. </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"> Finally, you might consider saving for retirement via a regular mutual fund or <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/brokerageaccount.asp">brokerage account</a>. The disadvantage of this route is that you'll lose many of the tax advantages of a 401(k), IRA, or HSA. The advantage—if your 401(k) is bad—is that you might pay far lower fees. You'll also have an almost limitless number of investment options.<br/> </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_32-0"><span class="heading-toc" id="toc-can-your-employer-make-you-contribute-to-a-401k"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Your Employer Make You Contribute to a 401(k)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Some employers have 401(k) plans with an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/auto-enrollment-plan.asp">automatic enrollment</a> feature that allows them to withhold a certain amount of an employee's pay and contribute it to a 401(k) on their behalf. However, if your employer does that, you have the right to opt out.<span class="ql-inline-citation" data-cite="9"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <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-is-your-employer-required-to-offer-a-401k-match"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Your Employer Required To Offer a 401(k) Match?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>No, that's entirely optional. One 2021 survey reported that 82% of employers offered some form of match, while 18% didn't.<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_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-good-employer-match-for-a-401k"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is a Good Employer Match for a 401(k)?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The average employer match for 401(k) accounts is 4.4%, according to Vanguard's most recent annual report on investing behavior.<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_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"> Not all 401(k) plans are created equal. Some have high fees while others may severely limit your investment options. If either applies to your 401(k), you should talk to your employer and ask them to improve your plan. If you are stuck with a bad 401(k), you should generally still contribute enough to take full advantage of your employer's matching contributions, if any. After that point, you may want to invest elsewhere, such as in an IRA or HSA. If you reach your contribution limits with those options, you can consider saving for retirement via a regular investment account but you'll lose the tax advantages of a 401(k).<br> </br></p></div>	Employer-sponsored 401(k) plans can be a great way to save for retirement, but some plans are better (or worse) than others. Though your employer has a [fiduciary](https://www.investopedia.com/terms/f/fiduciary.asp) duty to provide well-chosen investment options for your 401(k), and a responsible employer will try to keep the fees you pay to a minimum, some plans have both limited options and high fees. In this guide, we'll explain how to assess your [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp), how to try to improve it, and what to do if you're stuck with a less-than-ideal one. ### Key Takeaways * 401(k) plans vary from company to company in the investment options they offer. * A good plan will provide a diverse menu of investment options with reasonable fees. * Even if you think your plan falls short, it is probably worth contributing enough to obtain any match that your employer offers. * You can also save for retirement through a tax-advantaged [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp) or [health savings account (HSA)](https://www.investopedia.com/terms/h/hsa.asp), as well as through a regular mutual fund or brokerage account. ## How To Assess Your 401(k) Options The first step, if you suspect your company's 401(k) is subpar, is to see if you're right. Initially, [focus on the fees you are paying](https://www.investopedia.com/articles/basics/11/investors-fees-cheat-sheet.asp). Fees can make a huge difference in how much money you'll have accumulated in your plan by the time you're ready to retire. In addition to any administrative fees that your plan charges, each of your investments will carry its own fees. These fees are expressed as an [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) and can be found on your annual account statements. If you are paying more than 1% a year, especially for standard types of investments like large-cap stock mutual funds, you may have a high-cost plan. You should also look at the range of investment choices your plan offers. Employers are wary of including too many high-risk options in their 401(k) plans, but some take this too far. If your plan is lacking solid options for standard types of investments, this can also be an indication that your plan is not as good as it could be. If you find that your plan is not up to scratch after completing this research, your first step should be to talk with your employer or HR department. Be as specific as possible with your criticisms of your 401(k) and ask them to address your concerns. Some employers are open to feedback like this and it may improve the plan for everyone. ## Making the Most of a Bad 401(k) If your employer can't or won't improve your 401(k), you may be tempted not to participate at all. However, if your employer offers a [matching contribution](https://www.investopedia.com/terms/m/matchingcontribution.asp) as part of your plan, it's almost always worth taking advantage of this. No matter how high the fees on your 401(k) are, it's unlikely they will be more costly than the benefit you'll receive from a matching contribution. Financial planners typically advise contributing at least enough to your plan to get the full employer match. There are also a number of ways of investing wisely, even in the most limited 401(k) plans: * Minimize your fees by choosing low-cost [index funds](https://www.investopedia.com/terms/i/indexfund.asp) if your plan offers them. * Diversify outside of your 401(k) plan. In most cases, you should try to build a well-diversified 401(k) portfolio. However, if your 401(k) is missing a good option in a major [asset class](https://www.investopedia.com/terms/a/assetclasses.asp) (foreign stocks, say), you can invest in that elsewhere to achieve the overall balance you want. ### Note Some 401(k) plans now offer a [brokerage window](https://www.investopedia.com/terms/b/brokerage_window.asp). This allows you to invest outside of the options normally available via your 401(k). This opportunity might come with extra fees and costs, though, so be sure to ask. ## Going Beyond Your 401(k) As we've mentioned, even if your 401(k) isn't as good as it could be, you should usually try to contribute enough to maximize your employer's matching contributions by using the best investment options available through your plan. However, you may be lucky enough to be able to save more for retirement, and if your 401(k) is not great, you might want to invest outside of your employer's plan. There are several options open to you. The best place to start, for most investors, will be an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). An IRA offers similar tax advantages to a 401(k) plan, but you'll have much broader options when it comes to choosing your own investments. One drawback is that the contribution limits for IRAs are much lower than those for 401(k) plans. The second option could be to fund a [health savings account (HSA)](https://www.investopedia.com/terms/h/hsa.asp) if you have a [high-deductible health plan](https://www.investopedia.com/terms/h/hdhp.asp). HSAs have similar tax advantages to 401(k)s and IRAs, and while the money must be used for qualified health expenses, you don't have to spend it right away and can use it to cover your health-related costs in retirement. Finally, you might consider saving for retirement via a regular mutual fund or [brokerage account](https://www.investopedia.com/terms/b/brokerageaccount.asp). The disadvantage of this route is that you'll lose many of the tax advantages of a 401(k), IRA, or HSA. The advantage—if your 401(k) is bad—is that you might pay far lower fees. You'll also have an almost limitless number of investment options. ## Can Your Employer Make You Contribute to a 401(k)? Some employers have 401(k) plans with an [automatic enrollment](https://www.investopedia.com/terms/a/auto-enrollment-plan.asp) feature that allows them to withhold a certain amount of an employee's pay and contribute it to a 401(k) on their behalf. However, if your employer does that, you have the right to opt out. ## Is Your Employer Required To Offer a 401(k) Match? No, that's entirely optional. One 2021 survey reported that 82% of employers offered some form of match, while 18% didn't. ## What Is a Good Employer Match for a 401(k)? The average employer match for 401(k) accounts is 4.4%, according to Vanguard's most recent annual report on investing behavior. ## The Bottom Line Not all 401(k) plans are created equal. Some have high fees while others may severely limit your investment options. If either applies to your 401(k), you should talk to your employer and ask them to improve your plan. If you are stuck with a bad 401(k), you should generally still contribute enough to take full advantage of your employer's matching contributions, if any. After that point, you may want to invest elsewhere, such as in an IRA or HSA. If you reach your contribution limits with those options, you can consider saving for retirement via a regular investment account but you'll lose the tax advantages of a 401(k).	Employer-sponsored 401(k) plans can be a great way to save for retirement, but some plans are better (or worse) than others. Though your employer has a fiduciary duty to provide well-chosen investment options for your 401(k), and a responsible employer will try to keep the fees you pay to a minimum, some plans have both limited options and high fees. In this guide, we'll explain how to assess your 401(k) plan, how to try to improve it, and what to do if you're stuck with a less-than-ideal one. Key Takeaways 401(k) plans vary from company to company in the investment options they offer. A good plan will provide a diverse menu of investment options with reasonable fees. Even if you think your plan falls short, it is probably worth contributing enough to obtain any match that your employer offers. You can also save for retirement through a tax-advantaged individual retirement account (IRA) or health savings account (HSA), as well as through a regular mutual fund or brokerage account. How To Assess Your 401(k) Options The first step, if you suspect your company's 401(k) is subpar, is to see if you're right. Initially, focus on the fees you are paying. Fees can make a huge difference in how much money you'll have accumulated in your plan by the time you're ready to retire. In addition to any administrative fees that your plan charges, each of your investments will carry its own fees. These fees are expressed as an expense ratio and can be found on your annual account statements. If you are paying more than 1% a year, especially for standard types of investments like large-cap stock mutual funds, you may have a high-cost plan. You should also look at the range of investment choices your plan offers. Employers are wary of including too many high-risk options in their 401(k) plans, but some take this too far. If your plan is lacking solid options for standard types of investments, this can also be an indication that your plan is not as good as it could be. If you find that your plan is not up to scratch after completing this research, your first step should be to talk with your employer or HR department. Be as specific as possible with your criticisms of your 401(k) and ask them to address your concerns. Some employers are open to feedback like this and it may improve the plan for everyone. Making the Most of a Bad 401(k) If your employer can't or won't improve your 401(k), you may be tempted not to participate at all. However, if your employer offers a matching contribution as part of your plan, it's almost always worth taking advantage of this. No matter how high the fees on your 401(k) are, it's unlikely they will be more costly than the benefit you'll receive from a matching contribution. Financial planners typically advise contributing at least enough to your plan to get the full employer match. There are also a number of ways of investing wisely, even in the most limited 401(k) plans: Minimize your fees by choosing low-cost index funds if your plan offers them. Diversify outside of your 401(k) plan. In most cases, you should try to build a well-diversified 401(k) portfolio. However, if your 401(k) is missing a good option in a major asset class (foreign stocks, say), you can invest in that elsewhere to achieve the overall balance you want. Note Some 401(k) plans now offer a brokerage window. This allows you to invest outside of the options normally available via your 401(k). This opportunity might come with extra fees and costs, though, so be sure to ask. Going Beyond Your 401(k) As we've mentioned, even if your 401(k) isn't as good as it could be, you should usually try to contribute enough to maximize your employer's matching contributions by using the best investment options available through your plan. However, you may be lucky enough to be able to save more for retirement, and if your 401(k) is not great, you might want to invest outside of your employer's plan. There are several options open to you. The best place to start, for most investors, will be an individual retirement account (IRA). An IRA offers similar tax advantages to a 401(k) plan, but you'll have much broader options when it comes to choosing your own investments. One drawback is that the contribution limits for IRAs are much lower than those for 401(k) plans. The second option could be to fund a health savings account (HSA) if you have a high-deductible health plan. HSAs have similar tax advantages to 401(k)s and IRAs, and while the money must be used for qualified health expenses, you don't have to spend it right away and can use it to cover your health-related costs in retirement. Finally, you might consider saving for retirement via a regular mutual fund or brokerage account. The disadvantage of this route is that you'll lose many of the tax advantages of a 401(k), IRA, or HSA. The advantage—if your 401(k) is bad—is that you might pay far lower fees. You'll also have an almost limitless number of investment options. Can Your Employer Make You Contribute to a 401(k)? Some employers have 401(k) plans with an automatic enrollment feature that allows them to withhold a certain amount of an employee's pay and contribute it to a 401(k) on their behalf. However, if your employer does that, you have the right to opt out. Is Your Employer Required To Offer a 401(k) Match? No, that's entirely optional. One 2021 survey reported that 82% of employers offered some form of match, while 18% didn't. What Is a Good Employer Match for a 401(k)? The average employer match for 401(k) accounts is 4.4%, according to Vanguard's most recent annual report on investing behavior. The Bottom Line Not all 401(k) plans are created equal. Some have high fees while others may severely limit your investment options. If either applies to your 401(k), you should talk to your employer and ask them to improve your plan. If you are stuck with a bad 401(k), you should generally still contribute enough to take full advantage of your employer's matching contributions, if any. After that point, you may want to invest elsewhere, such as in an IRA or HSA. If you reach your contribution limits with those options, you can consider saving for retirement via a regular investment account but you'll lose the tax advantages of a 401(k).	[ [ "fiduciary", "https://www.investopedia.com/terms/f/fiduciary.asp" ], [ "401(k) plan", "https://www.investopedia.com/terms/1/401kplan.asp" ], [ "individual retirement account (IRA)", "https://www.investopedia.com/terms/i/ira.asp" ], [ "health savings account (HSA)", "https://www.investopedia.com/terms/h/hsa.asp" ], [ "focus on the fees you are paying", "https://www.investopedia.com/articles/basics/11/investors-fees-cheat-sheet.asp" ], [ "expense ratio", "https://www.investopedia.com/terms/e/expenseratio.asp" ], [ "matching contribution", "https://www.investopedia.com/terms/m/matchingcontribution.asp" ], [ "index funds", "https://www.investopedia.com/terms/i/indexfund.asp" ], [ "asset class", "https://www.investopedia.com/terms/a/assetclasses.asp" ], [ "brokerage window", "https://www.investopedia.com/terms/b/brokerage_window.asp" ], [ "individual retirement account (IRA)", "https://www.investopedia.com/terms/i/ira.asp" ], [ "health savings account (HSA)", "https://www.investopedia.com/terms/h/hsa.asp" ], [ "high-deductible health plan", "https://www.investopedia.com/terms/h/hdhp.asp" ], [ "brokerage account", "https://www.investopedia.com/terms/b/brokerageaccount.asp" ], [ "automatic enrollment", "https://www.investopedia.com/terms/a/auto-enrollment-plan.asp" ] ]
https://www.investopedia.com/ask/answers/112515/apple-pay-safe-and-free.asp	Is Apple Pay Safe?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Apple Pay is a mobile payment system that is in use by an estimated 45.4 million users in the US. An article from Oberlo forecasts that the number will grow to an estimated 56.7 million in 2026.<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_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Apple Pay is certainly safer than cash and it has more safety features than credit cards.</li><li>Some security features, like two-factor identification, are optional.</li><li>A complicated passcode is still a good idea.</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"> As for whether it's safe or not, Apple Pay is certainly safer to use than cash. And, it should be safer to use than plastic, as long as the account owner enables its full safety features. </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-apple-pay-safety-features"></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"> Apple Pay Safety Features </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Apple Pay can be used to complete a transaction at any merchant, web retailer, or app that accepts it. In addition, it allows users to send and receive money from other users via messaging.<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"> Each transaction incorporates a number of security measures: </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>It uses near-field communication (NFC), a chip-based technology that communicates with a card reader without the need for contact with it. The card stays in your wallet.</li> <li>In order to finalize transactions, the user can employ two-factor identification, including fingertip or face ID as well as a passcode. Use of fingertip or face ID is optional.</li> <li>Apple advises its customers to choose a complex passcode. It can't stop you from using your cat's name as a passcode, so this security tip, like two-factor identification, is voluntary.</li> <li>The merchant is never given your original card account number. (Apple doesn't have access to it either.)</li> <li>A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apple-pay.asp">tokenization method</a> is used to process transactions. That is, a unique encrypted code is created for one-time use. That code, not your account number, is transmitted to authorize the transaction.</li> <li>If the user ever suspects that the account has become insecure, Apple Pay can be disabled through the iCloud system.</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"> Apple promises never to share card information across its cloud. While this means users have to manually enter their card information into each device, it adds to the security of the service.<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_15-0"></div> <span class="heading-toc" id="toc-what-could-go-wrong"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_16-0"> <span class="mntl-sc-block-heading__text"> What Could Go Wrong? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Needless to say, Apple Pay and its competitors face a constant assault from hackers eager to scale its security walls. So far, these attempts appear to have uncovered vulnerabilities created by users but not by Apple. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>One report indicates that wi-fi hotspots may be used to intercept and reuse encrypted transaction data.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> One unconfirmed report claims that Apply Pay could make it easier to exploit stolen identities. That is, a criminal could simply load stolen information, including credit card numbers, into an iPhone and go on a shopping spree. (This actually would be the responsibility of the bank that issued the stolen card, not Apple.)<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> <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"> A White Hat Attack </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Another unconfirmed report claims that "white hat" hackers were able to infect a device with malware and then intercept payment data as it was entered by an iPhone user and sent to the Apple server. This could only be done on a "jailbroken" iPhone, meaning one with software that had been tampered with.<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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Yet another report claims that users of wi-fi hotspots are vulnerable to hackers who can intercept and reuse the cryptogram that is used to enable an Apple Pay transaction. Yes, the cryptogram is supposed to be usable only once, but apparently some merchants allow them to be used more than once. Another example of an error that exploits imperfect use of the Apple Pay system.<span class="ql-inline-citation" data-cite="6"></span> </p></div>	Apple Pay is a mobile payment system that is in use by an estimated 45.4 million users in the US. An article from Oberlo forecasts that the number will grow to an estimated 56.7 million in 2026. ### Key Takeaways * Apple Pay is certainly safer than cash and it has more safety features than credit cards. * Some security features, like two-factor identification, are optional. * A complicated passcode is still a good idea. As for whether it's safe or not, Apple Pay is certainly safer to use than cash. And, it should be safer to use than plastic, as long as the account owner enables its full safety features. ## Apple Pay Safety Features Apple Pay can be used to complete a transaction at any merchant, web retailer, or app that accepts it. In addition, it allows users to send and receive money from other users via messaging. Each transaction incorporates a number of security measures: * It uses near-field communication (NFC), a chip-based technology that communicates with a card reader without the need for contact with it. The card stays in your wallet. * In order to finalize transactions, the user can employ two-factor identification, including fingertip or face ID as well as a passcode. Use of fingertip or face ID is optional. * Apple advises its customers to choose a complex passcode. It can't stop you from using your cat's name as a passcode, so this security tip, like two-factor identification, is voluntary. * The merchant is never given your original card account number. (Apple doesn't have access to it either.) * A [tokenization method](https://www.investopedia.com/terms/a/apple-pay.asp) is used to process transactions. That is, a unique encrypted code is created for one-time use. That code, not your account number, is transmitted to authorize the transaction. * If the user ever suspects that the account has become insecure, Apple Pay can be disabled through the iCloud system. Apple promises never to share card information across its cloud. While this means users have to manually enter their card information into each device, it adds to the security of the service. ## What Could Go Wrong? Needless to say, Apple Pay and its competitors face a constant assault from hackers eager to scale its security walls. So far, these attempts appear to have uncovered vulnerabilities created by users but not by Apple. ### One report indicates that wi-fi hotspots may be used to intercept and reuse encrypted transaction data. One unconfirmed report claims that Apply Pay could make it easier to exploit stolen identities. That is, a criminal could simply load stolen information, including credit card numbers, into an iPhone and go on a shopping spree. (This actually would be the responsibility of the bank that issued the stolen card, not Apple.) ### A White Hat Attack Another unconfirmed report claims that "white hat" hackers were able to infect a device with malware and then intercept payment data as it was entered by an iPhone user and sent to the Apple server. This could only be done on a "jailbroken" iPhone, meaning one with software that had been tampered with. Yet another report claims that users of wi-fi hotspots are vulnerable to hackers who can intercept and reuse the cryptogram that is used to enable an Apple Pay transaction. Yes, the cryptogram is supposed to be usable only once, but apparently some merchants allow them to be used more than once. Another example of an error that exploits imperfect use of the Apple Pay system.	Apple Pay is a mobile payment system that is in use by an estimated 45.4 million users in the US. An article from Oberlo forecasts that the number will grow to an estimated 56.7 million in 2026. Key Takeaways Apple Pay is certainly safer than cash and it has more safety features than credit cards.Some security features, like two-factor identification, are optional.A complicated passcode is still a good idea. As for whether it's safe or not, Apple Pay is certainly safer to use than cash. And, it should be safer to use than plastic, as long as the account owner enables its full safety features. Apple Pay Safety Features Apple Pay can be used to complete a transaction at any merchant, web retailer, or app that accepts it. In addition, it allows users to send and receive money from other users via messaging. Each transaction incorporates a number of security measures: It uses near-field communication (NFC), a chip-based technology that communicates with a card reader without the need for contact with it. The card stays in your wallet. In order to finalize transactions, the user can employ two-factor identification, including fingertip or face ID as well as a passcode. Use of fingertip or face ID is optional. Apple advises its customers to choose a complex passcode. It can't stop you from using your cat's name as a passcode, so this security tip, like two-factor identification, is voluntary. The merchant is never given your original card account number. (Apple doesn't have access to it either.) A tokenization method is used to process transactions. That is, a unique encrypted code is created for one-time use. That code, not your account number, is transmitted to authorize the transaction. If the user ever suspects that the account has become insecure, Apple Pay can be disabled through the iCloud system. Apple promises never to share card information across its cloud. While this means users have to manually enter their card information into each device, it adds to the security of the service. What Could Go Wrong? Needless to say, Apple Pay and its competitors face a constant assault from hackers eager to scale its security walls. So far, these attempts appear to have uncovered vulnerabilities created by users but not by Apple. One report indicates that wi-fi hotspots may be used to intercept and reuse encrypted transaction data. One unconfirmed report claims that Apply Pay could make it easier to exploit stolen identities. That is, a criminal could simply load stolen information, including credit card numbers, into an iPhone and go on a shopping spree. (This actually would be the responsibility of the bank that issued the stolen card, not Apple.) A White Hat Attack Another unconfirmed report claims that "white hat" hackers were able to infect a device with malware and then intercept payment data as it was entered by an iPhone user and sent to the Apple server. This could only be done on a "jailbroken" iPhone, meaning one with software that had been tampered with. Yet another report claims that users of wi-fi hotspots are vulnerable to hackers who can intercept and reuse the cryptogram that is used to enable an Apple Pay transaction. Yes, the cryptogram is supposed to be usable only once, but apparently some merchants allow them to be used more than once. Another example of an error that exploits imperfect use of the Apple Pay system.	[ [ "tokenization method", "https://www.investopedia.com/terms/a/apple-pay.asp" ] ]
https://www.investopedia.com/smucker-buys-hostess-brands-7967966	Smucker Buys Twinkies Maker Hostess Brands for $5.6 Billion	<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>J.M. Smucker to buy Twinkies maker Hostess Brands for $5.56 billion to expand its snack food offerings.</li><li>The price of $34.25 per share is a 21.8% premium to Hostess's closing price Friday.</li><li>Shares of Hostess Brands jumped to an all-time high on the news.</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 Hostess Brands (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TWNK">TWNK</a>) skyrocketed after J.M. Smucker (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SJM">SJM</a>) agreed to buy the maker of Twinkies, Ding-Dongs and other treats for $5.6 billion, including $900 million in debt. </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 maker of its namesake jellies, Folgers coffee and other food products said it would be paying $34.25 per share in cash and stock for Hostess, a 21.8% premium to Friday’s closing price, in a move to expand its snack offerings.<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"> Along with its signature snack cake brands, Smucker will add Hostess's manufacturing plants in five states and Ontario, Canada, as well as a distribution facility in Kansas. Hostess’s approximately 3,000 employees will also join Smucker. </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"> CEO Mark Smucker explained that the acquisition provides “a compelling expansion of our family of brands and a unique opportunity to accelerate our focus on delighting consumers with convenient solutions across different meal and snacking occasions.” </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 indicated it expects the purchase will add about $1.5 billion in net sales with a mid-single-digit percentage annual growth rate, and that earnings per share (EPS) will be accretive in the first fiscal year. </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 transaction is expected to be completed in the third quarter of Smucker’s fiscal year which ends April 30, 2024. </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"> Hostess Brands shares soared to an all-time high. Shares of J.M. Smucker tumbled to their lowest level in 14 months.<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:65.6%;"> <img alt="TWNK, SJM" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/klY6N35OQfUwy2_64F6sOdlumWk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/klY6N35OQfUwy2_64F6sOdlumWk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png" data-srcset="https://www.investopedia.com/thmb/Wz7C_gJPMp4BnLF7M1tpDnYfI58=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png 750w" data-tracking-container="true" height="1313" id="mntl-sc-block-image_1-0" width="2000"/> <noscript> <img alt="TWNK, SJM" class="img--noscript universal-image__image" height="1313" sizes="750px" src="https://www.investopedia.com/thmb/klY6N35OQfUwy2_64F6sOdlumWk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png" srcset="https://www.investopedia.com/thmb/Wz7C_gJPMp4BnLF7M1tpDnYfI58=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png 750w" width="2000"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-text">YCharts.</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 * J.M. Smucker to buy Twinkies maker Hostess Brands for $5.56 billion to expand its snack food offerings. * The price of $34.25 per share is a 21.8% premium to Hostess's closing price Friday. * Shares of Hostess Brands jumped to an all-time high on the news. Shares of Hostess Brands ([TWNK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TWNK)) skyrocketed after J.M. Smucker ([SJM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SJM)) agreed to buy the maker of Twinkies, Ding-Dongs and other treats for $5.6 billion, including $900 million in debt. The maker of its namesake jellies, Folgers coffee and other food products said it would be paying $34.25 per share in cash and stock for Hostess, a 21.8% premium to Friday’s closing price, in a move to expand its snack offerings. Along with its signature snack cake brands, Smucker will add Hostess's manufacturing plants in five states and Ontario, Canada, as well as a distribution facility in Kansas. Hostess’s approximately 3,000 employees will also join Smucker. CEO Mark Smucker explained that the acquisition provides “a compelling expansion of our family of brands and a unique opportunity to accelerate our focus on delighting consumers with convenient solutions across different meal and snacking occasions.” The company indicated it expects the purchase will add about $1.5 billion in net sales with a mid-single-digit percentage annual growth rate, and that earnings per share (EPS) will be accretive in the first fiscal year. The transaction is expected to be completed in the third quarter of Smucker’s fiscal year which ends April 30, 2024. Hostess Brands shares soared to an all-time high. Shares of J.M. Smucker tumbled to their lowest level in 14 months. ![TWNK, SJM]() ![TWNK, SJM](https://www.investopedia.com/thmb/klY6N35OQfUwy2_64F6sOdlumWk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TWNK_SPXTR_SJM_chart-f4fc2fcd8f654ae1b97aa8064dff81b7.png) YCharts. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways J.M. Smucker to buy Twinkies maker Hostess Brands for $5.56 billion to expand its snack food offerings.The price of $34.25 per share is a 21.8% premium to Hostess's closing price Friday.Shares of Hostess Brands jumped to an all-time high on the news. Shares of Hostess Brands (TWNK) skyrocketed after J.M. Smucker (SJM) agreed to buy the maker of Twinkies, Ding-Dongs and other treats for $5.6 billion, including $900 million in debt. The maker of its namesake jellies, Folgers coffee and other food products said it would be paying $34.25 per share in cash and stock for Hostess, a 21.8% premium to Friday’s closing price, in a move to expand its snack offerings. Along with its signature snack cake brands, Smucker will add Hostess's manufacturing plants in five states and Ontario, Canada, as well as a distribution facility in Kansas. Hostess’s approximately 3,000 employees will also join Smucker. CEO Mark Smucker explained that the acquisition provides “a compelling expansion of our family of brands and a unique opportunity to accelerate our focus on delighting consumers with convenient solutions across different meal and snacking occasions.” The company indicated it expects the purchase will add about $1.5 billion in net sales with a mid-single-digit percentage annual growth rate, and that earnings per share (EPS) will be accretive in the first fiscal year. The transaction is expected to be completed in the third quarter of Smucker’s fiscal year which ends April 30, 2024. Hostess Brands shares soared to an all-time high. Shares of J.M. Smucker tumbled to their lowest level in 14 months. YCharts. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "TWNK", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=TWNK" ], [ "SJM", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=SJM" ], [ "TWNK, SJM", "https://www.investopedia.com/thmb/klY6N35OQfUwy2_64F6sOdlumWk=/1500x0/filters:no_upscale(" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/what-are-your-legal-rights-in-a-foreclosure-4846357	What Are Your Legal Rights in a Foreclosure?	<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 cannot keep up with your mortgage payments, the prospect of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/foreclosure.asp">foreclosure</a>—and with it losing your home—can be daunting. Still, foreclosure is a rigorous legal process, and you have certain rights based on state law along with the mortgage documents you signed. </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"> Knowing your rights can help you navigate the foreclosure process as smoothly as possible or even avoid it if your lender violates any foreclosure requirements. Here's what you need to know. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_5-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_6-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>If you fall behind on your mortgage payments, your lender could try to take back your property through a foreclosure.</li><li>Before initiating a foreclosure proceeding, your loan servicer must send you a notice that the loan is in default</li><li>This notice will give you a chance to get caught up or make a payment plan with your lender to avoid foreclosure.</li><li>You have the right to challenge a foreclosure if you think your lender made a mistake or has violated the law.</li><li>A notice of preforeclosure does not mean you need to vacate the home. </li></ul></div></div></div> <span class="heading-toc" id="toc-what-is-foreclosure"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_7-0"> <span class="mntl-sc-block-heading__text"> What Is Foreclosure? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Simply put, foreclosure is the legal process that allows lenders to recover the balance owed on a defaulted loan by taking ownership of and selling the mortgaged property as <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collateral.asp">collateral</a>. Nonpayment is what usually triggers <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/default2.asp">default</a>, but it can also happen if a borrower does not meet certain other terms in the mortgage contract. </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"> Your <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> is the company that handles your mortgage account, and it may or may not be the company that either issued or currently owns the loan. The loan servicer is required to contact you (or try to do so) by phone to talk about "loss mitigation" no later than 36 days after your first missed payment—and within 36 days of any subsequent missed payments. Loss mitigation is the process by which you and your lender work together to try and avoid foreclosure. </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"> Within 45 days of a missed payment, your servicer must notify you in writing about your loss mitigation options and refer you to someone who can help you try to avoid foreclosure.<span class="ql-inline-citation" data-cite="16"></span> In general, your servicer cannot start to foreclose until you are at least 120 days behind on your payments.<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_13-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_14-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-tip" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_15-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>Foreclosure notices are sent through the mail. If you're behind on your mortgage, read your mail carefully, and be sure to pick up any certified or registered mail.</p></div></div></div> <span class="heading-toc" id="toc-right-to-a-breach-letter"></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"> Right to a Breach Letter </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Mortgage contracts typically have a clause that obligates lenders to send a written notice called a "breach letter" to tell you when you are in default. The breach letter must include: </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>Details about the default and its causes</li><li>What you need to do to cure<strong> </strong>the default and reinstate the loan</li><li>The date by which you must cure the default (usually at least 30 days from the date you receive the notice)</li><li>Notice that failure to cure the default on time will lead to the sale of the property</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> To cure the default and avoid foreclosure, you must pay the entire past-due amount by the date shown in the breach letter, along with any back interest, late fees, and penalties. If you do not—and you have not worked out some other option—foreclosure proceedings will likely begin. In general, you must be behind on payments for at least 120 days before a foreclosure can start, so your lender will likely send a breach letter close to the 90<sup>th</sup> day of the delinquency.<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_22-0"></div> <span class="heading-toc" id="toc-notice-of-the-foreclosure"></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"> Notice of the Foreclosure </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> You are entitled to notice of a pending foreclosure no matter which state you live in. If it's a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/j/judicial_foreclosure.asp">judicial foreclosure</a>, you'll get a complaint and summons letting you know that a foreclosure has begun. If it's a nonjudicial foreclosure, you may receive two notices: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_25-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> <li><strong>Notice of default (NOD).</strong> Depending on state law, a nonjudicial foreclosure starts when 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</a> is recorded at the county office. The NOD serves as public notice that you are in default. It contains details about the borrowers, lender, trustee, property, default, action required to cure the default, and a statement that if the default is not cured by the stated deadline, the lender will sell the property at a public sale.</li> <li><strong>Notice of sale (NOS).</strong> The notice of sale might be mailed to you, published in a local newspaper, posted on the property, and recorded in the county land records. It includes details about the property, a statement that the property will be sold at a public auction, and information about the foreclosure sale.<span class="ql-inline-citation" data-cite="19"></span></li> </ol> <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"> If you do not receive an appropriate notice under your state's laws, you may have a defense against foreclosure. While that does not necessarily mean you could avoid the foreclosure, it may force the servicer to issue a new notice and start the foreclosure process from scratch. That could potentially give you enough time to get caught up on payments or sort out another option. An FDCPA validation notice may be combined with a breach letter.<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_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_30-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-warning" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_31-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_3-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_3-0"><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>.<span class="ql-inline-citation" data-cite="15"></span><span class="ql-inline-citation" data-cite="14"></span></p></div></div></div> <span class="heading-toc" id="toc-right-to-reinstate"></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"> Right to Reinstate </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> Depending on state law, you may be able to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/can-a-reverse-mortgage-stop-a-foreclosure-5270030">stop a foreclosure</a> if you make a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lumpsumdistribution.asp">lump-sum payment</a> to get up to date on your loan, including any fees and expenses. After that, you resume your regular payments. </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"> In general, you must reinstate the loan by a particular deadline, such as by 5:00 p.m. on the last business day before the property sale is scheduled. </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-right-of-redemption"></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"> Right of Redemption </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> Your mortgage contract may also give you the right to reinstate. Check your mortgage or deed of trust for a section known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reinstatement-clause.asp">reinstatement clause</a>, titled "Borrower's Right to Reinstate After Acceleration" (or similar language) to find out if and how you can reinstate your loan. </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"> If you do not have a right to reinstate through state law or your mortgage contract, the lender may allow you to reinstate after considering your request. If the lender refuses, you can ask a court to allow the reinstatement. In general, a judge would rather avoid foreclosure if you have the cash to get current on your loan.<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_41-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> All states let borrowers pay off debt (including fees and expenses) and "<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/right-of-redemption.asp">redeem</a>" their property before a foreclosure sale. Some states even allow borrowers to buy back the property after the foreclosure sale. To redeem the property, you pay the entire balance due before the foreclosure sale or reimburse the person or entity that bought the property at the foreclosure sale, depending on the situation.<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_43-0"></div> <span class="heading-toc" id="toc-right-to-foreclosure-mediation"></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"> Right to Foreclosure Mediation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_45-0"> Some states, counties, and cities give property owners facing foreclosure the right to partake in mediation. In foreclosure mediation, you meet with your lender (or servicer) and an impartial mediator to discuss options like a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan_modification.asp">loan modification</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/real-estate-short-sale.asp">short sale</a>, repayment plan, or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deed_in_lieu_of_foreclosure.asp">deed in lieu of foreclosure</a>.<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_46-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_47-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-important" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_48-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_4-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>Homeowners are provided rights and protections to help them in the event of a potential foreclosure. Most lenders would prefer to work out a plan than foreclose on your home.</p></div></div></div> <span class="heading-toc" id="toc-right-to-challenge-the-foreclosure"></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"> Right to Challenge the Foreclosure </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> No matter where you live, you have the right to challenge the foreclosure in court. You can participate in the existing foreclosure lawsuit if it's a judicial foreclosure. However, if it's a nonjudicial foreclosure, you must file your lawsuit. In general, it may make sense to challenge the foreclosure if you think the servicer made a mistake or violated the law. </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-right-to-a-surplus"></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"> Right to a Surplus </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> If the property sells at a foreclosure sale for more than you owe (including any fees, expenses, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lien.asp">liens</a> on the property), you are entitled to the excess proceeds—called a surplus. Of course, depending on state law, if the foreclosure sale does not cover your debt, you may be on the hook for a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deficiency-judgment.asp">deficiency judgment</a>.<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> <span class="heading-toc" id="toc-fair-debt-collection-practices-act-validation-letter"></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"> Fair Debt Collection Practices Act Validation Letter </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fair-debt-collection-practices-act-fdcpa.asp">Fair Debt Collection Practices Act (FDCPA)</a> is a federal law that covers when, how, and how often third-party debt collectors can contact debtors. FDCPA may apply to foreclosures, but it depends on whether it's judicial or nonjudicial: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_57-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> <li><strong>Judicial foreclosures.</strong> In general, judicial foreclosures are viewed as being subject to FDCPA because creditors can get deficiency judgments. </li><li><strong>Nonjudicial foreclosures.</strong> The FDCPA does not apply to firms pursuing nonjudicial foreclosures under a unanimous decision made in the U.S. Supreme Court case of <em>Obduskey v. McCarthy & Holthus, LLP </em>in March 2019.<span class="ql-inline-citation" data-cite="1"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_59-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> When FDCPA applies, your mortgage servicer must send you an FDCPA validation notice that includes: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_61-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> <li>How much you owe, including interest, late charges, attorney fees, and other charges</li><li>The name of the creditor</li><li>A statement that explains that, unless you dispute the validity of the debt within 30 days of receiving the letter, the debt will be assumed to be valid</li><li>A statement that, if you notify the debt collector in writing within the 30-day period to dispute the debt, the debt collector will get written verification of the debt and send you a copy</li><li>A statement that the debt collector will provide you with the name and address of the original creditor, if it's different from the current one if you request it within the 30-day period.<span class="ql-inline-citation" data-cite="10"></span></li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-what-does-foreclosure-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Foreclosure Mean?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>A foreclosure occurs when your mortgage payments are <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/past-due.asp">past due</a> for 120 or more days. If you don't pay your mortgage, the bank (or lender) will begin a legal process called foreclosure. You can lose your home if you aren't able to stop a foreclosure.<span class="ql-inline-citation" data-cite="18"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-what-does-pre-foreclosure-mean"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Pre-Foreclosure Mean?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If your home is in pre-foreclosure, it simply means your mortgage lender has issued a notice of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/081516/how-many-mortgage-payments-can-i-miss-foreclosure.asp">pending foreclosure</a> and you are at risk of losing your home. When a home is in pre-foreclosure, it is possible for you to work with the lender and other entities to try to hold onto your home.</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-how-can-i-protect-my-home-from-foreclosure"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Protect My Home From Foreclosure?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The best way to protect your home from foreclosure is to pay your mortgage bill on time. If you begin to have trouble paying your bill, speak to your lender right away and ask them if they will help you. Most <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/loan_servicing.asp">loan servicers</a> do not want to end up with homes in foreclosure and they will often try to help their borrowers.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_70-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_71-0"> Your legal rights in foreclosure vary depending on state law, your mortgage contract, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-finance/digging-out-of-debt/">your situation</a>. To learn more about your rights, consult with a local foreclosure lawyer who can help you navigate the process and ensure that your rights are protected. </p></div>	If you cannot keep up with your mortgage payments, the prospect of [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp)—and with it losing your home—can be daunting. Still, foreclosure is a rigorous legal process, and you have certain rights based on state law along with the mortgage documents you signed. Knowing your rights can help you navigate the foreclosure process as smoothly as possible or even avoid it if your lender violates any foreclosure requirements. Here's what you need to know. ### Key Takeaways * If you fall behind on your mortgage payments, your lender could try to take back your property through a foreclosure. * Before initiating a foreclosure proceeding, your loan servicer must send you a notice that the loan is in default * This notice will give you a chance to get caught up or make a payment plan with your lender to avoid foreclosure. * You have the right to challenge a foreclosure if you think your lender made a mistake or has violated the law. * A notice of preforeclosure does not mean you need to vacate the home. ## What Is Foreclosure? Simply put, foreclosure is the legal process that allows lenders to recover the balance owed on a defaulted loan by taking ownership of and selling the mortgaged property as [collateral](https://www.investopedia.com/terms/c/collateral.asp). Nonpayment is what usually triggers [default](https://www.investopedia.com/terms/d/default2.asp), but it can also happen if a borrower does not meet certain other terms in the mortgage contract. Your [loan servicer](https://www.investopedia.com/terms/l/loan_servicing.asp) is the company that handles your mortgage account, and it may or may not be the company that either issued or currently owns the loan. The loan servicer is required to contact you (or try to do so) by phone to talk about "loss mitigation" no later than 36 days after your first missed payment—and within 36 days of any subsequent missed payments. Loss mitigation is the process by which you and your lender work together to try and avoid foreclosure. Within 45 days of a missed payment, your servicer must notify you in writing about your loss mitigation options and refer you to someone who can help you try to avoid foreclosure. In general, your servicer cannot start to foreclose until you are at least 120 days behind on your payments. ### Foreclosure notices are sent through the mail. If you're behind on your mortgage, read your mail carefully, and be sure to pick up any certified or registered mail. ## Right to a Breach Letter Mortgage contracts typically have a clause that obligates lenders to send a written notice called a "breach letter" to tell you when you are in default. The breach letter must include: * Details about the default and its causes * What you need to do to curethe default and reinstate the loan * The date by which you must cure the default (usually at least 30 days from the date you receive the notice) * Notice that failure to cure the default on time will lead to the sale of the property To cure the default and avoid foreclosure, you must pay the entire past-due amount by the date shown in the breach letter, along with any back interest, late fees, and penalties. If you do not—and you have not worked out some other option—foreclosure proceedings will likely begin. In general, you must be behind on payments for at least 120 days before a foreclosure can start, so your lender will likely send a breach letter close to the 90th day of the delinquency. ## Notice of the Foreclosure You are entitled to notice of a pending foreclosure no matter which state you live in. If it's a [judicial foreclosure](https://www.investopedia.com/terms/j/judicial_foreclosure.asp), you'll get a complaint and summons letting you know that a foreclosure has begun. If it's a nonjudicial foreclosure, you may receive two notices: 1. Notice of default (NOD). Depending on state law, a nonjudicial foreclosure starts when a [notice of default](https://www.investopedia.com/terms/n/notice-of-default.asp) is recorded at the county office. The NOD serves as public notice that you are in default. It contains details about the borrowers, lender, trustee, property, default, action required to cure the default, and a statement that if the default is not cured by the stated deadline, the lender will sell the property at a public sale. 2. Notice of sale (NOS). The notice of sale might be mailed to you, published in a local newspaper, posted on the property, and recorded in the county land records. It includes details about the property, a statement that the property will be sold at a public auction, and information about the foreclosure sale. If you do not receive an appropriate notice under your state's laws, you may have a defense against foreclosure. While that does not necessarily mean you could avoid the foreclosure, it may force the servicer to issue a new notice and start the foreclosure process from scratch. That could potentially give you enough time to get caught up on payments or sort out another option. An FDCPA validation notice may be combined with a breach letter. ### 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). ## Right to Reinstate Depending on state law, you may be able to [stop a foreclosure](https://www.investopedia.com/can-a-reverse-mortgage-stop-a-foreclosure-5270030) if you make a [lump-sum payment](https://www.investopedia.com/terms/l/lumpsumdistribution.asp) to get up to date on your loan, including any fees and expenses. After that, you resume your regular payments. In general, you must reinstate the loan by a particular deadline, such as by 5:00 p.m. on the last business day before the property sale is scheduled. ## Right of Redemption Your mortgage contract may also give you the right to reinstate. Check your mortgage or deed of trust for a section known as the [reinstatement clause](https://www.investopedia.com/terms/r/reinstatement-clause.asp), titled "Borrower's Right to Reinstate After Acceleration" (or similar language) to find out if and how you can reinstate your loan. If you do not have a right to reinstate through state law or your mortgage contract, the lender may allow you to reinstate after considering your request. If the lender refuses, you can ask a court to allow the reinstatement. In general, a judge would rather avoid foreclosure if you have the cash to get current on your loan. All states let borrowers pay off debt (including fees and expenses) and "[redeem](https://www.investopedia.com/terms/r/right-of-redemption.asp)" their property before a foreclosure sale. Some states even allow borrowers to buy back the property after the foreclosure sale. To redeem the property, you pay the entire balance due before the foreclosure sale or reimburse the person or entity that bought the property at the foreclosure sale, depending on the situation. ## Right to Foreclosure Mediation Some states, counties, and cities give property owners facing foreclosure the right to partake in mediation. In foreclosure mediation, you meet with your lender (or servicer) and an impartial mediator to discuss options like a [loan modification](https://www.investopedia.com/terms/l/loan_modification.asp), [short sale](https://www.investopedia.com/terms/r/real-estate-short-sale.asp), repayment plan, or [deed in lieu of foreclosure](https://www.investopedia.com/terms/d/deed_in_lieu_of_foreclosure.asp). ### Homeowners are provided rights and protections to help them in the event of a potential foreclosure. Most lenders would prefer to work out a plan than foreclose on your home. ## Right to Challenge the Foreclosure No matter where you live, you have the right to challenge the foreclosure in court. You can participate in the existing foreclosure lawsuit if it's a judicial foreclosure. However, if it's a nonjudicial foreclosure, you must file your lawsuit. In general, it may make sense to challenge the foreclosure if you think the servicer made a mistake or violated the law. ## Right to a Surplus If the property sells at a foreclosure sale for more than you owe (including any fees, expenses, and [liens](https://www.investopedia.com/terms/l/lien.asp) on the property), you are entitled to the excess proceeds—called a surplus. Of course, depending on state law, if the foreclosure sale does not cover your debt, you may be on the hook for a [deficiency judgment](https://www.investopedia.com/terms/d/deficiency-judgment.asp). ## Fair Debt Collection Practices Act Validation Letter The [Fair Debt Collection Practices Act (FDCPA)](https://www.investopedia.com/terms/f/fair-debt-collection-practices-act-fdcpa.asp) is a federal law that covers when, how, and how often third-party debt collectors can contact debtors. FDCPA may apply to foreclosures, but it depends on whether it's judicial or nonjudicial: * Judicial foreclosures. In general, judicial foreclosures are viewed as being subject to FDCPA because creditors can get deficiency judgments. * Nonjudicial foreclosures. The FDCPA does not apply to firms pursuing nonjudicial foreclosures under a unanimous decision made in the U.S. Supreme Court case of Obduskey v. McCarthy & Holthus, LLP in March 2019. When FDCPA applies, your mortgage servicer must send you an FDCPA validation notice that includes: * How much you owe, including interest, late charges, attorney fees, and other charges * The name of the creditor * A statement that explains that, unless you dispute the validity of the debt within 30 days of receiving the letter, the debt will be assumed to be valid * A statement that, if you notify the debt collector in writing within the 30-day period to dispute the debt, the debt collector will get written verification of the debt and send you a copy * A statement that the debt collector will provide you with the name and address of the original creditor, if it's different from the current one if you request it within the 30-day period. ## What Does Foreclosure Mean? A foreclosure occurs when your mortgage payments are [past due](https://www.investopedia.com/terms/p/past-due.asp) for 120 or more days. If you don't pay your mortgage, the bank (or lender) will begin a legal process called foreclosure. You can lose your home if you aren't able to stop a foreclosure. ## What Does Pre-Foreclosure Mean? If your home is in pre-foreclosure, it simply means your mortgage lender has issued a notice of [pending foreclosure](https://www.investopedia.com/ask/answers/081516/how-many-mortgage-payments-can-i-miss-foreclosure.asp) and you are at risk of losing your home. When a home is in pre-foreclosure, it is possible for you to work with the lender and other entities to try to hold onto your home. ## How Can I Protect My Home From Foreclosure? The best way to protect your home from foreclosure is to pay your mortgage bill on time. If you begin to have trouble paying your bill, speak to your lender right away and ask them if they will help you. Most [loan servicers](https://www.investopedia.com/terms/l/loan_servicing.asp) do not want to end up with homes in foreclosure and they will often try to help their borrowers. ## The Bottom Line Your legal rights in foreclosure vary depending on state law, your mortgage contract, and [your situation](https://www.investopedia.com/personal-finance/digging-out-of-debt/). To learn more about your rights, consult with a local foreclosure lawyer who can help you navigate the process and ensure that your rights are protected.	If you cannot keep up with your mortgage payments, the prospect of foreclosure—and with it losing your home—can be daunting. Still, foreclosure is a rigorous legal process, and you have certain rights based on state law along with the mortgage documents you signed. Knowing your rights can help you navigate the foreclosure process as smoothly as possible or even avoid it if your lender violates any foreclosure requirements. Here's what you need to know. Key Takeaways If you fall behind on your mortgage payments, your lender could try to take back your property through a foreclosure.Before initiating a foreclosure proceeding, your loan servicer must send you a notice that the loan is in defaultThis notice will give you a chance to get caught up or make a payment plan with your lender to avoid foreclosure.You have the right to challenge a foreclosure if you think your lender made a mistake or has violated the law.A notice of preforeclosure does not mean you need to vacate the home. What Is Foreclosure? Simply put, foreclosure is the legal process that allows lenders to recover the balance owed on a defaulted loan by taking ownership of and selling the mortgaged property as collateral. Nonpayment is what usually triggers default, but it can also happen if a borrower does not meet certain other terms in the mortgage contract. Your loan servicer is the company that handles your mortgage account, and it may or may not be the company that either issued or currently owns the loan. The loan servicer is required to contact you (or try to do so) by phone to talk about "loss mitigation" no later than 36 days after your first missed payment—and within 36 days of any subsequent missed payments. Loss mitigation is the process by which you and your lender work together to try and avoid foreclosure. Within 45 days of a missed payment, your servicer must notify you in writing about your loss mitigation options and refer you to someone who can help you try to avoid foreclosure. In general, your servicer cannot start to foreclose until you are at least 120 days behind on your payments. Foreclosure notices are sent through the mail. If you're behind on your mortgage, read your mail carefully, and be sure to pick up any certified or registered mail. Right to a Breach Letter Mortgage contracts typically have a clause that obligates lenders to send a written notice called a "breach letter" to tell you when you are in default. The breach letter must include: Details about the default and its causesWhat you need to do to cure the default and reinstate the loanThe date by which you must cure the default (usually at least 30 days from the date you receive the notice)Notice that failure to cure the default on time will lead to the sale of the property To cure the default and avoid foreclosure, you must pay the entire past-due amount by the date shown in the breach letter, along with any back interest, late fees, and penalties. If you do not—and you have not worked out some other option—foreclosure proceedings will likely begin. In general, you must be behind on payments for at least 120 days before a foreclosure can start, so your lender will likely send a breach letter close to the 90th day of the delinquency. Notice of the Foreclosure You are entitled to notice of a pending foreclosure no matter which state you live in. If it's a judicial foreclosure, you'll get a complaint and summons letting you know that a foreclosure has begun. If it's a nonjudicial foreclosure, you may receive two notices: Notice of default (NOD). Depending on state law, a nonjudicial foreclosure starts when a notice of default is recorded at the county office. The NOD serves as public notice that you are in default. It contains details about the borrowers, lender, trustee, property, default, action required to cure the default, and a statement that if the default is not cured by the stated deadline, the lender will sell the property at a public sale. Notice of sale (NOS). The notice of sale might be mailed to you, published in a local newspaper, posted on the property, and recorded in the county land records. It includes details about the property, a statement that the property will be sold at a public auction, and information about the foreclosure sale. If you do not receive an appropriate notice under your state's laws, you may have a defense against foreclosure. While that does not necessarily mean you could avoid the foreclosure, it may force the servicer to issue a new notice and start the foreclosure process from scratch. That could potentially give you enough time to get caught up on payments or sort out another option. An FDCPA validation notice may be combined with a breach letter. 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). Right to Reinstate Depending on state law, you may be able to stop a foreclosure if you make a lump-sum payment to get up to date on your loan, including any fees and expenses. After that, you resume your regular payments. In general, you must reinstate the loan by a particular deadline, such as by 5:00 p.m. on the last business day before the property sale is scheduled. Right of Redemption Your mortgage contract may also give you the right to reinstate. Check your mortgage or deed of trust for a section known as the reinstatement clause, titled "Borrower's Right to Reinstate After Acceleration" (or similar language) to find out if and how you can reinstate your loan. If you do not have a right to reinstate through state law or your mortgage contract, the lender may allow you to reinstate after considering your request. If the lender refuses, you can ask a court to allow the reinstatement. In general, a judge would rather avoid foreclosure if you have the cash to get current on your loan. All states let borrowers pay off debt (including fees and expenses) and "redeem" their property before a foreclosure sale. Some states even allow borrowers to buy back the property after the foreclosure sale. To redeem the property, you pay the entire balance due before the foreclosure sale or reimburse the person or entity that bought the property at the foreclosure sale, depending on the situation. Right to Foreclosure Mediation Some states, counties, and cities give property owners facing foreclosure the right to partake in mediation. In foreclosure mediation, you meet with your lender (or servicer) and an impartial mediator to discuss options like a loan modification, short sale, repayment plan, or deed in lieu of foreclosure. Homeowners are provided rights and protections to help them in the event of a potential foreclosure. Most lenders would prefer to work out a plan than foreclose on your home. Right to Challenge the Foreclosure No matter where you live, you have the right to challenge the foreclosure in court. You can participate in the existing foreclosure lawsuit if it's a judicial foreclosure. However, if it's a nonjudicial foreclosure, you must file your lawsuit. In general, it may make sense to challenge the foreclosure if you think the servicer made a mistake or violated the law. Right to a Surplus If the property sells at a foreclosure sale for more than you owe (including any fees, expenses, and liens on the property), you are entitled to the excess proceeds—called a surplus. Of course, depending on state law, if the foreclosure sale does not cover your debt, you may be on the hook for a deficiency judgment. Fair Debt Collection Practices Act Validation Letter The Fair Debt Collection Practices Act (FDCPA) is a federal law that covers when, how, and how often third-party debt collectors can contact debtors. FDCPA may apply to foreclosures, but it depends on whether it's judicial or nonjudicial: Judicial foreclosures. In general, judicial foreclosures are viewed as being subject to FDCPA because creditors can get deficiency judgments. Nonjudicial foreclosures. The FDCPA does not apply to firms pursuing nonjudicial foreclosures under a unanimous decision made in the U.S. Supreme Court case of Obduskey v. McCarthy & Holthus, LLP in March 2019. When FDCPA applies, your mortgage servicer must send you an FDCPA validation notice that includes: How much you owe, including interest, late charges, attorney fees, and other chargesThe name of the creditorA statement that explains that, unless you dispute the validity of the debt within 30 days of receiving the letter, the debt will be assumed to be validA statement that, if you notify the debt collector in writing within the 30-day period to dispute the debt, the debt collector will get written verification of the debt and send you a copyA statement that the debt collector will provide you with the name and address of the original creditor, if it's different from the current one if you request it within the 30-day period. What Does Foreclosure Mean? A foreclosure occurs when your mortgage payments are past due for 120 or more days. If you don't pay your mortgage, the bank (or lender) will begin a legal process called foreclosure. You can lose your home if you aren't able to stop a foreclosure. What Does Pre-Foreclosure Mean? If your home is in pre-foreclosure, it simply means your mortgage lender has issued a notice of pending foreclosure and you are at risk of losing your home. When a home is in pre-foreclosure, it is possible for you to work with the lender and other entities to try to hold onto your home. How Can I Protect My Home From Foreclosure? The best way to protect your home from foreclosure is to pay your mortgage bill on time. If you begin to have trouble paying your bill, speak to your lender right away and ask them if they will help you. Most loan servicers do not want to end up with homes in foreclosure and they will often try to help their borrowers. The Bottom Line Your legal rights in foreclosure vary depending on state law, your mortgage contract, and your situation. To learn more about your rights, consult with a local foreclosure lawyer who can help you navigate the process and ensure that your rights are protected.	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https://www.investopedia.com/the-express-podcast-episode-175-8597761	Mining the Charts for Weaknesses in the Stock Market	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><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=MERE3149726331" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Mining the Charts for Weaknesses in the Stock Market"></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_3-0"> <strong>Subscribe Now</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197" rel="nofollow">Apple Podcasts</a> / <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9" rel="nofollow">Spotify</a> / <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="externalLink" href="https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver">Google Podcasts</a> / <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://player.fm/series/2836180">PlayerFM</a> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> JC Parets of AllStarCharts rejoins the show to help us identify the weaknesses across the capital markets as the major equity indices dance around all time highs and why we need to pay attention to the strengthening dollar, the Polish Zloty, copper prices, and tumbling Treasuries to know what will happen next to the stock market. Plus, are we witnessing Meme Stock 2.0 as stocks like Abercrombie & Fitch (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ANF">ANF</a>), Super Micro Computer (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMCI">SMCI</a>), Texas Roadhouse (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TXRH">TXRH</a>), and WingStop (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=WING">WING</a>) have been on head-spinning rallies? What's similar, but very different about this recent bout of irrational exuberance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_6-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> <strong>Link for Show Notes: </strong> </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="externalLink" href="https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf</a><a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/buyback.asp">https://www.investopedia.com/terms/b/buyback.asp</a><a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-to-expect-in-the-markets-this-week-8584380">https://www.investopedia.com/what-to-expect-in-the-markets-this-week-8584380</a><a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="externalLink" href="https://allstarcharts.com/blog/">https://allstarcharts.com/blog/</a><a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="externalLink" href="https://www.welcomeuruguay.com/vinos/uruguayan-tannat.html" rel="nofollow">https://www.welcomeuruguay.com/vinos/uruguayan-tannat.html</a><br/> </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>Do you have a news tip for Investopedia reporters?</strong> Please email us at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="mailto:[email protected]">[email protected]</a> </p></div>	Subscribe Now: [Apple Podcasts](https://podcasts.apple.com/us/podcast/the-investopedia-express-with-caleb-silver/id1529322197) / [Spotify](https://open.spotify.com/show/1TwnoxxgCIGK8mF7szI6j9) / [Google Podcasts](https://podcasts.google.com/search/The%20Investopedia%20Express%20with%20Caleb%20Silver) / [PlayerFM](https://player.fm/series/2836180) JC Parets of AllStarCharts rejoins the show to help us identify the weaknesses across the capital markets as the major equity indices dance around all time highs and why we need to pay attention to the strengthening dollar, the Polish Zloty, copper prices, and tumbling Treasuries to know what will happen next to the stock market. Plus, are we witnessing Meme Stock 2.0 as stocks like Abercrombie & Fitch ([ANF](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ANF)), Super Micro Computer ([SMCI](https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMCI)), Texas Roadhouse ([TXRH](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TXRH)), and WingStop ([WING](https://www.investopedia.com/markets/quote?tvwidgetsymbol=WING)) have been on head-spinning rallies? What's similar, but very different about this recent bout of irrational exuberance. Link for Show Notes: <https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf><https://www.investopedia.com/terms/b/buyback.asp><https://www.investopedia.com/what-to-expect-in-the-markets-this-week-8584380><https://allstarcharts.com/blog/><https://www.welcomeuruguay.com/vinos/uruguayan-tannat.html> 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 JC Parets of AllStarCharts rejoins the show to help us identify the weaknesses across the capital markets as the major equity indices dance around all time highs and why we need to pay attention to the strengthening dollar, the Polish Zloty, copper prices, and tumbling Treasuries to know what will happen next to the stock market. Plus, are we witnessing Meme Stock 2.0 as stocks like Abercrombie & Fitch (ANF), Super Micro Computer (SMCI), Texas Roadhouse (TXRH), and WingStop (WING) have been on head-spinning rallies? What's similar, but very different about this recent bout of irrational exuberance. Link for Show Notes: https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdfhttps://www.investopedia.com/terms/b/buyback.asphttps://www.investopedia.com/what-to-expect-in-the-markets-this-week-8584380https://allstarcharts.com/blog/https://www.welcomeuruguay.com/vinos/uruguayan-tannat.html 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" ], [ "ANF", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=ANF" ], [ "SMCI", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=SMCI" ], [ "TXRH", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=TXRH" ], [ "WING", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=WING" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/financial-edge/1110/5-things-to-know-about-potash.aspx	5 Things to Know About Potash	<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"> On July 31, 1790, President George Washington signed the first patent ever issued in the United States. The patent was granted to Samuel Hopkins for a new process and apparatus for making <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/potash.asp">potash</a>,<span class="ql-inline-citation" data-cite="1"></span> America's first industrial chemical.<span class="ql-inline-citation" data-cite="2"></span> While the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/patent.asp">patent</a> expired fourteen years later, potash remains an important product around the world today.<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_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>Potash is America's first industrial chemical, patented in 1790, and remains an essential product today.</li><li>Potash is made of potassium, which is an essential part of the human diet.</li><li>95% of the world's potash is used in farming to fertilize food supply.</li><li>Many of the pure-play potash stocks have been acquired by larger rivals, but Mosaic Company and Ashland have substantial potash operations.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-potash"></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 Potash </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> Potash is a vital resource in the world today, but not a topic that many people fully understand. Here are some facts that may help in understanding the ongoing importance of this unique product: </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"> Potash Is Made of Potassium </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The element potassium is a member of the alkali metal group and is abundant in nature. It's always found in combined forms with other minerals in the earth's crust, particularly where there are large deposits of clay minerals and heavy soils. </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"> Potash is an impure combination of potassium carbonate and potassium salt. Rock deposits bearing potash resulted when ancient inland seas evaporated millions of years ago. The term potash has been commonly used to describe the fertilizer forms of potassium derived from these rocks by separating the salt and other minerals. </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"> Potash Is Part of History </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> In the early days, the primary source of potash was the ash from native hardwood trees. The basic chemical compound potassium carbonate was extracted by leaching the ashes in big iron pots to dissolve out the soluble components.<span class="ql-inline-citation" data-cite="5"></span> Evaporation of the solution through percolation resulted in the production of potash. Potash was used in making fertilizer, glass, soap, gunpowder, and dyeing fabrics.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The outbreak of World War I forced other countries such as Russia and France to develop their own <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/basics/12/natural-resource-investing.asp">natural sources</a>.<span class="ql-inline-citation" data-cite="6"></span> Additional sources were discovered in Michigan, Utah, and New Mexico.<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_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"> Potash Is in Your Food </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Some 95% of the world's potash is used on farms to fertilize the food supply. It's a critical ingredient that helps to improve <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/crop-yield.asp">crop yields</a>, increase resistance to plant diseases, and heighten water retention. It also has a positive effect on food color, taste, and texture.<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_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Potash is a component of feed supplements used to grow livestock and enhance milk production.<span class="ql-inline-citation" data-cite="9"></span> It still has several industrial applications that trace their roots back to the colonial days, including glass, soap, and ceramic production.<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> <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"> You Need Potash in Your Diet </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Potassium is an important element of the human diet as it's involved in both cellular metabolism and body functions. It's essential for the growth and maintenance of tissues, muscles, and organs and the electrical activity of the heart.<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_25-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> The average recommended intake of potassium for an adult is 2.6 to 3.4 grams per day but the intake level can change depending on your specific medical condition, age, and sex. Good sources of potassium include citrus fruits and juices, milk, chicken, red meat, fish, soy products, root vegetables, bananas, nuts, and yogurt.<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_27-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Farm soil contains more potassium than nitrogen and phosphorous, and these three nutrients are all critical to thriving plant growth. Potassium absorption is enabled by the use of soil that is enriched with potash-based fertilizers. </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"> Potash Moves Stock Prices </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> In terms of investment opportunities, many of the <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 potash, such as Agrium and Potash, have been acquired by larger rivals over the years.<span class="ql-inline-citation" data-cite="12"></span> However, the Mosaic Company (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MOS">MOS</a>) and Ashland (ASH) have substantial potash operations. </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-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_33-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> As of 2019, Canada, Russia, and Belarus and China accounted for 80% of the world's potash production.<span class="ql-inline-citation" data-cite="15"></span> At the same time, life can't survive without food and water, and potash is a vital part of the formula for expanding the efficient expansion of the world's food supply. In fact, there are no known substitutes for potash. </p></div>	On July 31, 1790, President George Washington signed the first patent ever issued in the United States. The patent was granted to Samuel Hopkins for a new process and apparatus for making [potash](https://www.investopedia.com/terms/p/potash.asp), America's first industrial chemical. While the [patent](https://www.investopedia.com/terms/p/patent.asp) expired fourteen years later, potash remains an important product around the world today. ### Key Takeaways * Potash is America's first industrial chemical, patented in 1790, and remains an essential product today. * Potash is made of potassium, which is an essential part of the human diet. * 95% of the world's potash is used in farming to fertilize food supply. * Many of the pure-play potash stocks have been acquired by larger rivals, but Mosaic Company and Ashland have substantial potash operations. ## Understanding Potash Potash is a vital resource in the world today, but not a topic that many people fully understand. Here are some facts that may help in understanding the ongoing importance of this unique product: ### Potash Is Made of Potassium The element potassium is a member of the alkali metal group and is abundant in nature. It's always found in combined forms with other minerals in the earth's crust, particularly where there are large deposits of clay minerals and heavy soils. Potash is an impure combination of potassium carbonate and potassium salt. Rock deposits bearing potash resulted when ancient inland seas evaporated millions of years ago. The term potash has been commonly used to describe the fertilizer forms of potassium derived from these rocks by separating the salt and other minerals. ### Potash Is Part of History In the early days, the primary source of potash was the ash from native hardwood trees. The basic chemical compound potassium carbonate was extracted by leaching the ashes in big iron pots to dissolve out the soluble components. Evaporation of the solution through percolation resulted in the production of potash. Potash was used in making fertilizer, glass, soap, gunpowder, and dyeing fabrics. The outbreak of World War I forced other countries such as Russia and France to develop their own [natural sources](https://www.investopedia.com/articles/basics/12/natural-resource-investing.asp). Additional sources were discovered in Michigan, Utah, and New Mexico. ### Potash Is in Your Food Some 95% of the world's potash is used on farms to fertilize the food supply. It's a critical ingredient that helps to improve [crop yields](https://www.investopedia.com/terms/c/crop-yield.asp), increase resistance to plant diseases, and heighten water retention. It also has a positive effect on food color, taste, and texture. Potash is a component of feed supplements used to grow livestock and enhance milk production. It still has several industrial applications that trace their roots back to the colonial days, including glass, soap, and ceramic production. ### You Need Potash in Your Diet Potassium is an important element of the human diet as it's involved in both cellular metabolism and body functions. It's essential for the growth and maintenance of tissues, muscles, and organs and the electrical activity of the heart. The average recommended intake of potassium for an adult is 2.6 to 3.4 grams per day but the intake level can change depending on your specific medical condition, age, and sex. Good sources of potassium include citrus fruits and juices, milk, chicken, red meat, fish, soy products, root vegetables, bananas, nuts, and yogurt. Farm soil contains more potassium than nitrogen and phosphorous, and these three nutrients are all critical to thriving plant growth. Potassium absorption is enabled by the use of soil that is enriched with potash-based fertilizers. ### Potash Moves Stock Prices In terms of investment opportunities, many of the [pure plays](https://www.investopedia.com/ask/answers/04/042904.asp) on potash, such as Agrium and Potash, have been acquired by larger rivals over the years. However, the Mosaic Company ([MOS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MOS)) and Ashland (ASH) have substantial potash operations. ## The Bottom Line As of 2019, Canada, Russia, and Belarus and China accounted for 80% of the world's potash production. At the same time, life can't survive without food and water, and potash is a vital part of the formula for expanding the efficient expansion of the world's food supply. In fact, there are no known substitutes for potash.	On July 31, 1790, President George Washington signed the first patent ever issued in the United States. The patent was granted to Samuel Hopkins for a new process and apparatus for making potash, America's first industrial chemical. While the patent expired fourteen years later, potash remains an important product around the world today. Key Takeaways Potash is America's first industrial chemical, patented in 1790, and remains an essential product today.Potash is made of potassium, which is an essential part of the human diet.95% of the world's potash is used in farming to fertilize food supply.Many of the pure-play potash stocks have been acquired by larger rivals, but Mosaic Company and Ashland have substantial potash operations. Understanding Potash Potash is a vital resource in the world today, but not a topic that many people fully understand. Here are some facts that may help in understanding the ongoing importance of this unique product: Potash Is Made of Potassium The element potassium is a member of the alkali metal group and is abundant in nature. It's always found in combined forms with other minerals in the earth's crust, particularly where there are large deposits of clay minerals and heavy soils. Potash is an impure combination of potassium carbonate and potassium salt. Rock deposits bearing potash resulted when ancient inland seas evaporated millions of years ago. The term potash has been commonly used to describe the fertilizer forms of potassium derived from these rocks by separating the salt and other minerals. Potash Is Part of History In the early days, the primary source of potash was the ash from native hardwood trees. The basic chemical compound potassium carbonate was extracted by leaching the ashes in big iron pots to dissolve out the soluble components. Evaporation of the solution through percolation resulted in the production of potash. Potash was used in making fertilizer, glass, soap, gunpowder, and dyeing fabrics. The outbreak of World War I forced other countries such as Russia and France to develop their own natural sources. Additional sources were discovered in Michigan, Utah, and New Mexico. Potash Is in Your Food Some 95% of the world's potash is used on farms to fertilize the food supply. It's a critical ingredient that helps to improve crop yields, increase resistance to plant diseases, and heighten water retention. It also has a positive effect on food color, taste, and texture. Potash is a component of feed supplements used to grow livestock and enhance milk production. It still has several industrial applications that trace their roots back to the colonial days, including glass, soap, and ceramic production. You Need Potash in Your Diet Potassium is an important element of the human diet as it's involved in both cellular metabolism and body functions. It's essential for the growth and maintenance of tissues, muscles, and organs and the electrical activity of the heart. The average recommended intake of potassium for an adult is 2.6 to 3.4 grams per day but the intake level can change depending on your specific medical condition, age, and sex. Good sources of potassium include citrus fruits and juices, milk, chicken, red meat, fish, soy products, root vegetables, bananas, nuts, and yogurt. Farm soil contains more potassium than nitrogen and phosphorous, and these three nutrients are all critical to thriving plant growth. Potassium absorption is enabled by the use of soil that is enriched with potash-based fertilizers. Potash Moves Stock Prices In terms of investment opportunities, many of the pure plays on potash, such as Agrium and Potash, have been acquired by larger rivals over the years. However, the Mosaic Company (MOS) and Ashland (ASH) have substantial potash operations. The Bottom Line As of 2019, Canada, Russia, and Belarus and China accounted for 80% of the world's potash production. At the same time, life can't survive without food and water, and potash is a vital part of the formula for expanding the efficient expansion of the world's food supply. In fact, there are no known substitutes for potash.	[ [ "potash", "https://www.investopedia.com/terms/p/potash.asp" ], [ "patent", "https://www.investopedia.com/terms/p/patent.asp" ], [ "natural sources", "https://www.investopedia.com/articles/basics/12/natural-resource-investing.asp" ], [ "crop yields", "https://www.investopedia.com/terms/c/crop-yield.asp" ], [ "pure plays", "https://www.investopedia.com/ask/answers/04/042904.asp" ], [ "MOS", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=MOS" ] ]
https://www.investopedia.com/terms/w/wrongful-termination-claims.asp	Wrongful Termination Claim: Meaning, Types, Filing	<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-wrongful-termination-claim"></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 Wrongful Termination Claim? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A wrongful termination claim is filed in a court of law by someone who believes they were unjustly or illegally fired from their job. Wrongful termination claims involve an alleged violation of federal or state antidiscrimination laws, oral and written employment agreements/contracts, or labor laws, including <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/collective-bargaining.asp">collective bargaining</a> laws or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/w/whistleblower.asp">whistleblower</a> laws. Employees who feel their termination was a form of sexual harassment or in retaliation for having filed a complaint against the employer may also file a wrongful termination claim. </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 wrongful termination claim is a lawsuit-like action that an employee files against an employer whom they feel has fired them illegally.</li><li>Most wrongful termination claims are based on a violation of state or federal laws, but they can also represent a breach of an employment contract.</li><li>Types of wrongful termination claims can include dismissal due to discrimination, medical history, retaliation for whistleblowing/complaint filing, organizing a union, or without contractual cause.</li><li>Compensation for wrongful termination can include monetary damages and/or restoration of employment.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-wrongful-termination-claim"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_6-0"> <span class="mntl-sc-block-heading__text"> Understanding a Wrongful Termination Claim </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> In the United States, employment in most states is considered “at will,” meaning that employers neither need to have a reason to fire a worker nor give advance <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/notice-of-termination.asp">notice of termination</a> (though many do issue formal notices, to allow workers to obtain <a class="pseudoStyle" data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cobra.asp">Consolidated Omnibus Benefits Reconciliation Act</a> [COBRA] health benefits and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unemployment-insurance.asp">unemployment insurance</a> benefits). Still, employment-at-will doesn’t mean that businesses can discharge employees completely at their discretion. Firing people for certain reasons or motives is not permitted, especially if it’s in violation of state or federal laws or is a breach of contract of some sort. </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"> Individuals who feel their involuntary dismissal represents such a violation can file a wrongful termination claim against their employer. A wrongful termination claim is like a lawsuit—the employee is bringing an action against their former company and seeking compensation for being unfairly fired. </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"> If the employee prevails, then the compensation for wrongful termination can include monetary damages based on lost wages, job hunting costs, and other expenses. An employee could also ask to have their job restored or be given a comparable position. Depending on the grounds of the claim (see below), the employer might also face statutory penalties. </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-types-of-wrongful-termination-claims"></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"> Types of Wrongful Termination Claims </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Employees can file wrongful termination claims on several grounds. Some of the most common include: </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"> Discrimination </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_17-0"> Someone fired because of their "race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 or older), disability and genetic information (including family medical history)" may file a wrongful termination claim.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="3"></span> These laws fall under the purview of the U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/equal-employment-opportunity-commission-eeoc.asp">Equal Employment Opportunity Commission</a> (EEOC). On its website, the EEOC outlines <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.eeoc.gov/how-file-charge-employment-discrimination">how to file a charge of employment discrimination</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_18-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_19-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_20-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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 U.S. Equal Employment Opportunity Commission (EEOC) requires you to file a charge of discrimination with the agency before you can file a job discrimination lawsuit against your employer.</p></div></div></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"> Retaliation </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> Employers cannot legally punish workers for reporting wrongful activities, such as criminal activity, at work. This is known as whistleblower protection.<span class="ql-inline-citation" data-cite="4"></span> Also, it is not lawful to terminate a worker simply for filing a workers compensation claim, although anyone asserting that this has happened will have to prove that the measure was retaliatory and not based on work performance or another permitted reason. </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"> Medical history </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Under the Genetic Information Nondiscrimination Act (GINA), employers may not use genetic information in dealing with employees, or when making employment decisions, including hiring and firing. “Using genetic information” includes testing for whether a candidate or employee is at greater risk than average of developing certain diseases or inquiring about family medical history.<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_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"> Organizing </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> While an employer may have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx">grounds to fire an individual</a> for complaining or venting about an employer or boss, under the National Labor Relations Act (NLRA), workers are permitted to engage in “concerted activity” to improve wages or working conditions, such as organizing a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/labor-union.asp">labor union</a> or conducting a campaign to bring an existing union into their workplace. Workers need not already be in a union to be covered by this protection.<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> <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"> Lack of cause </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Individuals engaged under a contract that requires a cause for their termination but does not receive one may be eligible to file a wrongful termination claim.<span class="ql-inline-citation" data-cite="7"></span> Unlike other types of claims, this is a contractual breach rather than a violation of a law or statute. The contract must stipulate that the person can be <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx">fired only “for cause,”</a> meaning a reason for the dismissal must be noted, and it must fall under certain sorts of behavior or action, such as willful misconduct, deliberate neglect of job duties, deliberate sabotage or destruction of company property, or divulging company secrets. </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-how-to-file-a-wrongful-termination-claim"></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 File a Wrongful Termination Claim </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> First, it’s essential for an employee to read their original agreement letter or employment contract to find out what rights and resources they have available (and to check if all conditions and promises were met surrounding their term of employment and their dismissal). </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"> Also, they may want to hold off on signing any sort of severance agreement with their employer, especially if it specifically demands that they waive any rights to filing a claim or seeking legal redress. </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"> Workers who believe that they have been dismissed unlawfully should consult with an attorney—a labor lawyer, or an employment law/employees’ rights lawyer—for advice on whether they have a claim and for possible representation. The sooner, the better: There are different deadlines for filing claims under state and federal laws. </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"> If possible, individuals should try to obtain a copy of their personnel file, to discover who was responsible for their firing; who approved it; and any documents, such as warning letters, status reports, or performance reviews, referring or relating to it. Such information will be helpful to an attorney reviewing a potential case. </p></div>	## What Is a Wrongful Termination Claim? A wrongful termination claim is filed in a court of law by someone who believes they were unjustly or illegally fired from their job. Wrongful termination claims involve an alleged violation of federal or state antidiscrimination laws, oral and written employment agreements/contracts, or labor laws, including [collective bargaining](https://www.investopedia.com/terms/c/collective-bargaining.asp) laws or [whistleblower](https://www.investopedia.com/terms/w/whistleblower.asp) laws. Employees who feel their termination was a form of sexual harassment or in retaliation for having filed a complaint against the employer may also file a wrongful termination claim. ### Key Takeaways * A wrongful termination claim is a lawsuit-like action that an employee files against an employer whom they feel has fired them illegally. * Most wrongful termination claims are based on a violation of state or federal laws, but they can also represent a breach of an employment contract. * Types of wrongful termination claims can include dismissal due to discrimination, medical history, retaliation for whistleblowing/complaint filing, organizing a union, or without contractual cause. * Compensation for wrongful termination can include monetary damages and/or restoration of employment. ## Understanding a Wrongful Termination Claim In the United States, employment in most states is considered “at will,” meaning that employers neither need to have a reason to fire a worker nor give advance [notice of termination](https://www.investopedia.com/terms/n/notice-of-termination.asp) (though many do issue formal notices, to allow workers to obtain [Consolidated Omnibus Benefits Reconciliation Act](https://www.investopedia.com/terms/c/cobra.asp) [COBRA] health benefits and [unemployment insurance](https://www.investopedia.com/terms/u/unemployment-insurance.asp) benefits). Still, employment-at-will doesn’t mean that businesses can discharge employees completely at their discretion. Firing people for certain reasons or motives is not permitted, especially if it’s in violation of state or federal laws or is a breach of contract of some sort. Individuals who feel their involuntary dismissal represents such a violation can file a wrongful termination claim against their employer. A wrongful termination claim is like a lawsuit—the employee is bringing an action against their former company and seeking compensation for being unfairly fired. If the employee prevails, then the compensation for wrongful termination can include monetary damages based on lost wages, job hunting costs, and other expenses. An employee could also ask to have their job restored or be given a comparable position. Depending on the grounds of the claim (see below), the employer might also face statutory penalties. ## Types of Wrongful Termination Claims Employees can file wrongful termination claims on several grounds. Some of the most common include: ### Discrimination Someone fired because of their "race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 or older), disability and genetic information (including family medical history)" may file a wrongful termination claim. These laws fall under the purview of the U.S. [Equal Employment Opportunity Commission](https://www.investopedia.com/terms/e/equal-employment-opportunity-commission-eeoc.asp) (EEOC). On its website, the EEOC outlines [how to file a charge of employment discrimination](https://www.eeoc.gov/how-file-charge-employment-discrimination). ### The U.S. Equal Employment Opportunity Commission (EEOC) requires you to file a charge of discrimination with the agency before you can file a job discrimination lawsuit against your employer. ### Retaliation Employers cannot legally punish workers for reporting wrongful activities, such as criminal activity, at work. This is known as whistleblower protection. Also, it is not lawful to terminate a worker simply for filing a workers compensation claim, although anyone asserting that this has happened will have to prove that the measure was retaliatory and not based on work performance or another permitted reason. ### Medical history Under the Genetic Information Nondiscrimination Act (GINA), employers may not use genetic information in dealing with employees, or when making employment decisions, including hiring and firing. “Using genetic information” includes testing for whether a candidate or employee is at greater risk than average of developing certain diseases or inquiring about family medical history. ### Organizing While an employer may have [grounds to fire an individual](https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx) for complaining or venting about an employer or boss, under the National Labor Relations Act (NLRA), workers are permitted to engage in “concerted activity” to improve wages or working conditions, such as organizing a [labor union](https://www.investopedia.com/terms/l/labor-union.asp) or conducting a campaign to bring an existing union into their workplace. Workers need not already be in a union to be covered by this protection. ### Lack of cause Individuals engaged under a contract that requires a cause for their termination but does not receive one may be eligible to file a wrongful termination claim. Unlike other types of claims, this is a contractual breach rather than a violation of a law or statute. The contract must stipulate that the person can be [fired only “for cause,”](https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx) meaning a reason for the dismissal must be noted, and it must fall under certain sorts of behavior or action, such as willful misconduct, deliberate neglect of job duties, deliberate sabotage or destruction of company property, or divulging company secrets. ## How to File a Wrongful Termination Claim First, it’s essential for an employee to read their original agreement letter or employment contract to find out what rights and resources they have available (and to check if all conditions and promises were met surrounding their term of employment and their dismissal). Also, they may want to hold off on signing any sort of severance agreement with their employer, especially if it specifically demands that they waive any rights to filing a claim or seeking legal redress. Workers who believe that they have been dismissed unlawfully should consult with an attorney—a labor lawyer, or an employment law/employees’ rights lawyer—for advice on whether they have a claim and for possible representation. The sooner, the better: There are different deadlines for filing claims under state and federal laws. If possible, individuals should try to obtain a copy of their personnel file, to discover who was responsible for their firing; who approved it; and any documents, such as warning letters, status reports, or performance reviews, referring or relating to it. Such information will be helpful to an attorney reviewing a potential case.	What Is a Wrongful Termination Claim? A wrongful termination claim is filed in a court of law by someone who believes they were unjustly or illegally fired from their job. Wrongful termination claims involve an alleged violation of federal or state antidiscrimination laws, oral and written employment agreements/contracts, or labor laws, including collective bargaining laws or whistleblower laws. Employees who feel their termination was a form of sexual harassment or in retaliation for having filed a complaint against the employer may also file a wrongful termination claim. Key Takeaways A wrongful termination claim is a lawsuit-like action that an employee files against an employer whom they feel has fired them illegally.Most wrongful termination claims are based on a violation of state or federal laws, but they can also represent a breach of an employment contract.Types of wrongful termination claims can include dismissal due to discrimination, medical history, retaliation for whistleblowing/complaint filing, organizing a union, or without contractual cause.Compensation for wrongful termination can include monetary damages and/or restoration of employment. Understanding a Wrongful Termination Claim In the United States, employment in most states is considered “at will,” meaning that employers neither need to have a reason to fire a worker nor give advance notice of termination (though many do issue formal notices, to allow workers to obtain Consolidated Omnibus Benefits Reconciliation Act [COBRA] health benefits and unemployment insurance benefits). Still, employment-at-will doesn’t mean that businesses can discharge employees completely at their discretion. Firing people for certain reasons or motives is not permitted, especially if it’s in violation of state or federal laws or is a breach of contract of some sort. Individuals who feel their involuntary dismissal represents such a violation can file a wrongful termination claim against their employer. A wrongful termination claim is like a lawsuit—the employee is bringing an action against their former company and seeking compensation for being unfairly fired. If the employee prevails, then the compensation for wrongful termination can include monetary damages based on lost wages, job hunting costs, and other expenses. An employee could also ask to have their job restored or be given a comparable position. Depending on the grounds of the claim (see below), the employer might also face statutory penalties. Types of Wrongful Termination Claims Employees can file wrongful termination claims on several grounds. Some of the most common include: Discrimination Someone fired because of their "race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 or older), disability and genetic information (including family medical history)" may file a wrongful termination claim. These laws fall under the purview of the U.S. Equal Employment Opportunity Commission (EEOC). On its website, the EEOC outlines how to file a charge of employment discrimination. The U.S. Equal Employment Opportunity Commission (EEOC) requires you to file a charge of discrimination with the agency before you can file a job discrimination lawsuit against your employer. Retaliation Employers cannot legally punish workers for reporting wrongful activities, such as criminal activity, at work. This is known as whistleblower protection. Also, it is not lawful to terminate a worker simply for filing a workers compensation claim, although anyone asserting that this has happened will have to prove that the measure was retaliatory and not based on work performance or another permitted reason. Medical history Under the Genetic Information Nondiscrimination Act (GINA), employers may not use genetic information in dealing with employees, or when making employment decisions, including hiring and firing. “Using genetic information” includes testing for whether a candidate or employee is at greater risk than average of developing certain diseases or inquiring about family medical history. Organizing While an employer may have grounds to fire an individual for complaining or venting about an employer or boss, under the National Labor Relations Act (NLRA), workers are permitted to engage in “concerted activity” to improve wages or working conditions, such as organizing a labor union or conducting a campaign to bring an existing union into their workplace. Workers need not already be in a union to be covered by this protection. Lack of cause Individuals engaged under a contract that requires a cause for their termination but does not receive one may be eligible to file a wrongful termination claim. Unlike other types of claims, this is a contractual breach rather than a violation of a law or statute. The contract must stipulate that the person can be fired only “for cause,” meaning a reason for the dismissal must be noted, and it must fall under certain sorts of behavior or action, such as willful misconduct, deliberate neglect of job duties, deliberate sabotage or destruction of company property, or divulging company secrets. How to File a Wrongful Termination Claim First, it’s essential for an employee to read their original agreement letter or employment contract to find out what rights and resources they have available (and to check if all conditions and promises were met surrounding their term of employment and their dismissal). Also, they may want to hold off on signing any sort of severance agreement with their employer, especially if it specifically demands that they waive any rights to filing a claim or seeking legal redress. Workers who believe that they have been dismissed unlawfully should consult with an attorney—a labor lawyer, or an employment law/employees’ rights lawyer—for advice on whether they have a claim and for possible representation. The sooner, the better: There are different deadlines for filing claims under state and federal laws. If possible, individuals should try to obtain a copy of their personnel file, to discover who was responsible for their firing; who approved it; and any documents, such as warning letters, status reports, or performance reviews, referring or relating to it. Such information will be helpful to an attorney reviewing a potential case.	[ [ "collective bargaining", "https://www.investopedia.com/terms/c/collective-bargaining.asp" ], [ "whistleblower", "https://www.investopedia.com/terms/w/whistleblower.asp" ], [ "notice of termination", "https://www.investopedia.com/terms/n/notice-of-termination.asp" ], [ "Consolidated Omnibus Benefits Reconciliation Act", "https://www.investopedia.com/terms/c/cobra.asp" ], [ "unemployment insurance", "https://www.investopedia.com/terms/u/unemployment-insurance.asp" ], [ "Equal Employment Opportunity Commission", "https://www.investopedia.com/terms/e/equal-employment-opportunity-commission-eeoc.asp" ], [ "how to file a charge of employment discrimination", "https://www.eeoc.gov/how-file-charge-employment-discrimination" ], [ "grounds to fire an individual", "https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx" ], [ "labor union", "https://www.investopedia.com/terms/l/labor-union.asp" ], [ "fired only “for cause,”", "https://www.investopedia.com/financial-edge/1112/things-you-didnt-know-could-get-you-fired.aspx" ] ]
https://www.investopedia.com/terms/s/senior-bank-loan.asp	Senior Bank Loan: Definition, How It Works, Rates & Risks	<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-senior-bank-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 Senior Bank Loan? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A senior bank loan is a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debtfinancing.asp">debt financing</a> obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors. The repackaged debt obligation consists of multiple loans. Senior bank loans hold legal claim to the borrower's assets above all other debt obligations. </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"> Because it is considered senior to all other claims against the borrower, in the event of a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>, it will be the first loan to be repaid before any other creditors, preferred stockholders, or common stockholders receive repayment. Senior bank loans are usually secured via a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lien.asp">lien</a> against the assets of the borrower. </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 senior bank loan is a corporate loan repackaged into a bundle of corporate loans that is sold to investors.</li><li>Senior bank loans take priority over all of the other debt obligations of a borrower.</li><li>In the event of a bankruptcy, senior bank loans receive payment before other creditors, preferred stockholders, and common stockholders, when the assets of the borrower are sold off.</li><li>Senior bank loans are typically secured via a lien against the assets of the borrower.</li><li>Senior bank loans most often come with floating interest rates.</li><li>Historically, lenders that issue senior bank loans have been able to recover the entirety of the loan when the borrower has defaulted.</li><li>Senior bank loans typically provide high-yield returns for investors and protection against inflation</li></ul></div></div></div> <span class="heading-toc" id="toc-how-a-senior-bank-loan-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 Senior Bank Loan Works </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Loans are often used to provide a business with cash to continue its daily operations or any other capital needs that it may have. The loans are generally backed by the company's inventory, property, equipment, or real estate, 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>. Banks often take the multiple loans they make, repackage them into one debt obligation, and sell them off to investors as a financial product. The investors then receive the interest payments as the return on their investment. </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"> Because senior bank loans are at the top of a company’s capital structure, if the company files 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 secured assets are typically sold and the proceeds are distributed to senior loan holders before any other type of lender is paid back. </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"> Historically, the majority of businesses with senior bank loans that ended up filing for bankruptcy have been able to cover the loans entirely, meaning the lenders/investors have been paid back. Because senior bank loans take precedence in the repayment structure they are relatively safe, though they are still considered non-<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/">investment grade</a> assets, as most of the time the corporate loans in the bundle are made to non-investment grade companies. </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"> Senior bank loans typically have <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/floatinginterestrate.asp">floating interest rates</a> that fluctuate according to the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/libor.asp">London Interbank Offered Rate</a> (LIBOR) or other common benchmarks. For example, if a bank’s rate is LIBOR + 5%, and LIBOR is 3%, the loan's interest rate will be 8%. Because loan rates often change monthly or quarterly, interest on a senior bank loan may increase or decrease at regular intervals. This rate is also the yield that investors will make on their investment. The floating rate aspect of a senior bank loan provides investors with protection against rising short term interest rates, as a protection against <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inflation.asp">inflation</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"> In the repayment structure, after senior bank loans, which are typically classified as first lien and second lien, comes <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/unsecureddebt.asp">unsecured debt</a> followed by equity. </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-special-considerations"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_19-0"> <span class="mntl-sc-block-heading__text"> Special Considerations </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> Businesses that take out senior bank loans often have lower credit ratings than their peers, so the credit risk to the lender is typically greater than it would be with most corporate bonds. What's more, the valuations of senior bank loans fluctuate often and may be volatile. This was especially true during the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-crisis.asp">financial crisis</a> of 2008. </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"> Because of their inherent risk and volatility, senior bank loans typically pay the lender a higher yield than investment-grade corporate bonds. However, because the lenders are assured of getting at least some portion of their money back before the company's other creditors in the event of insolvency, the loans yield less than <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/high_yield_bond.asp">high-yield bonds</a>, which carry no such promise. </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"> Investing in mutual funds or <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded funds</a> (ETFs) that specialize in senior bank loans may make sense for some investors who are seeking regular income and who are willing to assume the additional risk and volatility. Here's why: </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>Because of the loans’ floating rate, when 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> raises interest rates, the loans will deliver higher yields.</li> <li>In addition, senior bank loan funds typically have a risk-adjusted return over a three-to-five-year period that makes them attractive to fairly conservative investors. When the loan funds underperform, bonds sell at a discount to par, increasing an investor’s yield.</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"> Investors can also take some reassurance from the fact that senior bank loan funds’ average <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defaultrate.asp">default rate</a> historically is a relatively modest 3%. </p></div>	## What Is a Senior Bank Loan? A senior bank loan is a [debt financing](https://www.investopedia.com/terms/d/debtfinancing.asp) obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors. The repackaged debt obligation consists of multiple loans. Senior bank loans hold legal claim to the borrower's assets above all other debt obligations. Because it is considered senior to all other claims against the borrower, in the event of a [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp), it will be the first loan to be repaid before any other creditors, preferred stockholders, or common stockholders receive repayment. Senior bank loans are usually secured via a [lien](https://www.investopedia.com/terms/l/lien.asp) against the assets of the borrower. ### Key Takeaways * A senior bank loan is a corporate loan repackaged into a bundle of corporate loans that is sold to investors. * Senior bank loans take priority over all of the other debt obligations of a borrower. * In the event of a bankruptcy, senior bank loans receive payment before other creditors, preferred stockholders, and common stockholders, when the assets of the borrower are sold off. * Senior bank loans are typically secured via a lien against the assets of the borrower. * Senior bank loans most often come with floating interest rates. * Historically, lenders that issue senior bank loans have been able to recover the entirety of the loan when the borrower has defaulted. * Senior bank loans typically provide high-yield returns for investors and protection against inflation ## How a Senior Bank Loan Works Loans are often used to provide a business with cash to continue its daily operations or any other capital needs that it may have. The loans are generally backed by the company's inventory, property, equipment, or real estate, as [collateral](https://www.investopedia.com/terms/c/collateral.asp). Banks often take the multiple loans they make, repackage them into one debt obligation, and sell them off to investors as a financial product. The investors then receive the interest payments as the return on their investment. Because senior bank loans are at the top of a company’s capital structure, if the company files for [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp), the secured assets are typically sold and the proceeds are distributed to senior loan holders before any other type of lender is paid back. Historically, the majority of businesses with senior bank loans that ended up filing for bankruptcy have been able to cover the loans entirely, meaning the lenders/investors have been paid back. Because senior bank loans take precedence in the repayment structure they are relatively safe, though they are still considered non-[investment grade](https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/) assets, as most of the time the corporate loans in the bundle are made to non-investment grade companies. Senior bank loans typically have [floating interest rates](https://www.investopedia.com/terms/f/floatinginterestrate.asp) that fluctuate according to the [London Interbank Offered Rate](https://www.investopedia.com/terms/l/libor.asp) (LIBOR) or other common benchmarks. For example, if a bank’s rate is LIBOR + 5%, and LIBOR is 3%, the loan's interest rate will be 8%. Because loan rates often change monthly or quarterly, interest on a senior bank loan may increase or decrease at regular intervals. This rate is also the yield that investors will make on their investment. The floating rate aspect of a senior bank loan provides investors with protection against rising short term interest rates, as a protection against [inflation](https://www.investopedia.com/terms/i/inflation.asp). In the repayment structure, after senior bank loans, which are typically classified as first lien and second lien, comes [unsecured debt](https://www.investopedia.com/terms/u/unsecureddebt.asp) followed by equity. ## Special Considerations Businesses that take out senior bank loans often have lower credit ratings than their peers, so the credit risk to the lender is typically greater than it would be with most corporate bonds. What's more, the valuations of senior bank loans fluctuate often and may be volatile. This was especially true during the [financial crisis](https://www.investopedia.com/terms/f/financial-crisis.asp) of 2008. Because of their inherent risk and volatility, senior bank loans typically pay the lender a higher yield than investment-grade corporate bonds. However, because the lenders are assured of getting at least some portion of their money back before the company's other creditors in the event of insolvency, the loans yield less than [high-yield bonds](https://www.investopedia.com/terms/h/high_yield_bond.asp), which carry no such promise. Investing in mutual funds or [exchange traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs) that specialize in senior bank loans may make sense for some investors who are seeking regular income and who are willing to assume the additional risk and volatility. Here's why: * Because of the loans’ floating rate, when the [Federal Reserve](https://www.investopedia.com/terms/f/federalreservebank.asp) raises interest rates, the loans will deliver higher yields. * In addition, senior bank loan funds typically have a risk-adjusted return over a three-to-five-year period that makes them attractive to fairly conservative investors. When the loan funds underperform, bonds sell at a discount to par, increasing an investor’s yield. Investors can also take some reassurance from the fact that senior bank loan funds’ average [default rate](https://www.investopedia.com/terms/d/defaultrate.asp) historically is a relatively modest 3%.	What Is a Senior Bank Loan? A senior bank loan is a debt financing obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors. The repackaged debt obligation consists of multiple loans. Senior bank loans hold legal claim to the borrower's assets above all other debt obligations. Because it is considered senior to all other claims against the borrower, in the event of a bankruptcy, it will be the first loan to be repaid before any other creditors, preferred stockholders, or common stockholders receive repayment. Senior bank loans are usually secured via a lien against the assets of the borrower. Key Takeaways A senior bank loan is a corporate loan repackaged into a bundle of corporate loans that is sold to investors.Senior bank loans take priority over all of the other debt obligations of a borrower.In the event of a bankruptcy, senior bank loans receive payment before other creditors, preferred stockholders, and common stockholders, when the assets of the borrower are sold off.Senior bank loans are typically secured via a lien against the assets of the borrower.Senior bank loans most often come with floating interest rates.Historically, lenders that issue senior bank loans have been able to recover the entirety of the loan when the borrower has defaulted.Senior bank loans typically provide high-yield returns for investors and protection against inflation How a Senior Bank Loan Works Loans are often used to provide a business with cash to continue its daily operations or any other capital needs that it may have. The loans are generally backed by the company's inventory, property, equipment, or real estate, as collateral. Banks often take the multiple loans they make, repackage them into one debt obligation, and sell them off to investors as a financial product. The investors then receive the interest payments as the return on their investment. Because senior bank loans are at the top of a company’s capital structure, if the company files for bankruptcy, the secured assets are typically sold and the proceeds are distributed to senior loan holders before any other type of lender is paid back. Historically, the majority of businesses with senior bank loans that ended up filing for bankruptcy have been able to cover the loans entirely, meaning the lenders/investors have been paid back. Because senior bank loans take precedence in the repayment structure they are relatively safe, though they are still considered non-investment grade assets, as most of the time the corporate loans in the bundle are made to non-investment grade companies. Senior bank loans typically have floating interest rates that fluctuate according to the London Interbank Offered Rate (LIBOR) or other common benchmarks. For example, if a bank’s rate is LIBOR + 5%, and LIBOR is 3%, the loan's interest rate will be 8%. Because loan rates often change monthly or quarterly, interest on a senior bank loan may increase or decrease at regular intervals. This rate is also the yield that investors will make on their investment. The floating rate aspect of a senior bank loan provides investors with protection against rising short term interest rates, as a protection against inflation. In the repayment structure, after senior bank loans, which are typically classified as first lien and second lien, comes unsecured debt followed by equity. Special Considerations Businesses that take out senior bank loans often have lower credit ratings than their peers, so the credit risk to the lender is typically greater than it would be with most corporate bonds. What's more, the valuations of senior bank loans fluctuate often and may be volatile. This was especially true during the financial crisis of 2008. Because of their inherent risk and volatility, senior bank loans typically pay the lender a higher yield than investment-grade corporate bonds. However, because the lenders are assured of getting at least some portion of their money back before the company's other creditors in the event of insolvency, the loans yield less than high-yield bonds, which carry no such promise. Investing in mutual funds or exchange traded funds (ETFs) that specialize in senior bank loans may make sense for some investors who are seeking regular income and who are willing to assume the additional risk and volatility. Here's why: Because of the loans’ floating rate, when the Federal Reserve raises interest rates, the loans will deliver higher yields. In addition, senior bank loan funds typically have a risk-adjusted return over a three-to-five-year period that makes them attractive to fairly conservative investors. When the loan funds underperform, bonds sell at a discount to par, increasing an investor’s yield. Investors can also take some reassurance from the fact that senior bank loan funds’ average default rate historically is a relatively modest 3%.	[ [ "debt financing", "https://www.investopedia.com/terms/d/debtfinancing.asp" ], [ "bankruptcy", "https://www.investopedia.com/terms/b/bankruptcy.asp" ], [ "lien", "https://www.investopedia.com/terms/l/lien.asp" ], [ "collateral", "https://www.investopedia.com/terms/c/collateral.asp" ], [ "bankruptcy", "https://www.investopedia.com/terms/b/bankruptcy.asp" ], [ "investment grade", "https://www.investopedia.com/ask/answers/what-does-investment-grade-mean/" ], [ "floating interest rates", "https://www.investopedia.com/terms/f/floatinginterestrate.asp" ], [ "London Interbank Offered Rate", "https://www.investopedia.com/terms/l/libor.asp" ], [ "inflation", "https://www.investopedia.com/terms/i/inflation.asp" ], [ "unsecured debt", "https://www.investopedia.com/terms/u/unsecureddebt.asp" ], [ "financial crisis", "https://www.investopedia.com/terms/f/financial-crisis.asp" ], [ "high-yield bonds", "https://www.investopedia.com/terms/h/high_yield_bond.asp" ], [ "exchange traded funds", "https://www.investopedia.com/terms/e/etf.asp" ], [ "Federal Reserve", "https://www.investopedia.com/terms/f/federalreservebank.asp" ], [ "default rate", "https://www.investopedia.com/terms/d/defaultrate.asp" ] ]
https://www.investopedia.com/schwab-announces-thinkorswim-platform-will-survive-5073994	Schwab Announces thinkorswim Platform Will Survive	<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"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Schwab's acquisition of TD Ameritrade, announced in November 2019, continues to move slowly forward. </li><li>On August 5, 2020, Schwab announced that the thinkorswim trading platform and the thinkpipes advisor platform would be supported once the acquisition is complete </li><li>The takeover is expected to be completed by the end of 2020, with platform rebranding and changes taking another 18-36 months. </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"> As Charles Schwab's acquisition of TD Ameritrade moves slowly forward, Schwab <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Announces-Plan-to-Adopt-thinkorswim-Trading-Platforms-as-Part-of-TD-Ameritrade-Integration/default.aspx" rel="noopener noreferrer nofollow">announced </a>on August 5, 2020, that the thinkorswim trading tools and the thinkpipes advisor platform would be integrated into its offerings. Thinkorswim is designed for derivatives-focused active traders and is available as a downloadable platform, web app, or mobile app. Customers use its powerful analysis tools and real-time streaming data to trade equities, options, futures, options on futures, and forex in their online accounts. To reflect its growing footprint in Asia, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/td-ameritrade-review-4587925" rel="noopener noreferrer">TD Ameritrade</a> made the platform available in traditional as well as simplified Chinese. </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"> Thinkorswim was founded in 1999 by Tom Sosnoff and Scott Sheridan, and acquired by TD Ameritrade in 2009. Sosnoff and Sheridan are now with tastyworks. TD Ameritrade went on to acquire Scottrade in 2017. Schwab announced its intention to take over TD Ameritrade in November 2019 as commissions at most online brokers for equity trading were being cut to $0. </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 acquisition of TD by Schwab was cleared by the Antitrust Division of the United States Department of Justice in early June, and Schwab stockholders voted to go forward in a special meeting of stockholders held later that same day. The transaction is expected to close in the second half of the year, according to statements made by Schwab CEO Walt Bettinger during an earnings call on July 21. </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-clients-respond"></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"> Clients Respond </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> There had been speculation, mostly on Twitter, about the fate of the thinkorswim platform as well as the advisor tools available on TD Ameritrade. Schwab has said that adopting its own platforms and systems generally will be the most effective way to achieve a successful and timely integration. In their joint statement, Executive Vice President of Schwab’s Integration Management Office Jason Clague asserted that “We are committed to leveraging material advantages in TD Ameritrade’s platforms when doing so enables us to deliver a differentiated experience to all of our clients. That commitment drove these decisions.” </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"> Jeremy Sellers, a day trader and day trading coach based in Birmingham, AL., and founder of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.velocitystock.com/" rel="noopener noreferrer nofollow">Velocity Stock Network</a>, says in a<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://www.youtube.com/watch?v=tfZGrApQQHo" rel="noopener noreferrer"> video response</a> to the news, "I'm sure that supposedly we'll be getting one of the best platforms and best customer service experiences," once the acquisition is complete. </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"> Several thinkorswim users commented that the platform has seemed slower since the acquisition was announced, with one saying, "The latency is unbearable and unacceptable. Perhaps this should be remedied prior to flooding TOS with more users." Steve Quirk, TD Ameritade's Global Head of Trading and Education, says, "Volumes are crazy and we are always working on that," going on to say that the firm has made great strides towards fixing the situation. </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 announcement that thinkpipes, with its real-time charting capabilities and allocation tools, and the portfolio rebalancing solution IRebal, would continue to live on generated positive response from financial advisors on Twitte<strong>r</strong>. In the statement, Schwab says, " Additional technology solutions continue to be evaluated for consideration as part of the combined platform." Two senior members of TD Ameritrade's advisory group, Skip Schweiss and Dani Fava, have left the company in the past two weeks. No announcement has yet been made about Veo One, the digital hub independent RIAs use to integrate various pieces of technology. </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>	### * Schwab's acquisition of TD Ameritrade, announced in November 2019, continues to move slowly forward. * On August 5, 2020, Schwab announced that the thinkorswim trading platform and the thinkpipes advisor platform would be supported once the acquisition is complete * The takeover is expected to be completed by the end of 2020, with platform rebranding and changes taking another 18-36 months. As Charles Schwab's acquisition of TD Ameritrade moves slowly forward, Schwab [announced](https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Announces-Plan-to-Adopt-thinkorswim-Trading-Platforms-as-Part-of-TD-Ameritrade-Integration/default.aspx) on August 5, 2020, that the thinkorswim trading tools and the thinkpipes advisor platform would be integrated into its offerings. Thinkorswim is designed for derivatives-focused active traders and is available as a downloadable platform, web app, or mobile app. Customers use its powerful analysis tools and real-time streaming data to trade equities, options, futures, options on futures, and forex in their online accounts. To reflect its growing footprint in Asia, [TD Ameritrade](https://www.investopedia.com/td-ameritrade-review-4587925) made the platform available in traditional as well as simplified Chinese. Thinkorswim was founded in 1999 by Tom Sosnoff and Scott Sheridan, and acquired by TD Ameritrade in 2009. Sosnoff and Sheridan are now with tastyworks. TD Ameritrade went on to acquire Scottrade in 2017. Schwab announced its intention to take over TD Ameritrade in November 2019 as commissions at most online brokers for equity trading were being cut to $0. The acquisition of TD by Schwab was cleared by the Antitrust Division of the United States Department of Justice in early June, and Schwab stockholders voted to go forward in a special meeting of stockholders held later that same day. The transaction is expected to close in the second half of the year, according to statements made by Schwab CEO Walt Bettinger during an earnings call on July 21. ## Clients Respond There had been speculation, mostly on Twitter, about the fate of the thinkorswim platform as well as the advisor tools available on TD Ameritrade. Schwab has said that adopting its own platforms and systems generally will be the most effective way to achieve a successful and timely integration. In their joint statement, Executive Vice President of Schwab’s Integration Management Office Jason Clague asserted that “We are committed to leveraging material advantages in TD Ameritrade’s platforms when doing so enables us to deliver a differentiated experience to all of our clients. That commitment drove these decisions.” Jeremy Sellers, a day trader and day trading coach based in Birmingham, AL., and founder of [Velocity Stock Network](https://www.velocitystock.com/), says in a[video response](https://www.youtube.com/watch?v=tfZGrApQQHo) to the news, "I'm sure that supposedly we'll be getting one of the best platforms and best customer service experiences," once the acquisition is complete. Several thinkorswim users commented that the platform has seemed slower since the acquisition was announced, with one saying, "The latency is unbearable and unacceptable. Perhaps this should be remedied prior to flooding TOS with more users." Steve Quirk, TD Ameritade's Global Head of Trading and Education, says, "Volumes are crazy and we are always working on that," going on to say that the firm has made great strides towards fixing the situation. The announcement that thinkpipes, with its real-time charting capabilities and allocation tools, and the portfolio rebalancing solution IRebal, would continue to live on generated positive response from financial advisors on Twitter. In the statement, Schwab says, " Additional technology solutions continue to be evaluated for consideration as part of the combined platform." Two senior members of TD Ameritrade's advisory group, Skip Schweiss and Dani Fava, have left the company in the past two weeks. No announcement has yet been made about Veo One, the digital hub independent RIAs use to integrate various pieces of technology. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Schwab's acquisition of TD Ameritrade, announced in November 2019, continues to move slowly forward. On August 5, 2020, Schwab announced that the thinkorswim trading platform and the thinkpipes advisor platform would be supported once the acquisition is complete The takeover is expected to be completed by the end of 2020, with platform rebranding and changes taking another 18-36 months. As Charles Schwab's acquisition of TD Ameritrade moves slowly forward, Schwab announced on August 5, 2020, that the thinkorswim trading tools and the thinkpipes advisor platform would be integrated into its offerings. Thinkorswim is designed for derivatives-focused active traders and is available as a downloadable platform, web app, or mobile app. Customers use its powerful analysis tools and real-time streaming data to trade equities, options, futures, options on futures, and forex in their online accounts. To reflect its growing footprint in Asia, TD Ameritrade made the platform available in traditional as well as simplified Chinese. Thinkorswim was founded in 1999 by Tom Sosnoff and Scott Sheridan, and acquired by TD Ameritrade in 2009. Sosnoff and Sheridan are now with tastyworks. TD Ameritrade went on to acquire Scottrade in 2017. Schwab announced its intention to take over TD Ameritrade in November 2019 as commissions at most online brokers for equity trading were being cut to $0. The acquisition of TD by Schwab was cleared by the Antitrust Division of the United States Department of Justice in early June, and Schwab stockholders voted to go forward in a special meeting of stockholders held later that same day. The transaction is expected to close in the second half of the year, according to statements made by Schwab CEO Walt Bettinger during an earnings call on July 21. Clients Respond There had been speculation, mostly on Twitter, about the fate of the thinkorswim platform as well as the advisor tools available on TD Ameritrade. Schwab has said that adopting its own platforms and systems generally will be the most effective way to achieve a successful and timely integration. In their joint statement, Executive Vice President of Schwab’s Integration Management Office Jason Clague asserted that “We are committed to leveraging material advantages in TD Ameritrade’s platforms when doing so enables us to deliver a differentiated experience to all of our clients. That commitment drove these decisions.” Jeremy Sellers, a day trader and day trading coach based in Birmingham, AL., and founder of Velocity Stock Network, says in a video response to the news, "I'm sure that supposedly we'll be getting one of the best platforms and best customer service experiences," once the acquisition is complete. Several thinkorswim users commented that the platform has seemed slower since the acquisition was announced, with one saying, "The latency is unbearable and unacceptable. Perhaps this should be remedied prior to flooding TOS with more users." Steve Quirk, TD Ameritade's Global Head of Trading and Education, says, "Volumes are crazy and we are always working on that," going on to say that the firm has made great strides towards fixing the situation. The announcement that thinkpipes, with its real-time charting capabilities and allocation tools, and the portfolio rebalancing solution IRebal, would continue to live on generated positive response from financial advisors on Twitter. In the statement, Schwab says, " Additional technology solutions continue to be evaluated for consideration as part of the combined platform." Two senior members of TD Ameritrade's advisory group, Skip Schweiss and Dani Fava, have left the company in the past two weeks. No announcement has yet been made about Veo One, the digital hub independent RIAs use to integrate various pieces of technology. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "announced", "https://pressroom.aboutschwab.com/press-releases/press-release/2020/Charles-Schwab-Announces-Plan-to-Adopt-thinkorswim-Trading-Platforms-as-Part-of-TD-Ameritrade-Integration/default.aspx" ], [ "TD Ameritrade", "https://www.investopedia.com/td-ameritrade-review-4587925" ], [ "Velocity Stock Network", "https://www.velocitystock.com/" ], [ "video response", "https://www.youtube.com/watch?v=tfZGrApQQHo" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/biggest-companies-in-the-world-by-market-cap-5212784	Biggest Companies in the World by Market Cap	<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 world's biggest companies by market capitalization range across different market sectors, including technology, communication services, energy, consumer cyclicals, and financial services. Most companies in the top-10 list generate hundreds of billions of dollars in annual revenue. However, there are a few that generate less than $100 billion in annual revenue, suggesting that investors are optimistic about the potential growth of these companies compared with others on the list. </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"> Companies are ranked as per TradingView's list of largest companies by market cap. All figures, which are also taken from TradingView, are current as of Jan. 20, 2024.<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_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>Company value is often measured by market capitalization or the value of all shares in the market.</li><li>Microsoft, Apple, and Saudi Aramco are the top three global companies, each with market caps of over $2 trillion each.</li><li>Technology and energy companies rank among the most valuable companies in the world today.</li><li>U.S.-based companies fill most top slots.</li></ul></div></div></div> <span class="heading-toc" id="toc-1-microsoft-msft"></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. Microsoft (MSFT) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> <li><strong>Market Cap: </strong>$2.96 trillion<br/></li><li><strong>Revenue (TTM):</strong> $218.31 billion</li><li><strong>Net Income (TTM)</strong>: $77.1 billion<br/></li><li><strong>1-year Trailing Total Return</strong>: 64.6%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded:</strong> 1975</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"> Microsoft (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>) is a global developer and licenser of software, devices, solutions, and services. The company is well known for its Windows and Office Suite software as well as its Xbox gaming hardware. The company is gaining more of its profits and revenue from cloud computing services, for which it is a market leader. Microsoft has also made a big play in AI, integrating it into its search and Office products. </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"> Microsoft's main cloud platform is Azure. Microsoft also owns and operates <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/120214/how-does-linkedin-lnkd-make-money.asp">LinkedIn</a>, the popular social networking site for professionals and job seekers.<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_13-0"></div> <span class="heading-toc" id="toc-2-apple-aapl"></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"> 2. Apple (AAPL) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> <li><strong>Market Cap</strong>: $2.96 trillion</li><li><strong>Revenue (TTM):</strong> $383.29 billion</li><li><strong>Net Income (TTM):</strong> $97 billion<br/></li><li><strong>1-year Trailing Total Return</strong>: 39.1%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded</strong>: 1976</li> </ul> <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"> Apple (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL">AAPL</a>) designs, manufactures, and markets a broad range of consumer technology products, including <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smartphone.asp">smartphones</a>, personal computers, tablets, wearable devices, home entertainment devices, and more. Some of its most popular products include its iPhone smartphones and Mac computers. </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"> Apple also has dramatically expanded its sales from services. It operates digital content stores, provides cloud and payment services, and recently launched AppleTV+, a streaming service for on-demand entertainment content.<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-3-saudi-aramco-2222sr"></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"> 3. Saudi Aramco (2222.SR) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> <li><strong>Market Cap</strong>: $2.06 trillion <br/></li> <li><strong>Revenue (TTM)</strong>: $501.65 billion</li> <li><strong>Net Income (TTM)</strong>: $126.52 billion<br/></li> <li><strong>1-year Trailing Total Return: </strong>9.8%</li> <li><strong>Exchange</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/investing/032515/saudi-stock-exchange.asp">Tadawul (Saudi Stock Exchange)</a></li> <li><strong>Year Founded:</strong> 1933</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"> Saudi Arabian Oil, better known as Saudi Aramco, is a Saudi Arabia-based integrated oil and gas company. The company was founded as Standard Oil's overseas operations and is now owned by the Saudi government. </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"> Aramco operates both <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/060215/what-difference-between-upstream-and-downstream-oil-and-gas-operations.asp">upstream and downstream</a> segments: </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>Its upstream segment engages in the exploration and production of crude oil, condensate, natural gas, and natural gas liquids.</li><li>The downstream segment is engaged in refining and petrochemical manufacturing, distribution, and power generation.</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"> Saudi Aramco also has a chemicals business that makes complex products such as synthetic rubber.<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_31-0"></div> <span class="heading-toc" id="toc-4-alphabet-googlgoog"></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"> 4. Alphabet (GOOGL/GOOG) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_33-0"> <li><strong>Market Cap</strong>: $1.84 trillion</li><li><strong>Revenue (TTM)</strong>: $296.38 billion</li><li><strong>Net Income (TTM):</strong> $66.73 billion<br/></li><li><strong>1-year Trailing Total Return:</strong> 57.4%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded:</strong> 1998</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"> Alphabet (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>/<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG">GOOG</a>) is the parent of Google, the dominant search engine in the global market. The company offers a range of technologies and digital services, including search, the Android smartphone operating system, the Chrome browser, the Gmail email services, the Google Drive online file storage platform, Google Maps, Google Photos, the Google Play app store, and YouTube. </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 company also provides cloud services through Google Cloud and a variety of workspace collaboration tools. In addition, the company earns revenue through a growing array of hardware products such as the Pixel phones, Fitbit, and the Google Nest home collection. Alphabet also operates its Other Bets segment which includes emerging businesses such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/031315/selfdriving-cars-could-change-auto-industry.asp">self-driving car</a> business Waymo.<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_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> Like Microsoft, Alphabet, and just about any tech company on this list, Alphabet is making a play in AI, releasing apps through its Gemini deep learning model.<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_40-0"></div> <span class="heading-toc" id="toc-5-amazon-amzn"></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"> 5. Amazon (AMZN) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> <li><strong>Market Cap:</strong> $1.61 trillion<br/></li><li><strong>Revenue (TTM)</strong>: $554.03 billion</li><li><strong>Net Income (TTM)</strong>: $20.08 billion<br/></li><li><strong>1-year Trailing Total Return</strong>: 62.6%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded</strong>: 1994</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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-amazon-makes-money-4587523">Amazon</a> (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN">AMZN</a>) is an <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/ecommerce.asp">ecommerce</a> retailer that sells a broad range of products and services globally and is the world's biggest provider of cloud computing services. Its ecommerce business includes merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. </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"> Amazon Web Services, launched in 2006, generates the majority of the company 's operating profits, providing cloud services to businesses, government agencies, and academic institutions. </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"> Amazon offers various subscription services and web services as well, including its cloud computing service and fast-growing streaming entertainment business. The company also manufactures and sells electronic devices, such as Kindle e-readers, Fire tablets, Fire TV, and Echo and Alexa. Amazon sells groceries through its subsidiary, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/markets/100715/how-expensive-whole-foods-really.asp">Whole Foods</a>.<span class="ql-inline-citation" data-cite="6"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_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_2-0"></h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_2-0"><p>A company's market cap is calculated by multiplying the number of shares outstanding by the current market price of a single share.</p></div></div></div> <span class="heading-toc" id="toc-6-nvidia-nvda"></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"> 6. Nvidia (NVDA) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_53-0"> <li><strong>Market Cap: </strong>$1.47 trillion</li><li><strong>Revenue (TTM):</strong> $44.88 billion</li><li><strong>Net Income (TTM):</strong> $18.89 billion<br/></li><li><strong>1-year Trailing Total Return</strong>: 246.4%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded:</strong> 1993</li> </ul> <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"> Nvidia (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>) designs and develops graphics processors and related software. It was a pioneer in the development of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp">graphics processing unit (GPU)</a>, whose initial applications were most used for PC graphics and video games. The capabilities of the GPU are now being leveraged for use in AI and machine-learning applications. </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"> The company offers products and platforms comprised of hardware, software, services, and more to serve the gaming, professional visualization, data center, and automotive markets. Nvidia GPUs have also featured prominently in cryptocurrency mining.<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> <span class="heading-toc" id="toc-7-meta-platforms-meta"></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"> 7. Meta Platforms (META) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> <li><strong>Market Cap</strong>: $985.41 billion</li><li><strong>Revenue (TTM)</strong>: $126.96 billion</li><li><strong>Net Income (TTM):</strong> $29.73 billion<br/></li><li><strong>1-Year Trailing Total Return:</strong> 172.3%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded:</strong> 2004</li> </ul> <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"> Meta Platforms (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=META">META</a>) is the owner of Facebook, the world's largest social media network. Meta provides products and digital platforms that enable individuals and businesses to connect with family and friends through mobile devices, personal computers, virtual reality headsets, and in-home devices. </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"> In addition to Facebook, it also owns Instagram, Messenger, and WhatsApp. The company also operates Facebook Reality Labs, which offers augmented and virtual reality (VR) products. </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"> Meta is also investing in and building the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/metaverse-definition-5206578">metaverse</a>, an expansive virtual world that combines aspects of social media, online gaming, augmented reality (AR), VR, and cryptocurrencies.<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_67-0"></div> <span class="heading-toc" id="toc-8-berkshire-hathaway-brkabrkb"></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"> 8. Berkshire Hathaway (BRK.A/BRK.B) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> <li><strong>Market Cap:</strong> $798.46 billion</li> <li><strong>Revenue (TTM):</strong> $395.95 billion</li> <li><strong>Net Income (TTM):</strong> $76.81 billion<br/></li> <li><strong>1-year Trailing Total Return: </strong>13.5%</li> <li><strong>Exchange</strong>: <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nyse.asp">New York Stock Exchange (NYSE)</a></li> <li><strong>Year Founded:</strong> 1839</li> </ul> <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"> Berkshire Hathaway (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.A">BRK.A</a>/<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B">BRK.B</a>) began with the merger of two regional textile companies in the 19th century. Only much later was it purchased by legendary investor Warren Buffett and converted into a conglomerate holding company. </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"> Berkshire Hathaway today owns a large number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/subsidy.asp">subsidiaries</a> engaged in insurance, freight rail transportation, retailing, and utility and energy generation and distribution. The company also operates manufacturing businesses that make products for industrial uses, construction, and for consumers.<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_74-0"></div> <span class="heading-toc" id="toc-9-tesla-tsla"></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"> 9. Tesla (TSLA) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_76-0"> <li><strong>Market Cap:</strong> $674.54 billion</li><li><strong>Revenue (TTM)</strong>: $95.92 billion</li><li><strong>Net Income (TTM)</strong>: $10.79 billion<br/></li><li><strong>1-year Trailing Total Return:</strong> 88.7%</li><li><strong>Exchange</strong>: Nasdaq</li><li><strong>Year Founded:</strong> 2003</li> </ul> <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"> Tesla (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA">TSLA</a>) is a leading manufacturer of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/investing-in-electric-vehicles-and-green-transportation-5220604">electric vehicles</a>, which include the following models: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_79-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_80-0"> <li>Model 3, a four-door, mid-size sedan designed and priced for mass-market appeal</li><li>Model Y, a compact sport utility vehicle (SUV) that seats seven adults</li><li>Model S, a four-door, full-size sedan</li><li>Model X, a mid-size SUV with seating for up to seven adults<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_81-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_82-0"> The company's has been developing and manufacturing its Cybertruck and Tesla Semi, a commercial EV. Tesla also produces solar panels, provides solar energy generation, and supplies energy storage products.<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_83-0"></div> <span class="heading-toc" id="toc-10-eli-lilly-and-company-lly"></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"> 10. Eli Lilly and Company (LLY) </span> </h2> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_85-0"> <li><strong>Market Cap</strong>: $596.71 billion</li><li><strong>Revenue (TTM): </strong>$32.07 billion</li><li><strong>Net Income (TTM):</strong> $4.99 billion<br/></li><li><strong>1-year Trailing Total Return</strong>: 76.5%</li><li><strong>Exchange</strong>: NYSE</li><li><strong>Year Founded:</strong> 1987</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_86-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_87-0"> Eli Lilly and Company (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY">LIL</a>) is one of the world's leading <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/06/drugmarket.asp">pharmaceutical companies</a>. Usually called just Lilly, the company is based in Indianapolis, Indiana. It researches, develops, manufactures, and markets human pharmaceuticals for the global market. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_88-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> Lilly's product lines focus on diabetes, oncology, immunology, and neuroscience. It also caters to health markets, including treatments for COVID-19, male sexual dysfunction, and osteoporosis in menopausal women.<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_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-what-are-the-biggest-companies-in-the-world-by-revenue"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Biggest Companies in the World by Revenue?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>While many people are interested in ranking companies by market value or market cap, the top companies by revenue differ somewhat. This could be because they are more capital-intensive and have lower profit margins. It could also mean that they are more mature companies with fewer growth prospects.</p><p>The top five companies by annual revenue as of Q1 2024, are:</p><p><br/></p><ol><li>Walmart (WMT): $608.79 billion</li><li>Saudi Aramco (2222.SR): $501.65 billion</li><li>Amazon (AMZN): $554.03 billion</li><li>Sinopec (600028.SS): $473.5 billion<br/></li><li>PetroChina (601857.SS) $435.3 billion<span class="ql-inline-citation" data-cite="16"></span><br/></li></ol></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-what-are-the-biggest-companies-in-the-world-by-number-of-employees"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Biggest Companies in the World by Number of Employees?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Walmart is the world's largest employer, with over 2.1 million global workers.</p><p>The top 5 companies in the world by employee count as of Q1 2024 are:</p><ol><li>Walmart (WMT): 2.10 million</li><li>Amazon (AMZN): 1.54 million</li><li>Hon Hai Precision Industry (OTCMKTS: HNHPF): 767,062<br/></li><li>Accenture (ACN): 733,000</li><li>Volkswagen (OTCMKTS: VWAGY): 675,805<span class="ql-inline-citation" data-cite="14"></span><br/></li></ol><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_94-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_95-0"><span class="heading-toc" id="toc-what-is-the-biggest-company-on-each-continent"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Biggest Company on Each Continent?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The largest company by market cap on each continent as of Q1 2024 (excluding Antarctica) are as follows:</p><ul><li>North America - Microsoft (MSFT): $3.0 trillion</li><li>South America - Petrobras (PBR): $105.0 billion</li><li>Europe - Novo Norodisk (NVO): $478.4 billion</li><li>Asia - Saudi Aramco (2222.SR): $2.06 trillion</li><li>Africa - Naspers (NPN.JO): $29.3 billion</li><li>Australia - BHP Group (BHP): $155.7 billion</li></ul><p><br/></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_96-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_97-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_98-0"> The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-world-s-10-most-profitable-companies-4694526">biggest companies in the world today</a> are worth several trillion dollars. This makes these companies larger and more valuable than some countries' entire economies. Today, tech and energy companies dominate the biggest corporations in the world. In the past, trading companies, railroads, and steelworks dominated. Time will tell if these high flyers can stay in the top positions and which industries emerge to challenge these coveted positions. </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>	The world's biggest companies by market capitalization range across different market sectors, including technology, communication services, energy, consumer cyclicals, and financial services. Most companies in the top-10 list generate hundreds of billions of dollars in annual revenue. However, there are a few that generate less than $100 billion in annual revenue, suggesting that investors are optimistic about the potential growth of these companies compared with others on the list. Companies are ranked as per TradingView's list of largest companies by market cap. All figures, which are also taken from TradingView, are current as of Jan. 20, 2024. ### Key Takeaways * Company value is often measured by market capitalization or the value of all shares in the market. * Microsoft, Apple, and Saudi Aramco are the top three global companies, each with market caps of over $2 trillion each. * Technology and energy companies rank among the most valuable companies in the world today. * U.S.-based companies fill most top slots. ## 1. Microsoft (MSFT) * Market Cap: $2.96 trillion * Revenue (TTM): $218.31 billion * Net Income (TTM): $77.1 billion * 1-year Trailing Total Return: 64.6% * Exchange: Nasdaq * Year Founded: 1975 Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)) is a global developer and licenser of software, devices, solutions, and services. The company is well known for its Windows and Office Suite software as well as its Xbox gaming hardware. The company is gaining more of its profits and revenue from cloud computing services, for which it is a market leader. Microsoft has also made a big play in AI, integrating it into its search and Office products. Microsoft's main cloud platform is Azure. Microsoft also owns and operates [LinkedIn](https://www.investopedia.com/ask/answers/120214/how-does-linkedin-lnkd-make-money.asp), the popular social networking site for professionals and job seekers. ## 2. Apple (AAPL) * Market Cap: $2.96 trillion * Revenue (TTM): $383.29 billion * Net Income (TTM): $97 billion * 1-year Trailing Total Return: 39.1% * Exchange: Nasdaq * Year Founded: 1976 Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) designs, manufactures, and markets a broad range of consumer technology products, including [smartphones](https://www.investopedia.com/terms/s/smartphone.asp), personal computers, tablets, wearable devices, home entertainment devices, and more. Some of its most popular products include its iPhone smartphones and Mac computers. Apple also has dramatically expanded its sales from services. It operates digital content stores, provides cloud and payment services, and recently launched AppleTV+, a streaming service for on-demand entertainment content. ## 3. Saudi Aramco (2222.SR) * Market Cap: $2.06 trillion * Revenue (TTM): $501.65 billion * Net Income (TTM): $126.52 billion * 1-year Trailing Total Return: 9.8% * Exchange: [Tadawul (Saudi Stock Exchange)](https://www.investopedia.com/articles/investing/032515/saudi-stock-exchange.asp) * Year Founded: 1933 Saudi Arabian Oil, better known as Saudi Aramco, is a Saudi Arabia-based integrated oil and gas company. The company was founded as Standard Oil's overseas operations and is now owned by the Saudi government. Aramco operates both [upstream and downstream](https://www.investopedia.com/ask/answers/060215/what-difference-between-upstream-and-downstream-oil-and-gas-operations.asp) segments: * Its upstream segment engages in the exploration and production of crude oil, condensate, natural gas, and natural gas liquids. * The downstream segment is engaged in refining and petrochemical manufacturing, distribution, and power generation. Saudi Aramco also has a chemicals business that makes complex products such as synthetic rubber. ## 4. Alphabet (GOOGL/GOOG) * Market Cap: $1.84 trillion * Revenue (TTM): $296.38 billion * Net Income (TTM): $66.73 billion * 1-year Trailing Total Return: 57.4% * Exchange: Nasdaq * Year Founded: 1998 Alphabet ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)/[GOOG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG)) is the parent of Google, the dominant search engine in the global market. The company offers a range of technologies and digital services, including search, the Android smartphone operating system, the Chrome browser, the Gmail email services, the Google Drive online file storage platform, Google Maps, Google Photos, the Google Play app store, and YouTube. The company also provides cloud services through Google Cloud and a variety of workspace collaboration tools. In addition, the company earns revenue through a growing array of hardware products such as the Pixel phones, Fitbit, and the Google Nest home collection. Alphabet also operates its Other Bets segment which includes emerging businesses such as the [self-driving car](https://www.investopedia.com/articles/personal-finance/031315/selfdriving-cars-could-change-auto-industry.asp) business Waymo. Like Microsoft, Alphabet, and just about any tech company on this list, Alphabet is making a play in AI, releasing apps through its Gemini deep learning model. ## 5. Amazon (AMZN) * Market Cap: $1.61 trillion * Revenue (TTM): $554.03 billion * Net Income (TTM): $20.08 billion * 1-year Trailing Total Return: 62.6% * Exchange: Nasdaq * Year Founded: 1994 [Amazon](https://www.investopedia.com/how-amazon-makes-money-4587523) ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN)) is an [ecommerce](https://www.investopedia.com/terms/e/ecommerce.asp) retailer that sells a broad range of products and services globally and is the world's biggest provider of cloud computing services. Its ecommerce business includes merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. Amazon Web Services, launched in 2006, generates the majority of the company 's operating profits, providing cloud services to businesses, government agencies, and academic institutions. Amazon offers various subscription services and web services as well, including its cloud computing service and fast-growing streaming entertainment business. The company also manufactures and sells electronic devices, such as Kindle e-readers, Fire tablets, Fire TV, and Echo and Alexa. Amazon sells groceries through its subsidiary, [Whole Foods](https://www.investopedia.com/articles/markets/100715/how-expensive-whole-foods-really.asp). ### A company's market cap is calculated by multiplying the number of shares outstanding by the current market price of a single share. ## 6. Nvidia (NVDA) * Market Cap: $1.47 trillion * Revenue (TTM): $44.88 billion * Net Income (TTM): $18.89 billion * 1-year Trailing Total Return: 246.4% * Exchange: Nasdaq * Year Founded: 1993 Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) designs and develops graphics processors and related software. It was a pioneer in the development of the [graphics processing unit (GPU)](https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp), whose initial applications were most used for PC graphics and video games. The capabilities of the GPU are now being leveraged for use in AI and machine-learning applications. The company offers products and platforms comprised of hardware, software, services, and more to serve the gaming, professional visualization, data center, and automotive markets. Nvidia GPUs have also featured prominently in cryptocurrency mining. ## 7. Meta Platforms (META) * Market Cap: $985.41 billion * Revenue (TTM): $126.96 billion * Net Income (TTM): $29.73 billion * 1-Year Trailing Total Return: 172.3% * Exchange: Nasdaq * Year Founded: 2004 Meta Platforms ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)) is the owner of Facebook, the world's largest social media network. Meta provides products and digital platforms that enable individuals and businesses to connect with family and friends through mobile devices, personal computers, virtual reality headsets, and in-home devices. In addition to Facebook, it also owns Instagram, Messenger, and WhatsApp. The company also operates Facebook Reality Labs, which offers augmented and virtual reality (VR) products. Meta is also investing in and building the [metaverse](https://www.investopedia.com/metaverse-definition-5206578), an expansive virtual world that combines aspects of social media, online gaming, augmented reality (AR), VR, and cryptocurrencies. ## 8. Berkshire Hathaway (BRK.A/BRK.B) * Market Cap: $798.46 billion * Revenue (TTM): $395.95 billion * Net Income (TTM): $76.81 billion * 1-year Trailing Total Return: 13.5% * Exchange: [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp) * Year Founded: 1839 Berkshire Hathaway ([BRK.A](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.A)/[BRK.B](https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B)) began with the merger of two regional textile companies in the 19th century. Only much later was it purchased by legendary investor Warren Buffett and converted into a conglomerate holding company. Berkshire Hathaway today owns a large number of [subsidiaries](https://www.investopedia.com/terms/s/subsidy.asp) engaged in insurance, freight rail transportation, retailing, and utility and energy generation and distribution. The company also operates manufacturing businesses that make products for industrial uses, construction, and for consumers. ## 9. Tesla (TSLA) * Market Cap: $674.54 billion * Revenue (TTM): $95.92 billion * Net Income (TTM): $10.79 billion * 1-year Trailing Total Return: 88.7% * Exchange: Nasdaq * Year Founded: 2003 Tesla ([TSLA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA)) is a leading manufacturer of [electric vehicles](https://www.investopedia.com/investing-in-electric-vehicles-and-green-transportation-5220604), which include the following models: * Model 3, a four-door, mid-size sedan designed and priced for mass-market appeal * Model Y, a compact sport utility vehicle (SUV) that seats seven adults * Model S, a four-door, full-size sedan * Model X, a mid-size SUV with seating for up to seven adults The company's has been developing and manufacturing its Cybertruck and Tesla Semi, a commercial EV. Tesla also produces solar panels, provides solar energy generation, and supplies energy storage products. ## 10. Eli Lilly and Company (LLY) * Market Cap: $596.71 billion * Revenue (TTM): $32.07 billion * Net Income (TTM): $4.99 billion * 1-year Trailing Total Return: 76.5% * Exchange: NYSE * Year Founded: 1987 Eli Lilly and Company ([LIL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY)) is one of the world's leading [pharmaceutical companies](https://www.investopedia.com/articles/06/drugmarket.asp). Usually called just Lilly, the company is based in Indianapolis, Indiana. It researches, develops, manufactures, and markets human pharmaceuticals for the global market. Lilly's product lines focus on diabetes, oncology, immunology, and neuroscience. It also caters to health markets, including treatments for COVID-19, male sexual dysfunction, and osteoporosis in menopausal women. ## What Are the Biggest Companies in the World by Revenue? While many people are interested in ranking companies by market value or market cap, the top companies by revenue differ somewhat. This could be because they are more capital-intensive and have lower profit margins. It could also mean that they are more mature companies with fewer growth prospects. The top five companies by annual revenue as of Q1 2024, are: 1. Walmart (WMT): $608.79 billion 2. Saudi Aramco (2222.SR): $501.65 billion 3. Amazon (AMZN): $554.03 billion 4. Sinopec (600028.SS): $473.5 billion 5. PetroChina (601857.SS) $435.3 billion ## What Are the Biggest Companies in the World by Number of Employees? Walmart is the world's largest employer, with over 2.1 million global workers. The top 5 companies in the world by employee count as of Q1 2024 are: 1. Walmart (WMT): 2.10 million 2. Amazon (AMZN): 1.54 million 3. Hon Hai Precision Industry (OTCMKTS: HNHPF): 767,062 4. Accenture (ACN): 733,000 5. Volkswagen (OTCMKTS: VWAGY): 675,805 ## What Is the Biggest Company on Each Continent? The largest company by market cap on each continent as of Q1 2024 (excluding Antarctica) are as follows: * North America - Microsoft (MSFT): $3.0 trillion * South America - Petrobras (PBR): $105.0 billion * Europe - Novo Norodisk (NVO): $478.4 billion * Asia - Saudi Aramco (2222.SR): $2.06 trillion * Africa - Naspers (NPN.JO): $29.3 billion * Australia - BHP Group (BHP): $155.7 billion ## The Bottom Line The [biggest companies in the world today](https://www.investopedia.com/the-world-s-10-most-profitable-companies-4694526) are worth several trillion dollars. This makes these companies larger and more valuable than some countries' entire economies. Today, tech and energy companies dominate the biggest corporations in the world. In the past, trading companies, railroads, and steelworks dominated. Time will tell if these high flyers can stay in the top positions and which industries emerge to challenge these coveted positions. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	The world's biggest companies by market capitalization range across different market sectors, including technology, communication services, energy, consumer cyclicals, and financial services. Most companies in the top-10 list generate hundreds of billions of dollars in annual revenue. However, there are a few that generate less than $100 billion in annual revenue, suggesting that investors are optimistic about the potential growth of these companies compared with others on the list. Companies are ranked as per TradingView's list of largest companies by market cap. All figures, which are also taken from TradingView, are current as of Jan. 20, 2024. Key Takeaways Company value is often measured by market capitalization or the value of all shares in the market.Microsoft, Apple, and Saudi Aramco are the top three global companies, each with market caps of over $2 trillion each.Technology and energy companies rank among the most valuable companies in the world today.U.S.-based companies fill most top slots. 1. Microsoft (MSFT) Market Cap: $2.96 trillionRevenue (TTM): $218.31 billionNet Income (TTM): $77.1 billion1-year Trailing Total Return: 64.6%Exchange: NasdaqYear Founded: 1975 Microsoft (MSFT) is a global developer and licenser of software, devices, solutions, and services. The company is well known for its Windows and Office Suite software as well as its Xbox gaming hardware. The company is gaining more of its profits and revenue from cloud computing services, for which it is a market leader. Microsoft has also made a big play in AI, integrating it into its search and Office products. Microsoft's main cloud platform is Azure. Microsoft also owns and operates LinkedIn, the popular social networking site for professionals and job seekers. 2. Apple (AAPL) Market Cap: $2.96 trillionRevenue (TTM): $383.29 billionNet Income (TTM): $97 billion1-year Trailing Total Return: 39.1%Exchange: NasdaqYear Founded: 1976 Apple (AAPL) designs, manufactures, and markets a broad range of consumer technology products, including smartphones, personal computers, tablets, wearable devices, home entertainment devices, and more. Some of its most popular products include its iPhone smartphones and Mac computers. Apple also has dramatically expanded its sales from services. It operates digital content stores, provides cloud and payment services, and recently launched AppleTV+, a streaming service for on-demand entertainment content. 3. Saudi Aramco (2222.SR) Market Cap: $2.06 trillion Revenue (TTM): $501.65 billion Net Income (TTM): $126.52 billion 1-year Trailing Total Return: 9.8% Exchange: Tadawul (Saudi Stock Exchange) Year Founded: 1933 Saudi Arabian Oil, better known as Saudi Aramco, is a Saudi Arabia-based integrated oil and gas company. The company was founded as Standard Oil's overseas operations and is now owned by the Saudi government. Aramco operates both upstream and downstream segments: Its upstream segment engages in the exploration and production of crude oil, condensate, natural gas, and natural gas liquids.The downstream segment is engaged in refining and petrochemical manufacturing, distribution, and power generation. Saudi Aramco also has a chemicals business that makes complex products such as synthetic rubber. 4. Alphabet (GOOGL/GOOG) Market Cap: $1.84 trillionRevenue (TTM): $296.38 billionNet Income (TTM): $66.73 billion1-year Trailing Total Return: 57.4%Exchange: NasdaqYear Founded: 1998 Alphabet (GOOGL/GOOG) is the parent of Google, the dominant search engine in the global market. The company offers a range of technologies and digital services, including search, the Android smartphone operating system, the Chrome browser, the Gmail email services, the Google Drive online file storage platform, Google Maps, Google Photos, the Google Play app store, and YouTube. The company also provides cloud services through Google Cloud and a variety of workspace collaboration tools. In addition, the company earns revenue through a growing array of hardware products such as the Pixel phones, Fitbit, and the Google Nest home collection. Alphabet also operates its Other Bets segment which includes emerging businesses such as the self-driving car business Waymo. Like Microsoft, Alphabet, and just about any tech company on this list, Alphabet is making a play in AI, releasing apps through its Gemini deep learning model. 5. Amazon (AMZN) Market Cap: $1.61 trillionRevenue (TTM): $554.03 billionNet Income (TTM): $20.08 billion1-year Trailing Total Return: 62.6%Exchange: NasdaqYear Founded: 1994 Amazon (AMZN) is an ecommerce retailer that sells a broad range of products and services globally and is the world's biggest provider of cloud computing services. Its ecommerce business includes merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. Amazon Web Services, launched in 2006, generates the majority of the company 's operating profits, providing cloud services to businesses, government agencies, and academic institutions. Amazon offers various subscription services and web services as well, including its cloud computing service and fast-growing streaming entertainment business. The company also manufactures and sells electronic devices, such as Kindle e-readers, Fire tablets, Fire TV, and Echo and Alexa. Amazon sells groceries through its subsidiary, Whole Foods. A company's market cap is calculated by multiplying the number of shares outstanding by the current market price of a single share. 6. Nvidia (NVDA) Market Cap: $1.47 trillionRevenue (TTM): $44.88 billionNet Income (TTM): $18.89 billion1-year Trailing Total Return: 246.4%Exchange: NasdaqYear Founded: 1993 Nvidia (NVDA) designs and develops graphics processors and related software. It was a pioneer in the development of the graphics processing unit (GPU), whose initial applications were most used for PC graphics and video games. The capabilities of the GPU are now being leveraged for use in AI and machine-learning applications. The company offers products and platforms comprised of hardware, software, services, and more to serve the gaming, professional visualization, data center, and automotive markets. Nvidia GPUs have also featured prominently in cryptocurrency mining. 7. Meta Platforms (META) Market Cap: $985.41 billionRevenue (TTM): $126.96 billionNet Income (TTM): $29.73 billion1-Year Trailing Total Return: 172.3%Exchange: NasdaqYear Founded: 2004 Meta Platforms (META) is the owner of Facebook, the world's largest social media network. Meta provides products and digital platforms that enable individuals and businesses to connect with family and friends through mobile devices, personal computers, virtual reality headsets, and in-home devices. In addition to Facebook, it also owns Instagram, Messenger, and WhatsApp. The company also operates Facebook Reality Labs, which offers augmented and virtual reality (VR) products. Meta is also investing in and building the metaverse, an expansive virtual world that combines aspects of social media, online gaming, augmented reality (AR), VR, and cryptocurrencies. 8. Berkshire Hathaway (BRK.A/BRK.B) Market Cap: $798.46 billion Revenue (TTM): $395.95 billion Net Income (TTM): $76.81 billion 1-year Trailing Total Return: 13.5% Exchange: New York Stock Exchange (NYSE) Year Founded: 1839 Berkshire Hathaway (BRK.A/BRK.B) began with the merger of two regional textile companies in the 19th century. Only much later was it purchased by legendary investor Warren Buffett and converted into a conglomerate holding company. Berkshire Hathaway today owns a large number of subsidiaries engaged in insurance, freight rail transportation, retailing, and utility and energy generation and distribution. The company also operates manufacturing businesses that make products for industrial uses, construction, and for consumers. 9. Tesla (TSLA) Market Cap: $674.54 billionRevenue (TTM): $95.92 billionNet Income (TTM): $10.79 billion1-year Trailing Total Return: 88.7%Exchange: NasdaqYear Founded: 2003 Tesla (TSLA) is a leading manufacturer of electric vehicles, which include the following models: Model 3, a four-door, mid-size sedan designed and priced for mass-market appealModel Y, a compact sport utility vehicle (SUV) that seats seven adultsModel S, a four-door, full-size sedanModel X, a mid-size SUV with seating for up to seven adults The company's has been developing and manufacturing its Cybertruck and Tesla Semi, a commercial EV. Tesla also produces solar panels, provides solar energy generation, and supplies energy storage products. 10. Eli Lilly and Company (LLY) Market Cap: $596.71 billionRevenue (TTM): $32.07 billionNet Income (TTM): $4.99 billion1-year Trailing Total Return: 76.5%Exchange: NYSEYear Founded: 1987 Eli Lilly and Company (LIL) is one of the world's leading pharmaceutical companies. Usually called just Lilly, the company is based in Indianapolis, Indiana. It researches, develops, manufactures, and markets human pharmaceuticals for the global market. Lilly's product lines focus on diabetes, oncology, immunology, and neuroscience. It also caters to health markets, including treatments for COVID-19, male sexual dysfunction, and osteoporosis in menopausal women. What Are the Biggest Companies in the World by Revenue? While many people are interested in ranking companies by market value or market cap, the top companies by revenue differ somewhat. This could be because they are more capital-intensive and have lower profit margins. It could also mean that they are more mature companies with fewer growth prospects.The top five companies by annual revenue as of Q1 2024, are:Walmart (WMT): $608.79 billionSaudi Aramco (2222.SR): $501.65 billionAmazon (AMZN): $554.03 billionSinopec (600028.SS): $473.5 billionPetroChina (601857.SS) $435.3 billion What Are the Biggest Companies in the World by Number of Employees? Walmart is the world's largest employer, with over 2.1 million global workers.The top 5 companies in the world by employee count as of Q1 2024 are:Walmart (WMT): 2.10 millionAmazon (AMZN): 1.54 millionHon Hai Precision Industry (OTCMKTS: HNHPF): 767,062Accenture (ACN): 733,000Volkswagen (OTCMKTS: VWAGY): 675,805 What Is the Biggest Company on Each Continent? The largest company by market cap on each continent as of Q1 2024 (excluding Antarctica) are as follows:North America - Microsoft (MSFT): $3.0 trillionSouth America - Petrobras (PBR): $105.0 billionEurope - Novo Norodisk (NVO): $478.4 billionAsia - Saudi Aramco (2222.SR): $2.06 trillionAfrica - Naspers (NPN.JO): $29.3 billionAustralia - BHP Group (BHP): $155.7 billion The Bottom Line The biggest companies in the world today are worth several trillion dollars. This makes these companies larger and more valuable than some countries' entire economies. Today, tech and energy companies dominate the biggest corporations in the world. In the past, trading companies, railroads, and steelworks dominated. Time will tell if these high flyers can stay in the top positions and which industries emerge to challenge these coveted positions. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "MSFT", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT" ], [ "LinkedIn", "https://www.investopedia.com/ask/answers/120214/how-does-linkedin-lnkd-make-money.asp" ], [ "AAPL", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL" ], [ "smartphones", "https://www.investopedia.com/terms/s/smartphone.asp" ], [ "Tadawul (Saudi Stock Exchange)", "https://www.investopedia.com/articles/investing/032515/saudi-stock-exchange.asp" ], [ "upstream and downstream", "https://www.investopedia.com/ask/answers/060215/what-difference-between-upstream-and-downstream-oil-and-gas-operations.asp" ], [ "GOOGL", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL" ], [ "GOOG", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOG" ], [ "self-driving car", "https://www.investopedia.com/articles/personal-finance/031315/selfdriving-cars-could-change-auto-industry.asp" ], [ "Amazon", "https://www.investopedia.com/how-amazon-makes-money-4587523" ], [ "AMZN", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=AMZN" ], [ "ecommerce", "https://www.investopedia.com/terms/e/ecommerce.asp" ], [ "Whole Foods", "https://www.investopedia.com/articles/markets/100715/how-expensive-whole-foods-really.asp" ], [ "NVDA", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA" ], [ "graphics processing unit (GPU)", "https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp" ], [ "META", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=META" ], [ "metaverse", "https://www.investopedia.com/metaverse-definition-5206578" ], [ "New York Stock Exchange (NYSE)", "https://www.investopedia.com/terms/n/nyse.asp" ], [ "BRK.A", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.A" ], [ "BRK.B", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=BRK.B" ], [ "subsidiaries", "https://www.investopedia.com/terms/s/subsidy.asp" ], [ "TSLA", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=TSLA" ], [ "electric vehicles", "https://www.investopedia.com/investing-in-electric-vehicles-and-green-transportation-5220604" ], [ "LIL", "https://www.investopedia.com/markets/quote?tvwidgetsymbol=LLY" ], [ "pharmaceutical companies", "https://www.investopedia.com/articles/06/drugmarket.asp" ], [ "biggest companies in the world today", "https://www.investopedia.com/the-world-s-10-most-profitable-companies-4694526" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/car-back-after-title-loan-repossession-7487035	Is It Possible to Get Your Car Back After Title Loan Repossession?	<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"> Having your car taken can be stressful, but you can potentially get your car back after a title repossession. Strategies for getting your car back include paying amounts past due, paying down the loan in full, and buying the car at auction. </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"> Learn more about getting your car back and how to avoid vehicle repossession. </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 most common reason for car repossession is failure to make loan payments.</li> <li><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 car loans can stay on your credit report for up to seven years.<span class="ql-inline-citation" data-cite="6"></span></li> <li>Options to get your car back include paying overdue payments and buying the car at auction.</li> <li>You can avoid a car repossession by making all your payments on time and ensuring you can afford a car before you buy it.</li> </ul></div></div></div> <span class="heading-toc" id="toc-why-has-my-car-been-repossessed"></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"> Why Has My Car Been Repossessed? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_8-0"> Repossession laws vary by state. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/auto-loans-4689734">Car loan</a> agreements typically outline the reasons why a car may be repossessed. The main reasons for a car repossession include not carrying required car insurance and failure to make loan payments as agreed in the contract. </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 many cases, cars are repossessed because the loan holder didn’t make payments. Your car can potentially be repossessed even after just one missed payment. It can also be repossessed if you violate other terms in the contract.<span class="ql-inline-citation" data-cite="7"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_11-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Depending on the laws in your state, you may forfeit your rights to your car if you are found guilty of trying to actively prevent a legal repossession, such as by hiding, destroying, or damaging the car.<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_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_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 believe your car has been repossessed unlawfully, you can contact your state Department of Motor Vehicles (DMV) or Office of Commissioner of Financial Regulation, or similarly named agencies.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Conditions for a repossession may vary depending on whether you have an auto loan, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-does-leasing-a-car-work-5119459">car lease</a>, or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/car-title-loan.asp">car title loan</a>, or if you have declared <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bankruptcy.asp">bankruptcy</a>. Let’s look at these scenarios in more detail. </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"> Auto Loan Repossession </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> When you have an auto loan, you physically possess the car, but the lender is listed as the owner on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/title.asp">the car title</a> until you pay the loan in full. If you stop making payments—in some cases, even if you miss only one payment—the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lender.asp">lender</a> has the legal right to repossess the vehicle. </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"> Car Lease Repossession </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> With a car lease, you are essentially renting the car from the auto dealer for a specific period of time. As with an auto loan, if you don’t make payments, the dealer can repossess the vehicle. </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"> Car Title Loan Repossession </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> With a car title loan, you take out a lump sum of money and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/110714/car-title-loan-requirements.asp">use your car title as collateral</a>. Once the loan is paid off, the lender returns the car title to the owner. If the owner fails to make payments on the loan, the lender has the legal right to repossess the vehicle. </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"> Bankruptcy </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Your vehicle is considered an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/asset.asp">asset</a>, so it can be seized by the bankruptcy court and sold to pay off your debts. There are some circumstances in which you could keep your vehicle, so it’s important to discuss these with a bankruptcy attorney.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_29-0"></div> <span class="heading-toc" id="toc-how-to-get-your-car-back-after-repossession"></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 Get Your Car Back After Repossession </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Even after your car is repossessed, there are options for you to reclaim it. </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"> First, you’ll want to talk to your lender and ask why it was repossessed. Often, if your lender plans to repossess your vehicle, you will have plenty of notice. After all, they typically send notifications by phone and/or mail stating why repossession could be forthcoming, such as a failure to provide proof of insurance or make payments as agreed. </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"> Second, find out your options to get your car back. When talking with your lender, find out what you can do to rectify the situation and get your car back. It could be a matter of sending a copy of your insurance policy to the lender. Or you may have to pay all past-due amounts plus any fees and late charges.<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_36-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> Options for working with your lender to get your car back may include reinstatement, redemption, and buying your car back at auction. Let’s look in more detail about those strategies. </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"> Reinstatement </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_40-0"> With reinstatement, you pay back all past-due amounts plus any fees and other charges to bring the existing loan up-to-date and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reinstatement.asp">reinstate</a> it. If necessary, negotiate new payment terms, interest rate, and length of loan to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/how-to-refinance-a-car-loan-7368491">refinance the car loan</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <h3 class="comp mntl-sc-block finance-sc-block-subheading mntl-sc-block-subheading" id="mntl-sc-block_42-0"> <span class="mntl-sc-block-subheading__text"> Redemption </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> With redemption, you pay off the entire loan balance plus any fees and other charges. The <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/right-of-redemption.asp">redemption</a> period is usually short-lived. If the borrower doesn’t redeem the vehicle within that time period, the lender can sell the car. </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"> Buying the Car at the Lender’s Auction </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_46-0"> If there is no reinstatement or redemption, the lender can sell the car at <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/auction.asp">auction</a>. The borrower can bid on the car to purchase it, possibly paying less at auction than through redemption or reinstatement. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_47-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_48-0"> A risk to this option is losing out on the car to a higher bidder. Also, if the lender sells the car at auction for an amount less than the loan, you could have to pay the difference, known as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/deficiency-balance.asp">deficiency amount</a>.<span class="ql-inline-citation" data-cite="7"></span><br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_49-0"></div> <span class="heading-toc" id="toc-how-to-avoid-repossession"></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"> How to Avoid Repossession </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_51-0"> The best approach to repossession of your vehicle is to avoid repossession altogether. There are several ways to avoid this situation.<br> </br></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"> Talk with Your Lender </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> If you are struggling to pay your car payments, talk with your lender to discuss options. It’s possible that your lender could renegotiate the loan, lowering your monthly payment and extending the loan term. The downside to this approach is you could pay more in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</a> over the loan term. </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-callout mntl-block" id="mntl-sc-block_56-0"><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_57-0"><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>Your lender could also provide a longer grace period for you to make your monthly payments. This means you have more time to make your payment before it’s considered late, triggering a late charge or default proceedings.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_58-0"> Or, your lender could agree to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/defermentperiod.asp">deferment</a> on the loan. This means you wouldn’t have to make car payments for a specific time period as agreed to between the lender and you. A grace period or deferment could give you the time you need to boost your finances so that making car payments going forward won’t be a financial hardship. </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 with-title" id="mntl-sc-block-callout-heading_4-0">Grace Period vs. Deferment </h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_4-0"><p>With a grace period, the lender extends the time you have to make payments before you have to pay a late fee or enter default. With deferment, you don’t have to make car payments for a specific period of time.</p></div></div></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-how-many-loan-payments-can-i-miss-before-repossession"></span> <h2 class="mntl-sc-block-questionandanswer__question">How many loan payments can I miss before repossession?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>This varies by loan, but the exact number should be included in the loan agreement.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_63-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_64-0"><span class="heading-toc" id="toc-how-does-repossession-affect-my-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">How does repossession affect my credit score?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Repossession itself does not affect your credit score. But if your repossession is a result of the fact that you have missed payments and defaulted on the loan, your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/10/credit-score-factors.asp">credit score</a> will likely decline. A significant portion of your credit score is based on your payment history.<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_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_66-0"><span class="heading-toc" id="toc-how-does-defaulting-on-an-auto-loan-affect-my-credit-score"></span> <h2 class="mntl-sc-block-questionandanswer__question">How does defaulting on an auto loan affect my credit score?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The initial harm to 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> begins with the missed payments. Each missed payment will lower your credit score.<span class="ql-inline-citation" data-cite="5"></span> By the time your loan is in default and your vehicle has been repossessed, your credit score will likely have undergone a significant hit. A default can stay on your credit report for seven years, so it could take quite a while to rebuild your credit and boost your credit score.<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_67-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_68-0"><span class="heading-toc" id="toc-what-is-a-voluntary-repossession"></span> <h2 class="mntl-sc-block-questionandanswer__question">What is a voluntary repossession?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You notify your lender that you can no longer pay the auto loan as agreed and plan to return the vehicle. The lender will sell the vehicle, and, if necessary, you will pay any deficiency balance if the vehicle is sold for less than the loan amount.<span class="ql-inline-citation" data-cite="7"></span></p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_69-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_70-0"><span class="heading-toc" id="toc-how-soon-can-i-get-my-repossessed-car-back"></span> <h2 class="mntl-sc-block-questionandanswer__question">How soon can I get my repossessed car back?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>It depends on how you resolve the repossession. Trying to reinstate or redeem your auto loan typically has to happen within a short time period, such as about two weeks, so you could have your car back soon after it’s repossessed. You may have to wait longer, perhaps several months, if the car is sold at auction due to the time of the auction process.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_73-0"> Having your car repossessed is never a good situation, but you have options for getting your car back. These include paying off the loan or reviving the existing car loan within a couple weeks of the repossession. It’s possible that you also could purchase the car at auction. </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"> Of course, if you don’t have the financial means to take advantage of these options, you may not be able to get your car back. It’s important to discuss this situation with your lender and perhaps a financial advisor to find the best resolution. </p></div>	Having your car taken can be stressful, but you can potentially get your car back after a title repossession. Strategies for getting your car back include paying amounts past due, paying down the loan in full, and buying the car at auction. Learn more about getting your car back and how to avoid vehicle repossession. ### Key Takeaways * The most common reason for car repossession is failure to make loan payments. * [Defaults](https://www.investopedia.com/terms/d/default2.asp) on car loans can stay on your credit report for up to seven years. * Options to get your car back include paying overdue payments and buying the car at auction. * You can avoid a car repossession by making all your payments on time and ensuring you can afford a car before you buy it. ## Why Has My Car Been Repossessed? Repossession laws vary by state. [Car loan](https://www.investopedia.com/auto-loans-4689734) agreements typically outline the reasons why a car may be repossessed. The main reasons for a car repossession include not carrying required car insurance and failure to make loan payments as agreed in the contract. In many cases, cars are repossessed because the loan holder didn’t make payments. Your car can potentially be repossessed even after just one missed payment. It can also be repossessed if you violate other terms in the contract. Depending on the laws in your state, you may forfeit your rights to your car if you are found guilty of trying to actively prevent a legal repossession, such as by hiding, destroying, or damaging the car. ### If you believe your car has been repossessed unlawfully, you can contact your state Department of Motor Vehicles (DMV) or Office of Commissioner of Financial Regulation, or similarly named agencies. Conditions for a repossession may vary depending on whether you have an auto loan, [car lease](https://www.investopedia.com/how-does-leasing-a-car-work-5119459), or [car title loan](https://www.investopedia.com/terms/c/car-title-loan.asp), or if you have declared [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp). Let’s look at these scenarios in more detail. ### Auto Loan Repossession When you have an auto loan, you physically possess the car, but the lender is listed as the owner on [the car title](https://www.investopedia.com/terms/t/title.asp) until you pay the loan in full. If you stop making payments—in some cases, even if you miss only one payment—the [lender](https://www.investopedia.com/terms/l/lender.asp) has the legal right to repossess the vehicle. ### Car Lease Repossession With a car lease, you are essentially renting the car from the auto dealer for a specific period of time. As with an auto loan, if you don’t make payments, the dealer can repossess the vehicle. ### Car Title Loan Repossession With a car title loan, you take out a lump sum of money and [use your car title as collateral](https://www.investopedia.com/articles/personal-finance/110714/car-title-loan-requirements.asp). Once the loan is paid off, the lender returns the car title to the owner. If the owner fails to make payments on the loan, the lender has the legal right to repossess the vehicle. ### Bankruptcy Your vehicle is considered an [asset](https://www.investopedia.com/terms/a/asset.asp), so it can be seized by the bankruptcy court and sold to pay off your debts. There are some circumstances in which you could keep your vehicle, so it’s important to discuss these with a bankruptcy attorney. ## How to Get Your Car Back After Repossession Even after your car is repossessed, there are options for you to reclaim it. First, you’ll want to talk to your lender and ask why it was repossessed. Often, if your lender plans to repossess your vehicle, you will have plenty of notice. After all, they typically send notifications by phone and/or mail stating why repossession could be forthcoming, such as a failure to provide proof of insurance or make payments as agreed. Second, find out your options to get your car back. When talking with your lender, find out what you can do to rectify the situation and get your car back. It could be a matter of sending a copy of your insurance policy to the lender. Or you may have to pay all past-due amounts plus any fees and late charges. Options for working with your lender to get your car back may include reinstatement, redemption, and buying your car back at auction. Let’s look in more detail about those strategies. ### Reinstatement With reinstatement, you pay back all past-due amounts plus any fees and other charges to bring the existing loan up-to-date and [reinstate](https://www.investopedia.com/terms/r/reinstatement.asp) it. If necessary, negotiate new payment terms, interest rate, and length of loan to [refinance the car loan](https://www.investopedia.com/how-to-refinance-a-car-loan-7368491). ### Redemption With redemption, you pay off the entire loan balance plus any fees and other charges. The [redemption](https://www.investopedia.com/terms/r/right-of-redemption.asp) period is usually short-lived. If the borrower doesn’t redeem the vehicle within that time period, the lender can sell the car. ### Buying the Car at the Lender’s Auction If there is no reinstatement or redemption, the lender can sell the car at [auction](https://www.investopedia.com/terms/a/auction.asp). The borrower can bid on the car to purchase it, possibly paying less at auction than through redemption or reinstatement. A risk to this option is losing out on the car to a higher bidder. Also, if the lender sells the car at auction for an amount less than the loan, you could have to pay the difference, known as the [deficiency amount](https://www.investopedia.com/terms/d/deficiency-balance.asp). ## How to Avoid Repossession The best approach to repossession of your vehicle is to avoid repossession altogether. There are several ways to avoid this situation. ### Talk with Your Lender If you are struggling to pay your car payments, talk with your lender to discuss options. It’s possible that your lender could renegotiate the loan, lowering your monthly payment and extending the loan term. The downside to this approach is you could pay more in [interest](https://www.investopedia.com/terms/i/interest.asp) over the loan term. ### Your lender could also provide a longer grace period for you to make your monthly payments. This means you have more time to make your payment before it’s considered late, triggering a late charge or default proceedings. Or, your lender could agree to a [deferment](https://www.investopedia.com/terms/d/defermentperiod.asp) on the loan. This means you wouldn’t have to make car payments for a specific time period as agreed to between the lender and you. A grace period or deferment could give you the time you need to boost your finances so that making car payments going forward won’t be a financial hardship. ### Grace Period vs. Deferment With a grace period, the lender extends the time you have to make payments before you have to pay a late fee or enter default. With deferment, you don’t have to make car payments for a specific period of time. ## How many loan payments can I miss before repossession? This varies by loan, but the exact number should be included in the loan agreement. ## How does repossession affect my credit score? Repossession itself does not affect your credit score. But if your repossession is a result of the fact that you have missed payments and defaulted on the loan, your [credit score](https://www.investopedia.com/articles/pf/10/credit-score-factors.asp) will likely decline. A significant portion of your credit score is based on your payment history. ## How does defaulting on an auto loan affect my credit score? The initial harm to your [credit score](https://www.investopedia.com/terms/c/credit_score.asp) begins with the missed payments. Each missed payment will lower your credit score. By the time your loan is in default and your vehicle has been repossessed, your credit score will likely have undergone a significant hit. A default can stay on your credit report for seven years, so it could take quite a while to rebuild your credit and boost your credit score. ## What is a voluntary repossession? You notify your lender that you can no longer pay the auto loan as agreed and plan to return the vehicle. The lender will sell the vehicle, and, if necessary, you will pay any deficiency balance if the vehicle is sold for less than the loan amount. ## How soon can I get my repossessed car back? It depends on how you resolve the repossession. Trying to reinstate or redeem your auto loan typically has to happen within a short time period, such as about two weeks, so you could have your car back soon after it’s repossessed. You may have to wait longer, perhaps several months, if the car is sold at auction due to the time of the auction process. ## The Bottom Line Having your car repossessed is never a good situation, but you have options for getting your car back. These include paying off the loan or reviving the existing car loan within a couple weeks of the repossession. It’s possible that you also could purchase the car at auction. Of course, if you don’t have the financial means to take advantage of these options, you may not be able to get your car back. It’s important to discuss this situation with your lender and perhaps a financial advisor to find the best resolution.	Having your car taken can be stressful, but you can potentially get your car back after a title repossession. Strategies for getting your car back include paying amounts past due, paying down the loan in full, and buying the car at auction. Learn more about getting your car back and how to avoid vehicle repossession. Key Takeaways The most common reason for car repossession is failure to make loan payments. Defaults on car loans can stay on your credit report for up to seven years. Options to get your car back include paying overdue payments and buying the car at auction. You can avoid a car repossession by making all your payments on time and ensuring you can afford a car before you buy it. Why Has My Car Been Repossessed? Repossession laws vary by state. Car loan agreements typically outline the reasons why a car may be repossessed. The main reasons for a car repossession include not carrying required car insurance and failure to make loan payments as agreed in the contract. In many cases, cars are repossessed because the loan holder didn’t make payments. Your car can potentially be repossessed even after just one missed payment. It can also be repossessed if you violate other terms in the contract. Depending on the laws in your state, you may forfeit your rights to your car if you are found guilty of trying to actively prevent a legal repossession, such as by hiding, destroying, or damaging the car. If you believe your car has been repossessed unlawfully, you can contact your state Department of Motor Vehicles (DMV) or Office of Commissioner of Financial Regulation, or similarly named agencies. Conditions for a repossession may vary depending on whether you have an auto loan, car lease, or car title loan, or if you have declared bankruptcy. Let’s look at these scenarios in more detail. Auto Loan Repossession When you have an auto loan, you physically possess the car, but the lender is listed as the owner on the car title until you pay the loan in full. If you stop making payments—in some cases, even if you miss only one payment—the lender has the legal right to repossess the vehicle. Car Lease Repossession With a car lease, you are essentially renting the car from the auto dealer for a specific period of time. As with an auto loan, if you don’t make payments, the dealer can repossess the vehicle. Car Title Loan Repossession With a car title loan, you take out a lump sum of money and use your car title as collateral. Once the loan is paid off, the lender returns the car title to the owner. If the owner fails to make payments on the loan, the lender has the legal right to repossess the vehicle. Bankruptcy Your vehicle is considered an asset, so it can be seized by the bankruptcy court and sold to pay off your debts. There are some circumstances in which you could keep your vehicle, so it’s important to discuss these with a bankruptcy attorney. How to Get Your Car Back After Repossession Even after your car is repossessed, there are options for you to reclaim it. First, you’ll want to talk to your lender and ask why it was repossessed. Often, if your lender plans to repossess your vehicle, you will have plenty of notice. After all, they typically send notifications by phone and/or mail stating why repossession could be forthcoming, such as a failure to provide proof of insurance or make payments as agreed. Second, find out your options to get your car back. When talking with your lender, find out what you can do to rectify the situation and get your car back. It could be a matter of sending a copy of your insurance policy to the lender. Or you may have to pay all past-due amounts plus any fees and late charges. Options for working with your lender to get your car back may include reinstatement, redemption, and buying your car back at auction. Let’s look in more detail about those strategies. Reinstatement With reinstatement, you pay back all past-due amounts plus any fees and other charges to bring the existing loan up-to-date and reinstate it. If necessary, negotiate new payment terms, interest rate, and length of loan to refinance the car loan. Redemption With redemption, you pay off the entire loan balance plus any fees and other charges. The redemption period is usually short-lived. If the borrower doesn’t redeem the vehicle within that time period, the lender can sell the car. Buying the Car at the Lender’s Auction If there is no reinstatement or redemption, the lender can sell the car at auction. The borrower can bid on the car to purchase it, possibly paying less at auction than through redemption or reinstatement. A risk to this option is losing out on the car to a higher bidder. Also, if the lender sells the car at auction for an amount less than the loan, you could have to pay the difference, known as the deficiency amount. How to Avoid Repossession The best approach to repossession of your vehicle is to avoid repossession altogether. There are several ways to avoid this situation. Talk with Your Lender If you are struggling to pay your car payments, talk with your lender to discuss options. It’s possible that your lender could renegotiate the loan, lowering your monthly payment and extending the loan term. The downside to this approach is you could pay more in interest over the loan term. Your lender could also provide a longer grace period for you to make your monthly payments. This means you have more time to make your payment before it’s considered late, triggering a late charge or default proceedings. Or, your lender could agree to a deferment on the loan. This means you wouldn’t have to make car payments for a specific time period as agreed to between the lender and you. A grace period or deferment could give you the time you need to boost your finances so that making car payments going forward won’t be a financial hardship. Grace Period vs. Deferment With a grace period, the lender extends the time you have to make payments before you have to pay a late fee or enter default. With deferment, you don’t have to make car payments for a specific period of time. How many loan payments can I miss before repossession? This varies by loan, but the exact number should be included in the loan agreement. How does repossession affect my credit score? Repossession itself does not affect your credit score. But if your repossession is a result of the fact that you have missed payments and defaulted on the loan, your credit score will likely decline. A significant portion of your credit score is based on your payment history. How does defaulting on an auto loan affect my credit score? The initial harm to your credit score begins with the missed payments. Each missed payment will lower your credit score. By the time your loan is in default and your vehicle has been repossessed, your credit score will likely have undergone a significant hit. A default can stay on your credit report for seven years, so it could take quite a while to rebuild your credit and boost your credit score. What is a voluntary repossession? You notify your lender that you can no longer pay the auto loan as agreed and plan to return the vehicle. The lender will sell the vehicle, and, if necessary, you will pay any deficiency balance if the vehicle is sold for less than the loan amount. How soon can I get my repossessed car back? It depends on how you resolve the repossession. Trying to reinstate or redeem your auto loan typically has to happen within a short time period, such as about two weeks, so you could have your car back soon after it’s repossessed. You may have to wait longer, perhaps several months, if the car is sold at auction due to the time of the auction process. The Bottom Line Having your car repossessed is never a good situation, but you have options for getting your car back. These include paying off the loan or reviving the existing car loan within a couple weeks of the repossession. It’s possible that you also could purchase the car at auction. Of course, if you don’t have the financial means to take advantage of these options, you may not be able to get your car back. It’s important to discuss this situation with your lender and perhaps a financial advisor to find the best resolution.	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https://www.investopedia.com/nvidia-q1-fy-2025-earnings-preview-8643286	What You Need To Know Ahead of Nvidia's Earnings Report	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> <em>UPDATE—May 21, 2024: This article has been updated to reflect more recent analyst estimates and share price information.</em> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_2-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_3-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_4-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>Nvidia will report earnings for its fiscal first quarter of 2025 after the bell on Wednesday.</li><li>The chipmaker's revenue and net income are expected to have gained significantly from the year-ago period, according to analyst estimates compiled by Visible Alpha.</li><li>Analysts anticipate the data center segment will sustain recent growth driven by artificial intelligence demand.</li><li>The chipmaker could also provide updates about its new Blackwell platform announced in March.<br/></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"> Nvidia (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA">NVDA</a>) is set to report earnings for its fiscal first quarter of 2025 after the bell Wednesday, with investors likely to be watching for sustained growth in its data center segment and any updates on the new Blackwell platform.<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 project Nvidia's revenue to be $24.74 billion for the first quarter of fiscal 2025, up from the previous quarter and more than tripling from the year-ago period, according to consensus estimates compiled by Visible Alpha. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Net income is expected to be $12.91 billion, growing from the final quarter of fiscal 2024 and well above the $2.04 billion in profit it recorded a year ago. Analysts expect diluted <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/eps.asp">earnings per share (EPS)</a> to come in at $5.19 for the first quarter, compared to 82 cents in the year-ago period.<br/> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_10-0"></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_11-0"> <div class="mntl-sc-block-table__table-wrapper"> <table class="mntl-sc-block-table__table"> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <colgroup span="1" style=""></colgroup> <tbody data-check="-1"> <tr> <td></td> <td>Analyst Estimates for Q1 FY25</td> <td>Q4 FY24</td> <td>Q1 FY24</td> </tr> <tr> <td>Revenue</td> <td>$24.74 billion</td> <td>$22.1 billion</td> <td>$7.19 billion</td> </tr> <tr> <td>Diluted Earnings Per Share</td> <td>$5.19</td> <td>$4.93</td> <td>$0.82</td> </tr> <tr> <td>Net Income</td> <td>$12.91 billion</td> <td>$12.29 billion</td> <td>$2.04 billion</td> </tr> </tbody> </table> </div></figure> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-key-metric-data-center-revenue"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_13-0"> <span class="mntl-sc-block-heading__text"> Key Metric: Data Center Revenue </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> Nvidia has positioned itself as an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-usd1-trillion-market-cap-gain-this-year-is-nearly-double-tesla-entire-market-cap-8605940">early beneficiary</a> of the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp">artificial intelligence (AI</a>) boom, even receiving a shoutout from ChatGPT maker OpenAI at its recent <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/microsoft-backed-openai-unveils-most-capable-ai-model-gpt-4o-8647639">GPT-4o launch</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"> Nvidia's data center segment has grown rapidly amid increased demand for its advanced computing chips capable of running AI workloads. Data center revenue reached a record-high $18.4 billion <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/nvidia-q4-fy2024-earnings-8598026">in the fourth quarter,</a> beating the record it had set the prior quarter and more than five times what it was a year earlier. The company <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/4-key-takeaways-from-nvidia-q4-fy2024-earnings-call-8598375">estimated</a> that around 40% of the data center revenue in fiscal 2024 was for AI inference.<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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_18-0"><iframe allow="encrypted-media 'src'" allowfullscreen="false" class="comp mntl-sc-block-iframe__uri mntl-block lazyload" data-src="https://datawrapper.dwcdn.net/njiVI/3/" frameborder="0" id="mntl-sc-block-iframe__uri_1-0" title="Nvidia's Data Center Revenue More Than Quintupled in Fiscal 2024 "></iframe></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> For data centers that are "optimized for throughput, NVIDIA delivers an order-of-magnitude reduction in cost and power," CEO Jensen Huang wrote in a letter to shareholders.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The data center segment could reach a fresh record of $21.27 billion in revenue for the first quarter of fiscal 2025, according to estimates compiled by Visible Alpha.<br> </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-business-spotlight-blackwell-ramp"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_24-0"> <span class="mntl-sc-block-heading__text"> Business Spotlight: Blackwell Ramp </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> Nvidia unveiled the Blackwell platform, the company's latest AI-powering technology, at its annual <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp">GPU</a> technology conference (GTC) in March. </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 platform included a Blackwell GPU, which the company said is the "world's most powerful chip," new Tensor Cores for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/large-language-model-7563532">large language model (LLM)</a> inference, new accelerators, and the GB200 Grace Blackwell Superchip.<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_28-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Nvidia hasn't provided specifics about pricing or general availability of the new system but said Blackwell would be available through its partners, including Amazon (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn">AMZN</a>), Microsoft (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT">MSFT</a>), and Alphabet's (<a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL">GOOGL</a>) Google, later this year. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The chipmaker has struggled to meet surging demand for its AI-capable chips, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/analysts-call-nvidia-blackwell-platform-the-most-ambitious-project-in-silicon-valley-8611111">analysts anticipate</a> that could continue to be the case. </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"> Nvidia shares have nearly doubled in value since the start of the year, at $948.30 as of 11:45 a.m. ET Tuesday.<br> </br></p></div>	UPDATE—May 21, 2024: This article has been updated to reflect more recent analyst estimates and share price information. ### Key Takeaways * Nvidia will report earnings for its fiscal first quarter of 2025 after the bell on Wednesday. * The chipmaker's revenue and net income are expected to have gained significantly from the year-ago period, according to analyst estimates compiled by Visible Alpha. * Analysts anticipate the data center segment will sustain recent growth driven by artificial intelligence demand. * The chipmaker could also provide updates about its new Blackwell platform announced in March. Nvidia ([NVDA](https://www.investopedia.com/markets/quote?tvwidgetsymbol=NVDA)) is set to report earnings for its fiscal first quarter of 2025 after the bell Wednesday, with investors likely to be watching for sustained growth in its data center segment and any updates on the new Blackwell platform. Analysts project Nvidia's revenue to be $24.74 billion for the first quarter of fiscal 2025, up from the previous quarter and more than tripling from the year-ago period, according to consensus estimates compiled by Visible Alpha. Net income is expected to be $12.91 billion, growing from the final quarter of fiscal 2024 and well above the $2.04 billion in profit it recorded a year ago. Analysts expect diluted [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) to come in at $5.19 for the first quarter, compared to 82 cents in the year-ago period. \| \| Analyst Estimates for Q1 FY25 \| Q4 FY24 \| Q1 FY24 \| \| --- \| --- \| --- \| --- \| \| Revenue \| $24.74 billion \| $22.1 billion \| $7.19 billion \| \| Diluted Earnings Per Share \| $5.19 \| $4.93 \| $0.82 \| \| Net Income \| $12.91 billion \| $12.29 billion \| $2.04 billion \| ## Key Metric: Data Center Revenue Nvidia has positioned itself as an [early beneficiary](https://www.investopedia.com/nvidia-usd1-trillion-market-cap-gain-this-year-is-nearly-double-tesla-entire-market-cap-8605940) of the [artificial intelligence (AI](https://www.investopedia.com/terms/a/artificial-intelligence-ai.asp)) boom, even receiving a shoutout from ChatGPT maker OpenAI at its recent [GPT-4o launch](https://www.investopedia.com/microsoft-backed-openai-unveils-most-capable-ai-model-gpt-4o-8647639). Nvidia's data center segment has grown rapidly amid increased demand for its advanced computing chips capable of running AI workloads. Data center revenue reached a record-high $18.4 billion [in the fourth quarter,](https://www.investopedia.com/nvidia-q4-fy2024-earnings-8598026) beating the record it had set the prior quarter and more than five times what it was a year earlier. The company [estimated](https://www.investopedia.com/4-key-takeaways-from-nvidia-q4-fy2024-earnings-call-8598375) that around 40% of the data center revenue in fiscal 2024 was for AI inference. For data centers that are "optimized for throughput, NVIDIA delivers an order-of-magnitude reduction in cost and power," CEO Jensen Huang wrote in a letter to shareholders. The data center segment could reach a fresh record of $21.27 billion in revenue for the first quarter of fiscal 2025, according to estimates compiled by Visible Alpha. ## Business Spotlight: Blackwell Ramp Nvidia unveiled the Blackwell platform, the company's latest AI-powering technology, at its annual [GPU](https://www.investopedia.com/terms/g/graphics-processing-unit-gpu.asp) technology conference (GTC) in March. The platform included a Blackwell GPU, which the company said is the "world's most powerful chip," new Tensor Cores for [large language model (LLM)](https://www.investopedia.com/large-language-model-7563532) inference, new accelerators, and the GB200 Grace Blackwell Superchip. Nvidia hasn't provided specifics about pricing or general availability of the new system but said Blackwell would be available through its partners, including Amazon ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)), Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=MSFT)), and Alphabet's ([GOOGL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=GOOGL)) Google, later this year. The chipmaker has struggled to meet surging demand for its AI-capable chips, and [analysts anticipate](https://www.investopedia.com/analysts-call-nvidia-blackwell-platform-the-most-ambitious-project-in-silicon-valley-8611111) that could continue to be the case. Nvidia shares have nearly doubled in value since the start of the year, at $948.30 as of 11:45 a.m. ET Tuesday.	UPDATE—May 21, 2024: This article has been updated to reflect more recent analyst estimates and share price information. Key Takeaways Nvidia will report earnings for its fiscal first quarter of 2025 after the bell on Wednesday.The chipmaker's revenue and net income are expected to have gained significantly from the year-ago period, according to analyst estimates compiled by Visible Alpha.Analysts anticipate the data center segment will sustain recent growth driven by artificial intelligence demand.The chipmaker could also provide updates about its new Blackwell platform announced in March. Nvidia (NVDA) is set to report earnings for its fiscal first quarter of 2025 after the bell Wednesday, with investors likely to be watching for sustained growth in its data center segment and any updates on the new Blackwell platform. Analysts project Nvidia's revenue to be $24.74 billion for the first quarter of fiscal 2025, up from the previous quarter and more than tripling from the year-ago period, according to consensus estimates compiled by Visible Alpha. Net income is expected to be $12.91 billion, growing from the final quarter of fiscal 2024 and well above the $2.04 billion in profit it recorded a year ago. Analysts expect diluted earnings per share (EPS) to come in at $5.19 for the first quarter, compared to 82 cents in the year-ago period. Analyst Estimates for Q1 FY25 Q4 FY24 Q1 FY24 Revenue $24.74 billion $22.1 billion $7.19 billion Diluted Earnings Per Share $5.19 $4.93 $0.82 Net Income $12.91 billion $12.29 billion $2.04 billion Key Metric: Data Center Revenue Nvidia has positioned itself as an early beneficiary of the artificial intelligence (AI) boom, even receiving a shoutout from ChatGPT maker OpenAI at its recent GPT-4o launch. Nvidia's data center segment has grown rapidly amid increased demand for its advanced computing chips capable of running AI workloads. Data center revenue reached a record-high $18.4 billion in the fourth quarter, beating the record it had set the prior quarter and more than five times what it was a year earlier. The company estimated that around 40% of the data center revenue in fiscal 2024 was for AI inference. For data centers that are "optimized for throughput, NVIDIA delivers an order-of-magnitude reduction in cost and power," CEO Jensen Huang wrote in a letter to shareholders. The data center segment could reach a fresh record of $21.27 billion in revenue for the first quarter of fiscal 2025, according to estimates compiled by Visible Alpha. Business Spotlight: Blackwell Ramp Nvidia unveiled the Blackwell platform, the company's latest AI-powering technology, at its annual GPU technology conference (GTC) in March. The platform included a Blackwell GPU, which the company said is the "world's most powerful chip," new Tensor Cores for large language model (LLM) inference, new accelerators, and the GB200 Grace Blackwell Superchip. Nvidia hasn't provided specifics about pricing or general availability of the new system but said Blackwell would be available through its partners, including Amazon (AMZN), Microsoft (MSFT), and Alphabet's (GOOGL) Google, later this year. The chipmaker has struggled to meet surging demand for its AI-capable chips, and analysts anticipate that could continue to be the case. Nvidia shares have nearly doubled in value since the start of the year, at $948.30 as of 11:45 a.m. ET Tuesday.	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https://www.investopedia.com/terms/s/speculative_flow.asp	Speculative Flow	<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-speculative-flow"></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 Speculative Flow? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Speculative flow is the movement of <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> into shares of a sector or specific company or an asset class in an attempt to earn short-term gains. Speculative flow can be sustained or short-lived, and if large enough, the increased demand will create upward pressure on the price of the securities where the money is flowing. </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>Speculative flow is the movement of hot money into shares of a sector or company or asset class for short-term gains.</li><li>Speculative flow is not generally grounded on deep fundamentals or analysis.</li><li>Speculative flows can also have a positive effect on nascent sectors or companies struggling to build out new markets.</li><li>Speculative flow also has the benefit of allowing investors to diversify their portfolio across investments with different risk profiles.</li><li>Speculative flow may be tied to assets with higher regulatory risk, volatility, or risk of market manipulation.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-speculative-flow"></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 Speculative Flow </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_7-0"> Speculation should not be confused with informed investing. Speculators may know very little about the fundamentals of a company or a sector or the underlying drivers of a particular asset class. However, if they believe something will go up, they may place their bets on the object of their adoration. Other like-minded speculators may catch wind of a hot trade and join in, adding to the speculative flow of money into a security — a stock, sector <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/etf.asp">ETF</a>, junk bonds, a foreign currency, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrency</a>, etc. </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"> Speculative flow may sometimes receive a bad rep as far as its effects are concerned, though it can also prove to be a force for good. For example, speculative flow can provide liquidity to nascent companies or sectors that are struggling to reach their market potential. An influx of money can help such sectors scale and build out the necessary infrastructure and marketing strategy necessary to gain new audiences. Speculative flow can have the same effect on developing or underdeveloped economies, enabling them to kickstart growth. </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-speculative-investing-vs-non-speculative-investing"></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"> Speculative Investing vs. Non-Speculative Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> Speculative investing entails investing in assets that are more risky than regular investments. Speculative investors are willing to take on additional risk in exchange for the possibility of larger profits for assets that have yet to appreciate in value or demonstrate true market value. Non-speculative investing, on the other hand, entails investing in assets that are less risky and more established. Non-speculative investors prefer investments with a track record of generating consistent returns, such as stocks, bonds, mutual funds, or real estate. </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 primary distinction between speculative and non-speculative investing is the level of risk an investor takes on. Speculative investments have the potential for larger returns but also carry a higher risk of loss as products or companies may not have an established history. Meanwhile, non-speculative assets carry a lower risk of loss but may provide lower returns. Non-speculative flow entails contributing cash to larger cap stocks or established technologies already engrained in markets. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Another major difference between speculative flow and non-speculative flow is the intention behind the investment. Individuals approaching <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">retirement</a> may want to make safer, smarter investments with less downside potential. Meanwhile, investors contributing speculative flow may enter the investment with the understanding that the funds may not be around when the investor retires. Therefore, speculative flow and non-speculative flow represent the baseline infrastructure to investment strategies. </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>All investments are speculative, as there are no guarantees in investing. However, some assets with more uncertainty and more risk are more specifically defined as speculative.</p></div></div></div> <span class="heading-toc" id="toc-advantages-and-disadvantages-of-speculative-flow"></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"> Advantages and Disadvantages of Speculative Flow </span> </h2> <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"> Pros of Speculative Flow </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The main advantage of speculative flow is it can help produce generate significant returns in a short period of time. Speculative flow often naturally occurs because it allows investors to make money from market movements based on trends or short-term opportunities. </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"> Another advantage of speculative flow is it usually produces liquidity in industries or for companies that would otherwise not have had capital needed for growth and innovation. In many ways, speculative flow is a self-fulfilling prophecy. Without a large influx of capital, some industries would not able to be successful; by being successful, more investors are attracted to the investment. </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"> Speculative flow is also a natural way for investors to <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversify</a> their portfolios. Speculative assets, by nature, are riskier with higher growth and income potential. For investors willing to hold a variety of assets with greater upside and greater loss potential, speculative flow is an indicator that investors are able to put capital towards a variety of assets based on their investment preferences. </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"> Cons of Speculative Flow </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> Though speculative assets may be able to yield higher returns, here are a number of risks and downsides to speculative flow. Speculative flow is capital that flows into highly volatile assets subject to price fluctuations. Speculative flow may result in capital losses if an investor is not fully aware of their investment. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> Although speculative flow represents capital that is flowing into a speculative asset, that asset may still not be liquid. Should the asset then cool down from market interest, an investor may find it difficult to sell the asset in the future. The asset may also be subject to regulatory risks as unestablished assets with limited track records. </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"> Last, speculative flow is based on hyper market sentiment in the short-term. For this reason, investors must be very aware of market manipulation situations, especially those easily perpetuated by social media. These types of investments may also get caught up in their own hype and lack true transparency or external reporting. </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-comparisonlist mntl-block" id="mntl-sc-block_35-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_36-0"> <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>Allow investors to pursue investments with high return potential</p></li> <li><p>Allow investors to diversify their investments</p></li> <li><p>May infuse capital into markets that would otherwise not be able to grow</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 relate to highly volatile assets</p></li> <li><p>May not allow investors to have an exit opportunity due to a lack of liquidity</p></li> <li><p>May face regulatory risks</p></li> <li><p>May be subject to market manipulation</p></li> </ul> </div> </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-example-of-speculative-flow"></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"> Example of Speculative Flow </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> On any given trading day, there are speculative flows to be found in all corners of the markets. The ones reported in the news happen to be the more interesting cases involving names or asset classes that many people have familiarity with. Take X Corp., for example, which went public in 2013. Shortly after it hit the market, massive speculative flow took the stock from its <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/ipo.asp">IPO</a> price of $26 per share to close to $45 by the end of its first trading day.<span class="ql-inline-citation" data-cite="4"></span><span class="ql-inline-citation" data-cite="6"></span> Speculative flows into the stock regularly occur when the rumor mill spins that the company will be bought. </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"> Another example of an asset class that is prone to speculative flow — this one global and gargantuan — is crude oil. When traders expect Middle East tensions to erupt, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/opec.asp">OPEC</a> to stick together, or supply of oil to otherwise be constrained, they may aggressively buy crude oil <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contracts</a> in an attempt to reap short-term profits from a potential spike in oil prices. </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"> Yet another example of speculation occurred during the housing crisis of 2006. Speculators pumped money into the housing market and pushed up supply of available housing stock in anticipation of gains. Their reasoning for a boom in the housing market was not based on present economic reality. According to research, it was anchored, in part, on extrapolation from past housing market changes. However, the script was altered in 2006 and the housing glut did not transform into a boom or profits. Instead it led to a crash.<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_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-does-speculation-mean-in-finance"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does Speculation Mean in Finance?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value. However, speculation is the act of also putting capital towards an investment that may presumably grow and eventually show its true market potential.</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-is-speculation-good-or-bad"></span> <h2 class="mntl-sc-block-questionandanswer__question">Is Speculation Good or Bad?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Speculation is suitable for certain types of investors. If an investor wants to take on risk for the potential for higher returns, they may enter into these types of investments. On the other hand, an investor who is getting closer to retirement may not want speculative flow as this may put their capital at undue risk.</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-how-do-you-profit-from-speculation"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Do You Profit From Speculation?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The strategy behind speculation is to enter into short-tern positions. Investors contribute capital to speculative assets in hopes that these assets may materially appreciate in the short-term. Investors tied to speculative flow often do not intend to hold investments for a long time. Instead, investors seek a quick turn from buying an assets, seeing their investment grow, and selling it promptly.</p></div> </div> <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-the-bottom-line"></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"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_52-0"> Speculative flow is the act of contributing capital to a speculative asset. It represents money that investors put towards assets with higher risk profiles that may also generate higher returns. Investors that contribute to speculative flow often enter into short-term positions to try and flip investments for quick profits. </p></div>	## What is Speculative Flow? Speculative flow is the movement of [hot money](https://www.investopedia.com/ask/answers/09/hot-money.asp) into shares of a sector or specific company or an asset class in an attempt to earn short-term gains. Speculative flow can be sustained or short-lived, and if large enough, the increased demand will create upward pressure on the price of the securities where the money is flowing. ### Key Takeaways * Speculative flow is the movement of hot money into shares of a sector or company or asset class for short-term gains. * Speculative flow is not generally grounded on deep fundamentals or analysis. * Speculative flows can also have a positive effect on nascent sectors or companies struggling to build out new markets. * Speculative flow also has the benefit of allowing investors to diversify their portfolio across investments with different risk profiles. * Speculative flow may be tied to assets with higher regulatory risk, volatility, or risk of market manipulation. ## Understanding Speculative Flow Speculation should not be confused with informed investing. Speculators may know very little about the fundamentals of a company or a sector or the underlying drivers of a particular asset class. However, if they believe something will go up, they may place their bets on the object of their adoration. Other like-minded speculators may catch wind of a hot trade and join in, adding to the speculative flow of money into a security — a stock, sector [ETF](https://www.investopedia.com/terms/e/etf.asp), junk bonds, a foreign currency, [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp), etc. Speculative flow may sometimes receive a bad rep as far as its effects are concerned, though it can also prove to be a force for good. For example, speculative flow can provide liquidity to nascent companies or sectors that are struggling to reach their market potential. An influx of money can help such sectors scale and build out the necessary infrastructure and marketing strategy necessary to gain new audiences. Speculative flow can have the same effect on developing or underdeveloped economies, enabling them to kickstart growth. ## Speculative Investing vs. Non-Speculative Investing Speculative investing entails investing in assets that are more risky than regular investments. Speculative investors are willing to take on additional risk in exchange for the possibility of larger profits for assets that have yet to appreciate in value or demonstrate true market value. Non-speculative investing, on the other hand, entails investing in assets that are less risky and more established. Non-speculative investors prefer investments with a track record of generating consistent returns, such as stocks, bonds, mutual funds, or real estate. The primary distinction between speculative and non-speculative investing is the level of risk an investor takes on. Speculative investments have the potential for larger returns but also carry a higher risk of loss as products or companies may not have an established history. Meanwhile, non-speculative assets carry a lower risk of loss but may provide lower returns. Non-speculative flow entails contributing cash to larger cap stocks or established technologies already engrained in markets. Another major difference between speculative flow and non-speculative flow is the intention behind the investment. Individuals approaching [retirement](https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp) may want to make safer, smarter investments with less downside potential. Meanwhile, investors contributing speculative flow may enter the investment with the understanding that the funds may not be around when the investor retires. Therefore, speculative flow and non-speculative flow represent the baseline infrastructure to investment strategies. ### All investments are speculative, as there are no guarantees in investing. However, some assets with more uncertainty and more risk are more specifically defined as speculative. ## Advantages and Disadvantages of Speculative Flow ### Pros of Speculative Flow The main advantage of speculative flow is it can help produce generate significant returns in a short period of time. Speculative flow often naturally occurs because it allows investors to make money from market movements based on trends or short-term opportunities. Another advantage of speculative flow is it usually produces liquidity in industries or for companies that would otherwise not have had capital needed for growth and innovation. In many ways, speculative flow is a self-fulfilling prophecy. Without a large influx of capital, some industries would not able to be successful; by being successful, more investors are attracted to the investment. Speculative flow is also a natural way for investors to [diversify](https://www.investopedia.com/terms/d/diversification.asp) their portfolios. Speculative assets, by nature, are riskier with higher growth and income potential. For investors willing to hold a variety of assets with greater upside and greater loss potential, speculative flow is an indicator that investors are able to put capital towards a variety of assets based on their investment preferences. ### Cons of Speculative Flow Though speculative assets may be able to yield higher returns, here are a number of risks and downsides to speculative flow. Speculative flow is capital that flows into highly volatile assets subject to price fluctuations. Speculative flow may result in capital losses if an investor is not fully aware of their investment. Although speculative flow represents capital that is flowing into a speculative asset, that asset may still not be liquid. Should the asset then cool down from market interest, an investor may find it difficult to sell the asset in the future. The asset may also be subject to regulatory risks as unestablished assets with limited track records. Last, speculative flow is based on hyper market sentiment in the short-term. For this reason, investors must be very aware of market manipulation situations, especially those easily perpetuated by social media. These types of investments may also get caught up in their own hype and lack true transparency or external reporting. Pros * Allow investors to pursue investments with high return potential * Allow investors to diversify their investments * May infuse capital into markets that would otherwise not be able to grow Cons * Often relate to highly volatile assets * May not allow investors to have an exit opportunity due to a lack of liquidity * May face regulatory risks * May be subject to market manipulation ## Example of Speculative Flow On any given trading day, there are speculative flows to be found in all corners of the markets. The ones reported in the news happen to be the more interesting cases involving names or asset classes that many people have familiarity with. Take X Corp., for example, which went public in 2013. Shortly after it hit the market, massive speculative flow took the stock from its [IPO](https://www.investopedia.com/terms/i/ipo.asp) price of $26 per share to close to $45 by the end of its first trading day. Speculative flows into the stock regularly occur when the rumor mill spins that the company will be bought. Another example of an asset class that is prone to speculative flow — this one global and gargantuan — is crude oil. When traders expect Middle East tensions to erupt, [OPEC](https://www.investopedia.com/terms/o/opec.asp) to stick together, or supply of oil to otherwise be constrained, they may aggressively buy crude oil [futures contracts](https://www.investopedia.com/terms/f/futurescontract.asp) in an attempt to reap short-term profits from a potential spike in oil prices. Yet another example of speculation occurred during the housing crisis of 2006. Speculators pumped money into the housing market and pushed up supply of available housing stock in anticipation of gains. Their reasoning for a boom in the housing market was not based on present economic reality. According to research, it was anchored, in part, on extrapolation from past housing market changes. However, the script was altered in 2006 and the housing glut did not transform into a boom or profits. Instead it led to a crash. ## What Does Speculation Mean in Finance? Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value. However, speculation is the act of also putting capital towards an investment that may presumably grow and eventually show its true market potential. ## Is Speculation Good or Bad? Speculation is suitable for certain types of investors. If an investor wants to take on risk for the potential for higher returns, they may enter into these types of investments. On the other hand, an investor who is getting closer to retirement may not want speculative flow as this may put their capital at undue risk. ## How Do You Profit From Speculation? The strategy behind speculation is to enter into short-tern positions. Investors contribute capital to speculative assets in hopes that these assets may materially appreciate in the short-term. Investors tied to speculative flow often do not intend to hold investments for a long time. Instead, investors seek a quick turn from buying an assets, seeing their investment grow, and selling it promptly. ## The Bottom Line Speculative flow is the act of contributing capital to a speculative asset. It represents money that investors put towards assets with higher risk profiles that may also generate higher returns. Investors that contribute to speculative flow often enter into short-term positions to try and flip investments for quick profits.	What is Speculative Flow? Speculative flow is the movement of hot money into shares of a sector or specific company or an asset class in an attempt to earn short-term gains. Speculative flow can be sustained or short-lived, and if large enough, the increased demand will create upward pressure on the price of the securities where the money is flowing. Key Takeaways Speculative flow is the movement of hot money into shares of a sector or company or asset class for short-term gains.Speculative flow is not generally grounded on deep fundamentals or analysis.Speculative flows can also have a positive effect on nascent sectors or companies struggling to build out new markets.Speculative flow also has the benefit of allowing investors to diversify their portfolio across investments with different risk profiles.Speculative flow may be tied to assets with higher regulatory risk, volatility, or risk of market manipulation. Understanding Speculative Flow Speculation should not be confused with informed investing. Speculators may know very little about the fundamentals of a company or a sector or the underlying drivers of a particular asset class. However, if they believe something will go up, they may place their bets on the object of their adoration. Other like-minded speculators may catch wind of a hot trade and join in, adding to the speculative flow of money into a security — a stock, sector ETF, junk bonds, a foreign currency, cryptocurrency, etc. Speculative flow may sometimes receive a bad rep as far as its effects are concerned, though it can also prove to be a force for good. For example, speculative flow can provide liquidity to nascent companies or sectors that are struggling to reach their market potential. An influx of money can help such sectors scale and build out the necessary infrastructure and marketing strategy necessary to gain new audiences. Speculative flow can have the same effect on developing or underdeveloped economies, enabling them to kickstart growth. Speculative Investing vs. Non-Speculative Investing Speculative investing entails investing in assets that are more risky than regular investments. Speculative investors are willing to take on additional risk in exchange for the possibility of larger profits for assets that have yet to appreciate in value or demonstrate true market value. Non-speculative investing, on the other hand, entails investing in assets that are less risky and more established. Non-speculative investors prefer investments with a track record of generating consistent returns, such as stocks, bonds, mutual funds, or real estate. The primary distinction between speculative and non-speculative investing is the level of risk an investor takes on. Speculative investments have the potential for larger returns but also carry a higher risk of loss as products or companies may not have an established history. Meanwhile, non-speculative assets carry a lower risk of loss but may provide lower returns. Non-speculative flow entails contributing cash to larger cap stocks or established technologies already engrained in markets. Another major difference between speculative flow and non-speculative flow is the intention behind the investment. Individuals approaching retirement may want to make safer, smarter investments with less downside potential. Meanwhile, investors contributing speculative flow may enter the investment with the understanding that the funds may not be around when the investor retires. Therefore, speculative flow and non-speculative flow represent the baseline infrastructure to investment strategies. All investments are speculative, as there are no guarantees in investing. However, some assets with more uncertainty and more risk are more specifically defined as speculative. Advantages and Disadvantages of Speculative Flow Pros of Speculative Flow The main advantage of speculative flow is it can help produce generate significant returns in a short period of time. Speculative flow often naturally occurs because it allows investors to make money from market movements based on trends or short-term opportunities. Another advantage of speculative flow is it usually produces liquidity in industries or for companies that would otherwise not have had capital needed for growth and innovation. In many ways, speculative flow is a self-fulfilling prophecy. Without a large influx of capital, some industries would not able to be successful; by being successful, more investors are attracted to the investment. Speculative flow is also a natural way for investors to diversify their portfolios. Speculative assets, by nature, are riskier with higher growth and income potential. For investors willing to hold a variety of assets with greater upside and greater loss potential, speculative flow is an indicator that investors are able to put capital towards a variety of assets based on their investment preferences. Cons of Speculative Flow Though speculative assets may be able to yield higher returns, here are a number of risks and downsides to speculative flow. Speculative flow is capital that flows into highly volatile assets subject to price fluctuations. Speculative flow may result in capital losses if an investor is not fully aware of their investment. Although speculative flow represents capital that is flowing into a speculative asset, that asset may still not be liquid. Should the asset then cool down from market interest, an investor may find it difficult to sell the asset in the future. The asset may also be subject to regulatory risks as unestablished assets with limited track records. Last, speculative flow is based on hyper market sentiment in the short-term. For this reason, investors must be very aware of market manipulation situations, especially those easily perpetuated by social media. These types of investments may also get caught up in their own hype and lack true transparency or external reporting. Pros Allow investors to pursue investments with high return potential Allow investors to diversify their investments May infuse capital into markets that would otherwise not be able to grow Cons Often relate to highly volatile assets May not allow investors to have an exit opportunity due to a lack of liquidity May face regulatory risks May be subject to market manipulation Example of Speculative Flow On any given trading day, there are speculative flows to be found in all corners of the markets. The ones reported in the news happen to be the more interesting cases involving names or asset classes that many people have familiarity with. Take X Corp., for example, which went public in 2013. Shortly after it hit the market, massive speculative flow took the stock from its IPO price of $26 per share to close to $45 by the end of its first trading day. Speculative flows into the stock regularly occur when the rumor mill spins that the company will be bought. Another example of an asset class that is prone to speculative flow — this one global and gargantuan — is crude oil. When traders expect Middle East tensions to erupt, OPEC to stick together, or supply of oil to otherwise be constrained, they may aggressively buy crude oil futures contracts in an attempt to reap short-term profits from a potential spike in oil prices. Yet another example of speculation occurred during the housing crisis of 2006. Speculators pumped money into the housing market and pushed up supply of available housing stock in anticipation of gains. Their reasoning for a boom in the housing market was not based on present economic reality. According to research, it was anchored, in part, on extrapolation from past housing market changes. However, the script was altered in 2006 and the housing glut did not transform into a boom or profits. Instead it led to a crash. What Does Speculation Mean in Finance? Speculation refers to the act of conducting a financial transaction that has substantial risk of losing value. However, speculation is the act of also putting capital towards an investment that may presumably grow and eventually show its true market potential. Is Speculation Good or Bad? Speculation is suitable for certain types of investors. If an investor wants to take on risk for the potential for higher returns, they may enter into these types of investments. On the other hand, an investor who is getting closer to retirement may not want speculative flow as this may put their capital at undue risk. How Do You Profit From Speculation? The strategy behind speculation is to enter into short-tern positions. Investors contribute capital to speculative assets in hopes that these assets may materially appreciate in the short-term. Investors tied to speculative flow often do not intend to hold investments for a long time. Instead, investors seek a quick turn from buying an assets, seeing their investment grow, and selling it promptly. The Bottom Line Speculative flow is the act of contributing capital to a speculative asset. It represents money that investors put towards assets with higher risk profiles that may also generate higher returns. Investors that contribute to speculative flow often enter into short-term positions to try and flip investments for quick profits.	[ [ "hot money", "https://www.investopedia.com/ask/answers/09/hot-money.asp" ], [ "ETF", "https://www.investopedia.com/terms/e/etf.asp" ], [ "cryptocurrency", "https://www.investopedia.com/terms/c/cryptocurrency.asp" ], [ "retirement", "https://www.investopedia.com/articles/retirement/11/5-steps-to-retirement-plan.asp" ], [ "diversify", "https://www.investopedia.com/terms/d/diversification.asp" ], [ "IPO", "https://www.investopedia.com/terms/i/ipo.asp" ], [ "OPEC", "https://www.investopedia.com/terms/o/opec.asp" ], [ "futures contracts", "https://www.investopedia.com/terms/f/futurescontract.asp" ] ]
https://www.investopedia.com/ask/answers/071615/what-difference-between-revocable-trust-and-living-trust.asp	Revocable Trust vs. Irrevocable Trust: What's the Difference?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-revocable-trust-vs-irrevocable-trust-an-overview"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_1-0"> <span class="mntl-sc-block-heading__text"> Revocable Trust vs. Irrevocable Trust: An Overview </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/irrevocabletrust.asp">irrevocable trust</a> describes a trust that cannot be modified after it is created without the beneficiaries' consent or court approval, and possibly both. </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 trust is a separate legal entity a person sets up to hold their assets. Trusts are set up during a person's lifetime to assure that assets are used in a way that the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them. The trustee determines how the assets are invested and distributes them when the trust owner dies. However, the trustee must manage the trust following the guidelines laid out when the trust was formed, including giving funds to the designated beneficiary or beneficiaries. </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"> It's not uncommon for an individual to use a trust instead of a will for <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a> and stipulating what happens to their assets upon their death. Trusts are also a way to reduce tax burdens and avoid assets going to probate. </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>Revocable, or living, trusts can be modified after they are created.</li><li>Revocable trusts are easier to set up than irrevocable trusts.</li><li>Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify.</li><li>Irrevocable trusts offer estate tax benefits that revocable trusts do not.</li><li>Irrevocable trusts may be good for individuals whose jobs may make them at higher risk of a lawsuit.</li></ul></div></div></div> <span class="heading-toc" id="toc-revocable-trust-living-trust"></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"> Revocable Trust (Living Trust) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> The two basic types of trusts are a revocable trust, also known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/06/revocablelivingtrust.asp">revocable living trust</a> or simply a living trust, and an irrevocable trust. The owner of a revocable trust may change its terms at any time. They can remove beneficiaries, designate new ones, and modify stipulations on how assets within the trust are managed. Given the flexibility of revocable or living trusts in contrast with the rigidity of an irrevocable trust, it may seem that all trusts should be revocable. </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"> However, there are a few key disadvantages to revocable trusts. Because the owner retains such a level of control over a revocable trust, the assets they put into it are not shielded from creditors the way they are in an irrevocable trust. If they are sued, the trust assets can be ordered liquidated to satisfy any judgment put forth. When the owner of a revocable trust dies, the assets held in trust are also subject to state and federal estate taxes. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> If the beneficiaries of a revocable trust are young (not of legal age) and the minor's real estate assets are held within a trust, it can replace the need to appoint a conservator, should the grantor die. In addition, if a grantor names beneficiaries who they deem unreliable with money, the trust can set aside a specific amount to be distributed at recurring intervals, or when they come of age (if they are minors). </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>The benefactor, having transferred assets into an irrevocable trust, effectively removes all rights of ownership to the assets and, for the most part, all control.</p></div></div></div> <span class="heading-toc" id="toc-irrevocable-trust"></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"> Irrevocable Trust </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any alterations would have to be done by 100% consent of its beneficiaries or by order of the court, and in some cases both court approval and beneficiary consent may be required. The exact rules can depend on state laws. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_21-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_22-0"> The main reason to select an irrevocable trust structure is taxes. Irrevocable trusts remove the benefactor's taxable estate assets, meaning they are not subject to estate tax upon death. If the trust is a guarantor trust, the creator of the trust covers the income tax of trust assets, and the beneficiary will not owe income taxes on distributions. If the trust is not a guarantor trust, the trust pays income taxes on its assets while they are in the trust, and the beneficiary will owe income taxes on distributions.<span class="ql-inline-citation" data-cite="2"></span><span class="ql-inline-citation" data-cite="1"></span> Irrevocable trusts can be difficult to set up and require the help of a qualified trust attorney. </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"> If you work in a profession where you may be at risk for lawsuits, such as a medical professional or lawyer, an irrevocable trust could be helpful to protect your assets. When assets are transferred, whether they are cash or property, to the ownership of an irrevocable trust, it means the trust is protected from <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/creditor.asp">creditors</a>, and even legal judgment. However, an irrevocable trust is a bit more complicated to set up than a revocable trust, namely because it cannot be altered. </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-key-differences"></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"> Key Differences </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> There are some key differences between a revocable and an irrevocable trust beyond that a revocable trust can be altered but an irrevocable trust cannot be changed. It is more common for the guarantor to be a trustee or the trustee of a revocable trust. For an irrevocable trust, it is possible, but less common. Many attorneys advise against it as well. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_28-0"></div> <span class="heading-toc" id="toc-revocable-trust-vs-irrevocable-trust-example"></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"> Revocable Trust vs. Irrevocable Trust Example </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_30-0"> Let us say an individual creates a revocable trust to benefit their family and protect their assets. In doing so, as the grantor of a revocable trust, they can also name themselves the trustee and the beneficiary of the trust. When they get older, they can go back into the trust and name a new beneficiary and add a trustee to step in if they become incapacitated in their more senior years. </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 trust can be amended several times within the trustee's lifetime, say if the trustee remarries or after the birth of a grandchild. When they pass, their trust is kept out of probate, and the stipulations in their trust can be carried out discreetly. </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 disadvantages, however, are it can be costly to write one up and even more expensive if you make alterations numerous times. A trust must be funded, and assets must be moved into the trust, which can also have some costs. </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"> Now, let's say the same individual creates an irrevocable trust to benefit their family and protect their assets. Instead of naming themselves the trustee and beneficiary, the grantor would usually designate a separate trustee and feel secure giving up ownership and controlling assets, such as property. They will now have to carefully vet a trustee and a trust protector who acts as an oversight manager of the trust. Then, they must <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/beneficiary_form.asp">name beneficiaries</a>. Once assets have been put into an irrevocable trust, unlike a revocable trust, the grantor now must let it rest, as they cannot alter the trust without significant difficulty. </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 certain circumstances, the inability to change the trust makes an irrevocable trust potentially a risky endeavor. It is difficult to change the named beneficiaries in an irrevocable trust. And the grantor may not be able to access their assets, even if a life event makes it necessary. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_39-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_40-0"><span class="heading-toc" id="toc-what-are-the-main-parties-involved-in-an-irrevocable-trust"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Parties Involved in an Irrevocable Trust?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are typically four parties involved in an irrevocable trust. The grantor, the trustee of the trust, and the beneficiary or beneficiaries. Some individuals may choose a trust protector who oversees the trustee.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_41-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_42-0"><span class="heading-toc" id="toc-what-are-the-main-downsides-of-revocable-and-irrevocable-trusts"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are the Main Downsides of Revocable and Irrevocable Trusts?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Both revocable and irrevocable trusts can be expensive to draw up, complex to undo, in the case of an irrevocable trust, and costly to rewrite, in the case of a revocable trust. It is very <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/071415/how-exactly-does-one-go-about-revoking-revocable-trust.asp">difficult to dissolve</a> an irrevocable trust, and a revocable trust doesn't necessarily protect your assets from creditors.</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"> Trusts are legal entities that a person sets up to hold their assets. A revocable trust has the advantage of flexibility in that it can be altered at any time by the grantor who sets it up. However, it has disadvantages, too. A revocable trust doesn't shield the grantor's assets from creditors, which means if the grantor is sued, the trust assets can be ordered liquidated to satisfy a judgment. Also, when the owner of a revocable trust dies, the assets held in trust are subject to state and federal estate taxes. By contrast, an irrevocable trust cannot be changed except under extremely rare circumstances. It also shields assets from creditors in lawsuits, and assets are not subject to estate taxes. But irrevocable trusts are complicated to set up. If you're thinking of establishing one, consult a qualified trust attorney.<br/> </p></div>	## Revocable Trust vs. Irrevocable Trust: An Overview A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An [irrevocable trust](https://www.investopedia.com/terms/i/irrevocabletrust.asp) describes a trust that cannot be modified after it is created without the beneficiaries' consent or court approval, and possibly both. A trust is a separate legal entity a person sets up to hold their assets. Trusts are set up during a person's lifetime to assure that assets are used in a way that the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them. The trustee determines how the assets are invested and distributes them when the trust owner dies. However, the trustee must manage the trust following the guidelines laid out when the trust was formed, including giving funds to the designated beneficiary or beneficiaries. It's not uncommon for an individual to use a trust instead of a will for [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp) and stipulating what happens to their assets upon their death. Trusts are also a way to reduce tax burdens and avoid assets going to probate. ### Key Takeaways * Revocable, or living, trusts can be modified after they are created. * Revocable trusts are easier to set up than irrevocable trusts. * Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify. * Irrevocable trusts offer estate tax benefits that revocable trusts do not. * Irrevocable trusts may be good for individuals whose jobs may make them at higher risk of a lawsuit. ## Revocable Trust (Living Trust) The two basic types of trusts are a revocable trust, also known as a [revocable living trust](https://www.investopedia.com/articles/pf/06/revocablelivingtrust.asp) or simply a living trust, and an irrevocable trust. The owner of a revocable trust may change its terms at any time. They can remove beneficiaries, designate new ones, and modify stipulations on how assets within the trust are managed. Given the flexibility of revocable or living trusts in contrast with the rigidity of an irrevocable trust, it may seem that all trusts should be revocable. However, there are a few key disadvantages to revocable trusts. Because the owner retains such a level of control over a revocable trust, the assets they put into it are not shielded from creditors the way they are in an irrevocable trust. If they are sued, the trust assets can be ordered liquidated to satisfy any judgment put forth. When the owner of a revocable trust dies, the assets held in trust are also subject to state and federal estate taxes. If the beneficiaries of a revocable trust are young (not of legal age) and the minor's real estate assets are held within a trust, it can replace the need to appoint a conservator, should the grantor die. In addition, if a grantor names beneficiaries who they deem unreliable with money, the trust can set aside a specific amount to be distributed at recurring intervals, or when they come of age (if they are minors). ### The benefactor, having transferred assets into an irrevocable trust, effectively removes all rights of ownership to the assets and, for the most part, all control. ## Irrevocable Trust The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any alterations would have to be done by 100% consent of its beneficiaries or by order of the court, and in some cases both court approval and beneficiary consent may be required. The exact rules can depend on state laws. The main reason to select an irrevocable trust structure is taxes. Irrevocable trusts remove the benefactor's taxable estate assets, meaning they are not subject to estate tax upon death. If the trust is a guarantor trust, the creator of the trust covers the income tax of trust assets, and the beneficiary will not owe income taxes on distributions. If the trust is not a guarantor trust, the trust pays income taxes on its assets while they are in the trust, and the beneficiary will owe income taxes on distributions. Irrevocable trusts can be difficult to set up and require the help of a qualified trust attorney. If you work in a profession where you may be at risk for lawsuits, such as a medical professional or lawyer, an irrevocable trust could be helpful to protect your assets. When assets are transferred, whether they are cash or property, to the ownership of an irrevocable trust, it means the trust is protected from [creditors](https://www.investopedia.com/terms/c/creditor.asp), and even legal judgment. However, an irrevocable trust is a bit more complicated to set up than a revocable trust, namely because it cannot be altered. ## Key Differences There are some key differences between a revocable and an irrevocable trust beyond that a revocable trust can be altered but an irrevocable trust cannot be changed. It is more common for the guarantor to be a trustee or the trustee of a revocable trust. For an irrevocable trust, it is possible, but less common. Many attorneys advise against it as well. ## Revocable Trust vs. Irrevocable Trust Example Let us say an individual creates a revocable trust to benefit their family and protect their assets. In doing so, as the grantor of a revocable trust, they can also name themselves the trustee and the beneficiary of the trust. When they get older, they can go back into the trust and name a new beneficiary and add a trustee to step in if they become incapacitated in their more senior years. The trust can be amended several times within the trustee's lifetime, say if the trustee remarries or after the birth of a grandchild. When they pass, their trust is kept out of probate, and the stipulations in their trust can be carried out discreetly. The disadvantages, however, are it can be costly to write one up and even more expensive if you make alterations numerous times. A trust must be funded, and assets must be moved into the trust, which can also have some costs. Now, let's say the same individual creates an irrevocable trust to benefit their family and protect their assets. Instead of naming themselves the trustee and beneficiary, the grantor would usually designate a separate trustee and feel secure giving up ownership and controlling assets, such as property. They will now have to carefully vet a trustee and a trust protector who acts as an oversight manager of the trust. Then, they must [name beneficiaries](https://www.investopedia.com/articles/pf/07/beneficiary_form.asp). Once assets have been put into an irrevocable trust, unlike a revocable trust, the grantor now must let it rest, as they cannot alter the trust without significant difficulty. Under certain circumstances, the inability to change the trust makes an irrevocable trust potentially a risky endeavor. It is difficult to change the named beneficiaries in an irrevocable trust. And the grantor may not be able to access their assets, even if a life event makes it necessary. ## What Are the Main Parties Involved in an Irrevocable Trust? There are typically four parties involved in an irrevocable trust. The grantor, the trustee of the trust, and the beneficiary or beneficiaries. Some individuals may choose a trust protector who oversees the trustee. ## What Are the Main Downsides of Revocable and Irrevocable Trusts? Both revocable and irrevocable trusts can be expensive to draw up, complex to undo, in the case of an irrevocable trust, and costly to rewrite, in the case of a revocable trust. It is very [difficult to dissolve](https://www.investopedia.com/ask/answers/071415/how-exactly-does-one-go-about-revoking-revocable-trust.asp) an irrevocable trust, and a revocable trust doesn't necessarily protect your assets from creditors. ## The Bottom Line Trusts are legal entities that a person sets up to hold their assets. A revocable trust has the advantage of flexibility in that it can be altered at any time by the grantor who sets it up. However, it has disadvantages, too. A revocable trust doesn't shield the grantor's assets from creditors, which means if the grantor is sued, the trust assets can be ordered liquidated to satisfy a judgment. Also, when the owner of a revocable trust dies, the assets held in trust are subject to state and federal estate taxes. By contrast, an irrevocable trust cannot be changed except under extremely rare circumstances. It also shields assets from creditors in lawsuits, and assets are not subject to estate taxes. But irrevocable trusts are complicated to set up. If you're thinking of establishing one, consult a qualified trust attorney.	Revocable Trust vs. Irrevocable Trust: An Overview A revocable trust and living trust are separate terms that describe the same thing: a trust in which the terms can be changed at any time. An irrevocable trust describes a trust that cannot be modified after it is created without the beneficiaries' consent or court approval, and possibly both. A trust is a separate legal entity a person sets up to hold their assets. Trusts are set up during a person's lifetime to assure that assets are used in a way that the person setting up the trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them. The trustee determines how the assets are invested and distributes them when the trust owner dies. However, the trustee must manage the trust following the guidelines laid out when the trust was formed, including giving funds to the designated beneficiary or beneficiaries. It's not uncommon for an individual to use a trust instead of a will for estate planning and stipulating what happens to their assets upon their death. Trusts are also a way to reduce tax burdens and avoid assets going to probate. Key Takeaways Revocable, or living, trusts can be modified after they are created.Revocable trusts are easier to set up than irrevocable trusts.Irrevocable trusts cannot be modified after they are created, or at least they are very difficult to modify.Irrevocable trusts offer estate tax benefits that revocable trusts do not.Irrevocable trusts may be good for individuals whose jobs may make them at higher risk of a lawsuit. Revocable Trust (Living Trust) The two basic types of trusts are a revocable trust, also known as a revocable living trust or simply a living trust, and an irrevocable trust. The owner of a revocable trust may change its terms at any time. They can remove beneficiaries, designate new ones, and modify stipulations on how assets within the trust are managed. Given the flexibility of revocable or living trusts in contrast with the rigidity of an irrevocable trust, it may seem that all trusts should be revocable. However, there are a few key disadvantages to revocable trusts. Because the owner retains such a level of control over a revocable trust, the assets they put into it are not shielded from creditors the way they are in an irrevocable trust. If they are sued, the trust assets can be ordered liquidated to satisfy any judgment put forth. When the owner of a revocable trust dies, the assets held in trust are also subject to state and federal estate taxes. If the beneficiaries of a revocable trust are young (not of legal age) and the minor's real estate assets are held within a trust, it can replace the need to appoint a conservator, should the grantor die. In addition, if a grantor names beneficiaries who they deem unreliable with money, the trust can set aside a specific amount to be distributed at recurring intervals, or when they come of age (if they are minors). The benefactor, having transferred assets into an irrevocable trust, effectively removes all rights of ownership to the assets and, for the most part, all control. Irrevocable Trust The terms of an irrevocable trust, in contrast, are set in stone the minute the agreement is signed. Except under exceedingly rare circumstances, no changes may be made to an irrevocable trust. Any alterations would have to be done by 100% consent of its beneficiaries or by order of the court, and in some cases both court approval and beneficiary consent may be required. The exact rules can depend on state laws. The main reason to select an irrevocable trust structure is taxes. Irrevocable trusts remove the benefactor's taxable estate assets, meaning they are not subject to estate tax upon death. If the trust is a guarantor trust, the creator of the trust covers the income tax of trust assets, and the beneficiary will not owe income taxes on distributions. If the trust is not a guarantor trust, the trust pays income taxes on its assets while they are in the trust, and the beneficiary will owe income taxes on distributions. Irrevocable trusts can be difficult to set up and require the help of a qualified trust attorney. If you work in a profession where you may be at risk for lawsuits, such as a medical professional or lawyer, an irrevocable trust could be helpful to protect your assets. When assets are transferred, whether they are cash or property, to the ownership of an irrevocable trust, it means the trust is protected from creditors, and even legal judgment. However, an irrevocable trust is a bit more complicated to set up than a revocable trust, namely because it cannot be altered. Key Differences There are some key differences between a revocable and an irrevocable trust beyond that a revocable trust can be altered but an irrevocable trust cannot be changed. It is more common for the guarantor to be a trustee or the trustee of a revocable trust. For an irrevocable trust, it is possible, but less common. Many attorneys advise against it as well. Revocable Trust vs. Irrevocable Trust Example Let us say an individual creates a revocable trust to benefit their family and protect their assets. In doing so, as the grantor of a revocable trust, they can also name themselves the trustee and the beneficiary of the trust. When they get older, they can go back into the trust and name a new beneficiary and add a trustee to step in if they become incapacitated in their more senior years. The trust can be amended several times within the trustee's lifetime, say if the trustee remarries or after the birth of a grandchild. When they pass, their trust is kept out of probate, and the stipulations in their trust can be carried out discreetly. The disadvantages, however, are it can be costly to write one up and even more expensive if you make alterations numerous times. A trust must be funded, and assets must be moved into the trust, which can also have some costs. Now, let's say the same individual creates an irrevocable trust to benefit their family and protect their assets. Instead of naming themselves the trustee and beneficiary, the grantor would usually designate a separate trustee and feel secure giving up ownership and controlling assets, such as property. They will now have to carefully vet a trustee and a trust protector who acts as an oversight manager of the trust. Then, they must name beneficiaries. Once assets have been put into an irrevocable trust, unlike a revocable trust, the grantor now must let it rest, as they cannot alter the trust without significant difficulty. Under certain circumstances, the inability to change the trust makes an irrevocable trust potentially a risky endeavor. It is difficult to change the named beneficiaries in an irrevocable trust. And the grantor may not be able to access their assets, even if a life event makes it necessary. What Are the Main Parties Involved in an Irrevocable Trust? There are typically four parties involved in an irrevocable trust. The grantor, the trustee of the trust, and the beneficiary or beneficiaries. Some individuals may choose a trust protector who oversees the trustee. What Are the Main Downsides of Revocable and Irrevocable Trusts? Both revocable and irrevocable trusts can be expensive to draw up, complex to undo, in the case of an irrevocable trust, and costly to rewrite, in the case of a revocable trust. It is very difficult to dissolve an irrevocable trust, and a revocable trust doesn't necessarily protect your assets from creditors. The Bottom Line Trusts are legal entities that a person sets up to hold their assets. A revocable trust has the advantage of flexibility in that it can be altered at any time by the grantor who sets it up. However, it has disadvantages, too. A revocable trust doesn't shield the grantor's assets from creditors, which means if the grantor is sued, the trust assets can be ordered liquidated to satisfy a judgment. Also, when the owner of a revocable trust dies, the assets held in trust are subject to state and federal estate taxes. By contrast, an irrevocable trust cannot be changed except under extremely rare circumstances. It also shields assets from creditors in lawsuits, and assets are not subject to estate taxes. But irrevocable trusts are complicated to set up. If you're thinking of establishing one, consult a qualified trust attorney.	[ [ "irrevocable trust", "https://www.investopedia.com/terms/i/irrevocabletrust.asp" ], [ "estate planning", "https://www.investopedia.com/terms/e/estateplanning.asp" ], [ "revocable living trust", "https://www.investopedia.com/articles/pf/06/revocablelivingtrust.asp" ], [ "creditors", "https://www.investopedia.com/terms/c/creditor.asp" ], [ "name beneficiaries", "https://www.investopedia.com/articles/pf/07/beneficiary_form.asp" ], [ "difficult to dissolve", "https://www.investopedia.com/ask/answers/071415/how-exactly-does-one-go-about-revoking-revocable-trust.asp" ] ]
https://www.investopedia.com/fewer-evs-would-qualify-for-tax-credits-under-new-treasury-department-rules-8409854	Fewer EVs Would Qualify for Tax Credits Under New Treasury Department Rules	<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 U.S. Department of the Treasury proposed new requirements regarding which electric vehicles (EVs) qualify for federal tax credits.</li><li>The plans would place restrictions on EVs that contain key components coming from certain countries, including China.</li><li>The limits are likely to reduce the number of EVs that will be eligible for tax credits starting next year.</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"> Proposed new U.S. rules on foreign-made components are expected to limit the number of electric vehicles (EVs) that can qualify for buyers to receive <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/q/qualified-electric-vehicle.asp">federal EV tax credits</a>. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_4-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_5-0"> The Treasury Department said starting next year, EVs will not qualify for tax credits of up to $7,500 under 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 (IRA)</a> if they contain "any battery components that are manufactured or assembled" by a "foreign entity of concern (FEOC)."<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"> The proposed rules become even more stringent in 2025. Beginning that year, qualified EVs can't have "any critical minerals that were extracted, processed, or recycled by a FEOC." Officials indicated that the decision aims to strengthen the security of U.S. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/supplychain.asp">supply chains</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_8-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> The Department of Energy has indicated that China, Russia, Iran, and North Korea will be considered FEOCs.<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 restrictions involving China are especially significant since that country accounts for a large amount of the mining, refining, and component manufacturing needed for EV battery production.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> John Podesta, senior advisor to the president for Clean Energy Innovation and Implementation, said President Biden has been determined "to reverse the decades-long trend of letting jobs and factories go overseas to China." The new guidance from the Treasury and Energy Departments is "helping ensure that the electric vehicle future will be made in America," he said.<span class="ql-inline-citation" data-cite="1"></span><br/> </p> <div class="comp news-tip mntl-block" id="news-tip_1-0"><div class="comp news-tip__text mntl-text-block" id="news-tip__text_1-0">Do you have a news tip for Investopedia reporters? Please email us at</div> <a class="news-tip__email mntl-text-link" data-tracking-container="true" href="mailto:[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 U.S. Department of the Treasury proposed new requirements regarding which electric vehicles (EVs) qualify for federal tax credits. * The plans would place restrictions on EVs that contain key components coming from certain countries, including China. * The limits are likely to reduce the number of EVs that will be eligible for tax credits starting next year. Proposed new U.S. rules on foreign-made components are expected to limit the number of electric vehicles (EVs) that can qualify for buyers to receive [federal EV tax credits](https://www.investopedia.com/terms/q/qualified-electric-vehicle.asp). The Treasury Department said starting next year, EVs will not qualify for tax credits of up to $7,500 under the [Inflation Reduction Act (IRA)](https://www.investopedia.com/inflation-reduction-act-of-2022-6362263) if they contain "any battery components that are manufactured or assembled" by a "foreign entity of concern (FEOC)." The proposed rules become even more stringent in 2025. Beginning that year, qualified EVs can't have "any critical minerals that were extracted, processed, or recycled by a FEOC." Officials indicated that the decision aims to strengthen the security of U.S. [supply chains](https://www.investopedia.com/terms/s/supplychain.asp). The Department of Energy has indicated that China, Russia, Iran, and North Korea will be considered FEOCs. The restrictions involving China are especially significant since that country accounts for a large amount of the mining, refining, and component manufacturing needed for EV battery production. John Podesta, senior advisor to the president for Clean Energy Innovation and Implementation, said President Biden has been determined "to reverse the decades-long trend of letting jobs and factories go overseas to China." The new guidance from the Treasury and Energy Departments is "helping ensure that the electric vehicle future will be made in America," he said. Do you have a news tip for Investopedia reporters? Please email us at [[email protected]](mailto:[email protected])	Key Takeaways The U.S. Department of the Treasury proposed new requirements regarding which electric vehicles (EVs) qualify for federal tax credits.The plans would place restrictions on EVs that contain key components coming from certain countries, including China.The limits are likely to reduce the number of EVs that will be eligible for tax credits starting next year. Proposed new U.S. rules on foreign-made components are expected to limit the number of electric vehicles (EVs) that can qualify for buyers to receive federal EV tax credits. The Treasury Department said starting next year, EVs will not qualify for tax credits of up to $7,500 under the Inflation Reduction Act (IRA) if they contain "any battery components that are manufactured or assembled" by a "foreign entity of concern (FEOC)." The proposed rules become even more stringent in 2025. Beginning that year, qualified EVs can't have "any critical minerals that were extracted, processed, or recycled by a FEOC." Officials indicated that the decision aims to strengthen the security of U.S. supply chains. The Department of Energy has indicated that China, Russia, Iran, and North Korea will be considered FEOCs. The restrictions involving China are especially significant since that country accounts for a large amount of the mining, refining, and component manufacturing needed for EV battery production. John Podesta, senior advisor to the president for Clean Energy Innovation and Implementation, said President Biden has been determined "to reverse the decades-long trend of letting jobs and factories go overseas to China." The new guidance from the Treasury and Energy Departments is "helping ensure that the electric vehicle future will be made in America," he said. Do you have a news tip for Investopedia reporters? Please email us at [email protected]	[ [ "federal EV tax credits", "https://www.investopedia.com/terms/q/qualified-electric-vehicle.asp" ], [ "Inflation Reduction Act (IRA)", "https://www.investopedia.com/inflation-reduction-act-of-2022-6362263" ], [ "supply chains", "https://www.investopedia.com/terms/s/supplychain.asp" ], [ "[email protected]", "mailto:[email protected]" ] ]
https://www.investopedia.com/terms/c/consumption-smoothing.asp	Consumption Smoothing Definition, Affect on Living Standards	<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-consumption-smoothing"></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 Consumption Smoothing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Consumption smoothing is the practice of optimizing our <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/standard-of-living.asp">standard of living</a> by ensuring a proper balance between spending and saving during the different phases of our lives. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement. Those who oversave will live a more frugal lifestyle while working to enjoy a better lifestyle while retired. </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 each case, the overall standard of living is less than optimal. </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>Consumption smoothing is creating a balance between spending and saving during the different phases of our lives to achieve a higher overall standard of living.</li><li>Consumption smoothing requires planning and sticking to a budget so that bills are paid when they come due.</li><li>Economists use predictive models to attempt to predict and smooth consumption by adjusting spending patterns.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-consumption-smoothing"></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 Consumption Smoothing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Saving for retirement is a delicate balancing act. By having a better understanding of the saving and spending requirements to smooth out the standard of living, it is possible to achieve a higher overall standard of living, at least in theory. Striking a balance is one of the major challenges of financial planning. </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"> Consumption smoothing is also necessary in the short term. Millions of Americans have unsteady streams of income. A freelancer or shift worker might have $3,000 to spend in one month and only $1,000 to spend the next while living expenses such as rent and food remain the same. Consumption smoothing allows them to control their spending so that they can meet their various obligations when income is fluctuating. To achieve consumption smoothing, most people plan and try to stick to 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> so that they can pay their bills when they come due. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_13-0"> As an economics concept, consumption smoothing captures the desire of people to have a stable path of consumption. There are several related areas of study to consumption smoothing, such as <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/behavioraleconomics.asp">behavioral economics</a>, psychology, and even anthropology. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_14-0"></div> <span class="heading-toc" id="toc-special-considerations-for-consumption-smoothing"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_15-0"> <span class="mntl-sc-block-heading__text"> Special Considerations for Consumption Smoothing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> Humans dislike and go to great lengths to eliminate uncertainty in their day-to-day lives, but it is impossible to do so completely. Consumption smoothing is an attempt by economists to identify how to eliminate the uncertainty by adjusting consumption (spending) patterns. </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"> Consumption smoothing has some validity in the short run, but the long-term predictive value is mixed. Because it is hard to anticipate future events, such as a change in income (be it a raise at work or loss of employment), a change in the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-code.asp">tax code</a>, or unforeseen tragic events (loss of a loved one), it is even harder to predict future consumption patterns. </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"> For instance, since the early 1980s to 2019, according to Centers for Medicare & Medicaid Services,<span class="ql-inline-citation" data-cite="1"></span> Americans have steadily increased healthcare spending as a percentage of GDP while consumption of food-related items has remained flat, relatively, according to the United States Department of Agriculture.<span class="ql-inline-citation" data-cite="2"></span> Consumption smoothing would seek to describe these changes in spending in economic terms. </p></div>	## What Is Consumption Smoothing? Consumption smoothing is the practice of optimizing our [standard of living](https://www.investopedia.com/terms/s/standard-of-living.asp) by ensuring a proper balance between spending and saving during the different phases of our lives. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement. Those who oversave will live a more frugal lifestyle while working to enjoy a better lifestyle while retired. In each case, the overall standard of living is less than optimal. ### Key Takeaways: * Consumption smoothing is creating a balance between spending and saving during the different phases of our lives to achieve a higher overall standard of living. * Consumption smoothing requires planning and sticking to a budget so that bills are paid when they come due. * Economists use predictive models to attempt to predict and smooth consumption by adjusting spending patterns. ## Understanding Consumption Smoothing Saving for retirement is a delicate balancing act. By having a better understanding of the saving and spending requirements to smooth out the standard of living, it is possible to achieve a higher overall standard of living, at least in theory. Striking a balance is one of the major challenges of financial planning. Consumption smoothing is also necessary in the short term. Millions of Americans have unsteady streams of income. A freelancer or shift worker might have $3,000 to spend in one month and only $1,000 to spend the next while living expenses such as rent and food remain the same. Consumption smoothing allows them to control their spending so that they can meet their various obligations when income is fluctuating. To achieve consumption smoothing, most people plan and try to stick to a [budget](https://www.investopedia.com/terms/b/budget.asp) so that they can pay their bills when they come due. As an economics concept, consumption smoothing captures the desire of people to have a stable path of consumption. There are several related areas of study to consumption smoothing, such as [behavioral economics](https://www.investopedia.com/terms/b/behavioraleconomics.asp), psychology, and even anthropology. ## Special Considerations for Consumption Smoothing Humans dislike and go to great lengths to eliminate uncertainty in their day-to-day lives, but it is impossible to do so completely. Consumption smoothing is an attempt by economists to identify how to eliminate the uncertainty by adjusting consumption (spending) patterns. Consumption smoothing has some validity in the short run, but the long-term predictive value is mixed. Because it is hard to anticipate future events, such as a change in income (be it a raise at work or loss of employment), a change in the [tax code](https://www.investopedia.com/terms/t/tax-code.asp), or unforeseen tragic events (loss of a loved one), it is even harder to predict future consumption patterns. For instance, since the early 1980s to 2019, according to Centers for Medicare & Medicaid Services, Americans have steadily increased healthcare spending as a percentage of GDP while consumption of food-related items has remained flat, relatively, according to the United States Department of Agriculture. Consumption smoothing would seek to describe these changes in spending in economic terms.	What Is Consumption Smoothing? Consumption smoothing is the practice of optimizing our standard of living by ensuring a proper balance between spending and saving during the different phases of our lives. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement. Those who oversave will live a more frugal lifestyle while working to enjoy a better lifestyle while retired. In each case, the overall standard of living is less than optimal. Key Takeaways: Consumption smoothing is creating a balance between spending and saving during the different phases of our lives to achieve a higher overall standard of living.Consumption smoothing requires planning and sticking to a budget so that bills are paid when they come due.Economists use predictive models to attempt to predict and smooth consumption by adjusting spending patterns. Understanding Consumption Smoothing Saving for retirement is a delicate balancing act. By having a better understanding of the saving and spending requirements to smooth out the standard of living, it is possible to achieve a higher overall standard of living, at least in theory. Striking a balance is one of the major challenges of financial planning. Consumption smoothing is also necessary in the short term. Millions of Americans have unsteady streams of income. A freelancer or shift worker might have $3,000 to spend in one month and only $1,000 to spend the next while living expenses such as rent and food remain the same. Consumption smoothing allows them to control their spending so that they can meet their various obligations when income is fluctuating. To achieve consumption smoothing, most people plan and try to stick to a budget so that they can pay their bills when they come due. As an economics concept, consumption smoothing captures the desire of people to have a stable path of consumption. There are several related areas of study to consumption smoothing, such as behavioral economics, psychology, and even anthropology. Special Considerations for Consumption Smoothing Humans dislike and go to great lengths to eliminate uncertainty in their day-to-day lives, but it is impossible to do so completely. Consumption smoothing is an attempt by economists to identify how to eliminate the uncertainty by adjusting consumption (spending) patterns. Consumption smoothing has some validity in the short run, but the long-term predictive value is mixed. Because it is hard to anticipate future events, such as a change in income (be it a raise at work or loss of employment), a change in the tax code, or unforeseen tragic events (loss of a loved one), it is even harder to predict future consumption patterns. For instance, since the early 1980s to 2019, according to Centers for Medicare & Medicaid Services, Americans have steadily increased healthcare spending as a percentage of GDP while consumption of food-related items has remained flat, relatively, according to the United States Department of Agriculture. Consumption smoothing would seek to describe these changes in spending in economic terms.	[ [ "standard of living", "https://www.investopedia.com/terms/s/standard-of-living.asp" ], [ "budget", "https://www.investopedia.com/terms/b/budget.asp" ], [ "behavioral economics", "https://www.investopedia.com/terms/b/behavioraleconomics.asp" ], [ "tax code", "https://www.investopedia.com/terms/t/tax-code.asp" ] ]
https://www.investopedia.com/how-to-build-generational-wealth-8417999	How to Build Generational Wealth	<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"> Generational wealth refers to assets passed down from one generation to the next. Building generational wealth can provide long-term financial security and opportunities for your children, grandchildren, and beyond. </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/generational-wealth-definition-5189580">Generational wealth</a> is about more than just financial resources, according to <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="externalLink" href="https://kovarwealth.com/taylor-kovar/" rel="nofollow">Taylor Kovar</a>, certified financial planner (CFP) and CEO of Kovar Wealth Management in Lufkin, Texas. “Its value extends beyond the monetary aspect—it’s also about imparting enduring family values and wisdom, creating a legacy that benefits and shapes the lives of future generations,” he says. </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"> Learn more about why generational wealth is important, how to lay the foundations to build wealth for your family, and how to ensure that your legacy is passed on in the most efficient way.<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>Generational wealth refers to passing down assets from one generation to the next.</li><li>Before you can build generational wealth, start creating a strong financial foundation by prioritizing savings, growing an emergency fund, and thinking through future plans.</li><li>Generational wealth can provide long-term financial security and open up opportunities for your children and beyond.</li><li>Strategies for building generational wealth include investing in education, financial markets, and real estate, and creating and preserving assets.</li><li>Maximizing tax benefits and avoiding debt are crucial for building generational wealth.</li></ul></div></div></div> <span class="heading-toc" id="toc-the-importance-of-building-generational-wealth"></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 Importance of Building Generational Wealth </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> Achieving financial success takes a lot of hard work, sacrifice, and planning. Not only can it help you enjoy things in your lifetime, but it can also help your heirs reap the benefits of your legacy and enjoy a financially secure lifestyle after you’re gone. </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"> Think of it as a wealth snowball. For example, generational wealth paves the way for enhanced educational opportunities and, consequently, greater earning potential for your kids, according to Kovar. And then they can continue building upon that foundation for their kids (your grandkids). </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-the-challenges-of-building-generational-wealth"></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"> The Challenges of Building Generational Wealth </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> Building generational wealth is not an easy undertaking, but it’s especially challenging if you grow up in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/poverty.asp">poverty</a> or face systemic barriers. Unfortunately, that has been the experience of many marginalized groups in this country. </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 instance, in 2019, the median wealth of White families was 6.5 times that of Black families, 5.5 times that of Hispanic families, and 2.7 times that of Asian and other families, according to the Congressional Budget Office.<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"> Another key finding in the report: Black and Hispanic families each owned about 24 cents for every $1 of white family wealth, on average, as of the second quarter of 2023.<span class="ql-inline-citation" data-cite="1"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_20-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_21-0"> Contributing to this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-racial-wealth-gap-5105010">racial wealth gap</a> is the fact that Black Americans are less likely to own a home, which is one of the major ways that people pass on wealth. The underlying reason for this is, in part, systemic <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/the-history-of-lending-discrimination-5076948">discriminatory practices in home selling</a>, home lending, and appraisals that have been well documented in recent decades. </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"> Black Americans and other marginalized groups have also historically had <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/u/underbanked.asp">less access to banking and financial services</a> and lower <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_score.asp">credit scores</a>, which has locked them out of various investment opportunities. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_24-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_25-0"> If building generational wealth is a goal of yours, there are a few financial moves you can make that can help you achieve this goal. </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-build-a-strong-financial-foundation"></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"> Build a Strong Financial Foundation </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_28-0"> Building generational wealth is as much about setting a strong example as it is about making the right financial decisions. You can model the building blocks of healthy personal finances to your family, which includes the following best practices. </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"> Prioritize Savings </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> “It’s not how much you make, but how much you keep. That’s the key to accumulate savings and wealth,” says Jason “JB” Beckett, founder of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://beckettfinancialgroup.com" rel="nofollow">Beckett Financial Group</a> in West Columbia, South Carolina. </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"> Many people fall into the trap of saying they’ll save what’s left over at the end of the month but never end up getting around to it, or they spend beyond their means. A better approach is to create a budget to control your spending so that you have guaranteed funds available to save, and set up an <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 payment</a> to yourself each month. </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’s how to get started: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_36-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_37-0"> <li>Pick a percentage or dollar amount that you are able to allocate toward savings goals after your expenses are covered.</li> <li>If you have more than one savings goal, create separate accounts for each one.</li> <li>Consider 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> that earns interest on top of your contributions.</li> <li>Set up automatic payments to each savings account and watch them grow.</li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_38-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_39-0"> For longer-term savings goals, you might consider putting money in <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> accounts for a guaranteed <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/return.asp">return</a>. </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"> Build an Emergency Fund </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> One of the most important tools for building generational wealth is making sure that you have financial security in case of an emergency or loss of income. That’s where an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/emergency_fund.asp">emergency fund</a> comes in. </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"> Oftentimes, not having an emergency fund is what leads people into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debt.asp">debt</a> or causes them to cash out <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/retirement-planning.asp">retirement accounts</a>, which not only incurs penalties but also comes with a big opportunity cost. </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"> Ultimately, you want to end up with enough money saved to cover a few months’ worth of expenses, but that will take some time to build up. In the interim, focus on making regular, automated contributions, and save more aggressively if you find ways to trim expenses or develop new <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/income.asp">income</a> streams. Most important is that you avoid the temptation to withdraw money from the account—it must be reserved for true emergencies. </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"> Involve Kids in Money Conversations </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_49-0"> One often-overlooked aspect of building a strong financial foundation is involving your family, and <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/07/childinvestor.asp">children specifically</a>, in the conversation. This way, they can understand financial basics from a young age, alongside you. </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"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="externalLink" href="https://www.gwadvisors.net/who/financial-advisors/kevin-m-curley-ii-cfp/" rel="nofollow">Kevin M. Curley II</a>, CFP and financial advisor at Global Wealth Advisors in Dallas, Texas, recommends including children in the family finances from a young age through fun and games. </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"> “Play Monopoly and teach them poker at the kitchen table,” Curley says. “Consider giving them an allowance and discuss how they plan to spend it. Later, let them invest a small amount in their favorite video game designer or cosmetics manufacturer and track wins and losses together.” </p> <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-invest-in-education"></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"> Invest in Education </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_56-0"> Once you’ve made some progress on your emergency fund, you can allocate some of your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/033015/what-difference-between-disposable-income-and-discretionary-income.asp">discretionary income</a> toward other big financial goals. A popular one is to save for your children’s education. If you’re aiming to build generational wealth, you can think of <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/saving-for-college-4689712">college savings</a> for your kids as an investment in their future earning power. </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"> That’s because degree attainment is directly correlated with an increase in lifetime earnings—in the millions, as a study by the Georgetown University Center on Education and the Workforce found. According to the study, someone with a high school diploma can expect to earn $1.3 million over a lifetime; a bachelor’s degree holder will earn $2.3 million; a master’s degree can lead to $2.7 million in lifetime earnings; and a professional degree holder can earn $3.6 million.<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_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 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>Of course, the costs of education are continuing to rise, and it may not be the best option for everyone. It’s best to take a comprehensive look at your financial situation and life goals before deciding to invest in education.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Consider opening a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-529-plans-5070533">529 plan</a>, which is a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-advantaged.asp">tax-advantaged</a> account that is tax-free when used for eligible educational expenses.<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_63-0"></div> <span class="heading-toc" id="toc-invest-in-financial-markets"></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"> Invest in Financial Markets </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_65-0"> To build wealth in a meaningful way, the sooner you get started, the better. “Starting early and consistently saving, even in smaller amounts, can lead to significant growth over time, thanks to the power of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/compoundinterest.asp">compound interest</a>,” Kovar says. </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"> While investing in the stock market comes with some risk, if you <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/diversification.asp">diversify your investments</a> across stocks, bonds, and other assets, you can balance risk with growth potential. One popular strategy for beginners is to invest in <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>, which is a collection of many stocks designed to mimic the performance of major market indexes like the S&P 500. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_68-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_69-0"> The key to investing in the stock market is to think of it in the long term by riding out the downturns since, historically, it usually bounces back. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_70-0"></div> <span class="heading-toc" id="toc-invest-in-real-estate"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_71-0"> <span class="mntl-sc-block-heading__text"> Invest in Real Estate </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_72-0"> Another popular investment avenue to explore is <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/realestate.asp">real estate</a>, thanks to its potential rental income and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/appreciation.asp">appreciation</a> in property value. Plus, it’s a strong investment to pass on to your next of kin. </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"> “Exploring various property types, from residential to commercial, can diversify your real estate <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/portfolio.asp">portfolio</a>,” Kovar says. </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"> If you’re not ready for that level of investment or don’t want the commitment of running a property, Beckett suggests looking into <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/reit.asp">real estate investment trusts (REITs</a>). </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_77-0"></div> <span class="heading-toc" id="toc-create-and-preserve-assets"></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"> Create and Preserve Assets </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_79-0"> <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/">Building wealth</a> is just step one in creating <em>generational</em> wealth. The next part is making sure that your assets are protected so that they remain available to pass on to future generations. You also want your heirs to be able to retain as much of their inheritance (if relevant) as possible, which is why tax implications come into play. </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"> To ensure your children are protected and set up in the best possible way financially, consider the following actions. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <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"> Build an Estate Plan </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_84-0"> As your assets grow and become more complex, working with financial professionals and attorneys on <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/estateplanning.asp">estate planning</a> is the smart move. Some considerations include: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_85-0"></div> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_86-0"> <li>Creating a business that you can pass down </li> <li>Considering <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-life-insurance-companies-4845858">life insurance</a>. “Life insurance is one of the most tax-efficient vehicles to pass on wealth,” Beckett says.</li> <li>Making sure other <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/insurance.asp">insurance</a> needs are met. Make sure you’re covered in case of a catastrophic event involving your <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/home-insurance-reviews-5072164">home</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-car-insurance-companies-4783675">car</a>, or a <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-health-insurance-companies-4775920">medical</a> event. If not, one incident or lawsuit could wipe out your savings.</li> </ul> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_87-0"></div> <span class="heading-toc" id="toc-maximize-tax-benefits"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_88-0"> <span class="mntl-sc-block-heading__text"> Maximize Tax Benefits </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_89-0"> A number of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp">tax-efficient investing</a> strategies and vehicles can help you retain a greater share of your returns. Some strategies include: </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><strong><a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-deferred-savings-plan.asp">Tax-deferred</a> accounts</strong>: <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/traditionalira.asp">Traditional individual retirement accounts (IRAs)</a> and <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/1/401kplan.asp">401(k) plans</a> are <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/taxdeferred.asp">tax-deferred</a>, offering you an upfront tax break as you invest. You pay taxes when you withdraw your money in retirement.<span class="ql-inline-citation" data-cite="6"></span><span class="ql-inline-citation" data-cite="7"></span> </li> <li><strong>Tax-exempt accounts</strong>: <a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rothira.asp">Roth IRAs</a> and <a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/roth401k.asp">Roth 401(k)s</a> are <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax_exempt.asp">tax-exempt</a> when you withdraw, since contributions are made with after-tax dollars.<span class="ql-inline-citation" data-cite="4"></span></li> <li><a data-component="link" data-ordinal="8" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/hsa.asp"><strong>Health Savings Accounts (HSAs)</strong></a>: You contribute <a data-component="link" data-ordinal="9" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tax-free.asp">tax-free</a> and enjoy tax-free growth. Then, if used for eligible medical expenses, money comes out tax-free, too.<span class="ql-inline-citation" data-cite="5"></span></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"> Work 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 accountant</a> or <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/financial-advisor.asp">financial advisor</a> to learn what strategies are best for you, and ultimately shield the most money from taxes as possible. </p> <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-avoid-debt-and-financial-pitfalls"></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"> Avoid Debt and Financial Pitfalls </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_96-0"> Living within your means and having a healthy emergency fund are the two best ways to avoid unnecessary, high-interest debt like high credit card balances. Those types of borrowing costs can prevent you from making progress on your savings and wealth-building goals. </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"> If you do have some debt to contend with, prioritize paying your highest-interest accounts, while still maintaining your contributions to your emergency fund and retirement accounts (though it’s OK to scale back temporarily). Try to use any <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/personal-finance/062014/five-tax-strategies-bonus-or-windfall.asp">windfalls of money</a> such as tax returns or monetary gifts to pay off large chunks when those opportunities become available. </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-how-to-pass-down-generational-wealth"></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"> How to Pass Down Generational Wealth </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_101-0"> The last aspect of generational wealth is making sure it goes where you want it to go. This involves getting your wishes documented legally. At a very basic level, you can start with a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/08/what-is-a-will.asp">will</a>. But as finances get more complex, you’ll want to go beyond that, according to Curley. </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"> Beckett recommends setting up a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trust.asp">trust</a>. “A trust can be efficient for bypassing <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/probate.asp">probate</a> if it’s set up properly,” he says. “And it’s private. If it’s in a trust, it’s not public record.” </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_104-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_105-0"> Once you have your affairs in order, keep the lines of communication open with your family, letting them know your plans and how to access your documents. This is beneficial on the off chance that a sudden emergency happens and your family needs to take over the financial plans. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_106-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_107-0"><span class="heading-toc" id="toc-how-can-i-start-building-generational-wealth-if-i-have-limited-financial-resources"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Start Building Generational Wealth If I Have Limited Financial Resources?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Take it one small step at a time. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/budget.asp">Create a budget</a> that allows you to allocate money toward savings each month. Make lifestyle choices that help fuel your financial goals. And invest in your retirement as early as possible to give it time to grow.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_108-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_109-0"><span class="heading-toc" id="toc-what-are-some-tax-efficient-strategies-for-maximizing-generational-wealth"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Are Some Tax-Efficient Strategies for Maximizing Generational Wealth?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>There are many tax-efficient strategies that you may consider adopting, such as investing in tax-deferred accounts or Health Savings Accounts. The route you choose to go will depend on your own personal financial situation, so you may want to work with a tax professional or financial advisor. Plus, these individuals can help you stay current with any new tax rules as they are established.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_110-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_111-0"><span class="heading-toc" id="toc-how-can-i-protect-my-assets-and-ensure-they-are-passed-down-to-future-generations"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can I Protect My Assets and Ensure They Are Passed Down to Future Generations?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Making sure you’re properly insured (through home, auto, and life insurance) and working with an estate planner are the two best ways to protect your assets. In addition, be sure you at least have a will, and consider establishing a trust.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_112-0"></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_113-0"> <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_114-0"> If you’re a first-generation wealth builder, committing to taking those first steps of saving money, building an emergency fund, and starting to invest for the long term and following through with consistency will eventually pay off. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_115-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_116-0"> Though it might take some sacrifice upfront, building generational wealth has both short- and long-term benefits that make it worth the effort. In your lifetime, you’ll get to enjoy the peace of mind of knowing that your loved ones will be well taken care of financially. You can also share your knowledge and insights with your children and grandchildren to help instill strong financial habits that can help them keep the family legacy strong for the next generation. </p></div>	Generational wealth refers to assets passed down from one generation to the next. Building generational wealth can provide long-term financial security and opportunities for your children, grandchildren, and beyond. [Generational wealth](https://www.investopedia.com/generational-wealth-definition-5189580) is about more than just financial resources, according to [Taylor Kovar](https://kovarwealth.com/taylor-kovar/), certified financial planner (CFP) and CEO of Kovar Wealth Management in Lufkin, Texas. “Its value extends beyond the monetary aspect—it’s also about imparting enduring family values and wisdom, creating a legacy that benefits and shapes the lives of future generations,” he says. Learn more about why generational wealth is important, how to lay the foundations to build wealth for your family, and how to ensure that your legacy is passed on in the most efficient way. ### Key Takeaways * Generational wealth refers to passing down assets from one generation to the next. * Before you can build generational wealth, start creating a strong financial foundation by prioritizing savings, growing an emergency fund, and thinking through future plans. * Generational wealth can provide long-term financial security and open up opportunities for your children and beyond. * Strategies for building generational wealth include investing in education, financial markets, and real estate, and creating and preserving assets. * Maximizing tax benefits and avoiding debt are crucial for building generational wealth. ## The Importance of Building Generational Wealth Achieving financial success takes a lot of hard work, sacrifice, and planning. Not only can it help you enjoy things in your lifetime, but it can also help your heirs reap the benefits of your legacy and enjoy a financially secure lifestyle after you’re gone. Think of it as a wealth snowball. For example, generational wealth paves the way for enhanced educational opportunities and, consequently, greater earning potential for your kids, according to Kovar. And then they can continue building upon that foundation for their kids (your grandkids). ## The Challenges of Building Generational Wealth Building generational wealth is not an easy undertaking, but it’s especially challenging if you grow up in [poverty](https://www.investopedia.com/terms/p/poverty.asp) or face systemic barriers. Unfortunately, that has been the experience of many marginalized groups in this country. For instance, in 2019, the median wealth of White families was 6.5 times that of Black families, 5.5 times that of Hispanic families, and 2.7 times that of Asian and other families, according to the Congressional Budget Office. Another key finding in the report: Black and Hispanic families each owned about 24 cents for every $1 of white family wealth, on average, as of the second quarter of 2023. Contributing to this [racial wealth gap](https://www.investopedia.com/the-racial-wealth-gap-5105010) is the fact that Black Americans are less likely to own a home, which is one of the major ways that people pass on wealth. The underlying reason for this is, in part, systemic [discriminatory practices in home selling](https://www.investopedia.com/the-history-of-lending-discrimination-5076948), home lending, and appraisals that have been well documented in recent decades. Black Americans and other marginalized groups have also historically had [less access to banking and financial services](https://www.investopedia.com/terms/u/underbanked.asp) and lower [credit scores](https://www.investopedia.com/terms/c/credit_score.asp), which has locked them out of various investment opportunities. If building generational wealth is a goal of yours, there are a few financial moves you can make that can help you achieve this goal. ## Build a Strong Financial Foundation Building generational wealth is as much about setting a strong example as it is about making the right financial decisions. You can model the building blocks of healthy personal finances to your family, which includes the following best practices. ### Prioritize Savings “It’s not how much you make, but how much you keep. That’s the key to accumulate savings and wealth,” says Jason “JB” Beckett, founder of [Beckett Financial Group](https://beckettfinancialgroup.com) in West Columbia, South Carolina. Many people fall into the trap of saying they’ll save what’s left over at the end of the month but never end up getting around to it, or they spend beyond their means. A better approach is to create a budget to control your spending so that you have guaranteed funds available to save, and set up an [automatic payment](https://www.investopedia.com/terms/a/automatic-bill-payment.asp) to yourself each month. Here’s how to get started: 1. Pick a percentage or dollar amount that you are able to allocate toward savings goals after your expenses are covered. 2. If you have more than one savings goal, create separate accounts for each one. 3. Consider a [high-yield savings account](https://www.investopedia.com/best-high-yield-savings-accounts-4770633) that earns interest on top of your contributions. 4. Set up automatic payments to each savings account and watch them grow. For longer-term savings goals, you might consider putting money in [certificate of deposit (CD)](https://www.investopedia.com/terms/c/certificateofdeposit.asp) accounts for a guaranteed [return](https://www.investopedia.com/terms/r/return.asp). ### Build an Emergency Fund One of the most important tools for building generational wealth is making sure that you have financial security in case of an emergency or loss of income. That’s where an [emergency fund](https://www.investopedia.com/terms/e/emergency_fund.asp) comes in. Oftentimes, not having an emergency fund is what leads people into [debt](https://www.investopedia.com/terms/d/debt.asp) or causes them to cash out [retirement accounts](https://www.investopedia.com/terms/r/retirement-planning.asp), which not only incurs penalties but also comes with a big opportunity cost. Ultimately, you want to end up with enough money saved to cover a few months’ worth of expenses, but that will take some time to build up. In the interim, focus on making regular, automated contributions, and save more aggressively if you find ways to trim expenses or develop new [income](https://www.investopedia.com/terms/i/income.asp) streams. Most important is that you avoid the temptation to withdraw money from the account—it must be reserved for true emergencies. ### Involve Kids in Money Conversations One often-overlooked aspect of building a strong financial foundation is involving your family, and [children specifically](https://www.investopedia.com/articles/pf/07/childinvestor.asp), in the conversation. This way, they can understand financial basics from a young age, alongside you. [Kevin M. Curley II](https://www.gwadvisors.net/who/financial-advisors/kevin-m-curley-ii-cfp/), CFP and financial advisor at Global Wealth Advisors in Dallas, Texas, recommends including children in the family finances from a young age through fun and games. “Play Monopoly and teach them poker at the kitchen table,” Curley says. “Consider giving them an allowance and discuss how they plan to spend it. Later, let them invest a small amount in their favorite video game designer or cosmetics manufacturer and track wins and losses together.” ## Invest in Education Once you’ve made some progress on your emergency fund, you can allocate some of your [discretionary income](https://www.investopedia.com/ask/answers/033015/what-difference-between-disposable-income-and-discretionary-income.asp) toward other big financial goals. A popular one is to save for your children’s education. If you’re aiming to build generational wealth, you can think of [college savings](https://www.investopedia.com/saving-for-college-4689712) for your kids as an investment in their future earning power. That’s because degree attainment is directly correlated with an increase in lifetime earnings—in the millions, as a study by the Georgetown University Center on Education and the Workforce found. According to the study, someone with a high school diploma can expect to earn $1.3 million over a lifetime; a bachelor’s degree holder will earn $2.3 million; a master’s degree can lead to $2.7 million in lifetime earnings; and a professional degree holder can earn $3.6 million. ### Note Of course, the costs of education are continuing to rise, and it may not be the best option for everyone. It’s best to take a comprehensive look at your financial situation and life goals before deciding to invest in education. Consider opening a [529 plan](https://www.investopedia.com/best-529-plans-5070533), which is a [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) account that is tax-free when used for eligible educational expenses. ## Invest in Financial Markets To build wealth in a meaningful way, the sooner you get started, the better. “Starting early and consistently saving, even in smaller amounts, can lead to significant growth over time, thanks to the power of [compound interest](https://www.investopedia.com/terms/c/compoundinterest.asp),” Kovar says. While investing in the stock market comes with some risk, if you [diversify your investments](https://www.investopedia.com/terms/d/diversification.asp) across stocks, bonds, and other assets, you can balance risk with growth potential. One popular strategy for beginners is to invest in [index funds](https://www.investopedia.com/terms/i/indexfund.asp), which is a collection of many stocks designed to mimic the performance of major market indexes like the S&P 500. The key to investing in the stock market is to think of it in the long term by riding out the downturns since, historically, it usually bounces back. ## Invest in Real Estate Another popular investment avenue to explore is [real estate](https://www.investopedia.com/terms/r/realestate.asp), thanks to its potential rental income and [appreciation](https://www.investopedia.com/terms/a/appreciation.asp) in property value. Plus, it’s a strong investment to pass on to your next of kin. “Exploring various property types, from residential to commercial, can diversify your real estate [portfolio](https://www.investopedia.com/terms/p/portfolio.asp),” Kovar says. If you’re not ready for that level of investment or don’t want the commitment of running a property, Beckett suggests looking into [real estate investment trusts (REITs](https://www.investopedia.com/terms/r/reit.asp)). ## Create and Preserve Assets [Building wealth](https://www.investopedia.com/managing-wealth/simple-steps-building-wealth/) is just step one in creating generational wealth. The next part is making sure that your assets are protected so that they remain available to pass on to future generations. You also want your heirs to be able to retain as much of their inheritance (if relevant) as possible, which is why tax implications come into play. To ensure your children are protected and set up in the best possible way financially, consider the following actions. ### Build an Estate Plan As your assets grow and become more complex, working with financial professionals and attorneys on [estate planning](https://www.investopedia.com/terms/e/estateplanning.asp) is the smart move. Some considerations include: * Creating a business that you can pass down * Considering [life insurance](https://www.investopedia.com/best-life-insurance-companies-4845858). “Life insurance is one of the most tax-efficient vehicles to pass on wealth,” Beckett says. * Making sure other [insurance](https://www.investopedia.com/terms/i/insurance.asp) needs are met. Make sure you’re covered in case of a catastrophic event involving your [home](https://www.investopedia.com/home-insurance-reviews-5072164), [car](https://www.investopedia.com/best-car-insurance-companies-4783675), or a [medical](https://www.investopedia.com/best-health-insurance-companies-4775920) event. If not, one incident or lawsuit could wipe out your savings. ## Maximize Tax Benefits A number of [tax-efficient investing](https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp) strategies and vehicles can help you retain a greater share of your returns. Some strategies include: * [Tax-deferred](https://www.investopedia.com/terms/t/tax-deferred-savings-plan.asp) accounts: [Traditional individual retirement accounts (IRAs)](https://www.investopedia.com/terms/t/traditionalira.asp) and [401(k) plans](https://www.investopedia.com/terms/1/401kplan.asp) are [tax-deferred](https://www.investopedia.com/terms/t/taxdeferred.asp), offering you an upfront tax break as you invest. You pay taxes when you withdraw your money in retirement. * Tax-exempt accounts: [Roth IRAs](https://www.investopedia.com/terms/r/rothira.asp) and [Roth 401(k)s](https://www.investopedia.com/terms/r/roth401k.asp) are [tax-exempt](https://www.investopedia.com/terms/t/tax_exempt.asp) when you withdraw, since contributions are made with after-tax dollars. * [Health Savings Accounts (HSAs)](https://www.investopedia.com/terms/h/hsa.asp): You contribute [tax-free](https://www.investopedia.com/terms/t/tax-free.asp) and enjoy tax-free growth. Then, if used for eligible medical expenses, money comes out tax-free, too. Work with a [tax accountant](https://www.investopedia.com/terms/t/taxadvisor.asp) or [financial advisor](https://www.investopedia.com/terms/f/financial-advisor.asp) to learn what strategies are best for you, and ultimately shield the most money from taxes as possible. ## Avoid Debt and Financial Pitfalls Living within your means and having a healthy emergency fund are the two best ways to avoid unnecessary, high-interest debt like high credit card balances. Those types of borrowing costs can prevent you from making progress on your savings and wealth-building goals. If you do have some debt to contend with, prioritize paying your highest-interest accounts, while still maintaining your contributions to your emergency fund and retirement accounts (though it’s OK to scale back temporarily). Try to use any [windfalls of money](https://www.investopedia.com/articles/personal-finance/062014/five-tax-strategies-bonus-or-windfall.asp) such as tax returns or monetary gifts to pay off large chunks when those opportunities become available. ## How to Pass Down Generational Wealth The last aspect of generational wealth is making sure it goes where you want it to go. This involves getting your wishes documented legally. At a very basic level, you can start with a [will](https://www.investopedia.com/articles/pf/08/what-is-a-will.asp). But as finances get more complex, you’ll want to go beyond that, according to Curley. Beckett recommends setting up a [trust](https://www.investopedia.com/terms/t/trust.asp). “A trust can be efficient for bypassing [probate](https://www.investopedia.com/terms/p/probate.asp) if it’s set up properly,” he says. “And it’s private. If it’s in a trust, it’s not public record.” Once you have your affairs in order, keep the lines of communication open with your family, letting them know your plans and how to access your documents. This is beneficial on the off chance that a sudden emergency happens and your family needs to take over the financial plans. ## How Can I Start Building Generational Wealth If I Have Limited Financial Resources? Take it one small step at a time. [Create a budget](https://www.investopedia.com/terms/b/budget.asp) that allows you to allocate money toward savings each month. Make lifestyle choices that help fuel your financial goals. And invest in your retirement as early as possible to give it time to grow. ## What Are Some Tax-Efficient Strategies for Maximizing Generational Wealth? There are many tax-efficient strategies that you may consider adopting, such as investing in tax-deferred accounts or Health Savings Accounts. The route you choose to go will depend on your own personal financial situation, so you may want to work with a tax professional or financial advisor. Plus, these individuals can help you stay current with any new tax rules as they are established. ## How Can I Protect My Assets and Ensure They Are Passed Down to Future Generations? Making sure you’re properly insured (through home, auto, and life insurance) and working with an estate planner are the two best ways to protect your assets. In addition, be sure you at least have a will, and consider establishing a trust. ## The Bottom Line If you’re a first-generation wealth builder, committing to taking those first steps of saving money, building an emergency fund, and starting to invest for the long term and following through with consistency will eventually pay off. Though it might take some sacrifice upfront, building generational wealth has both short- and long-term benefits that make it worth the effort. In your lifetime, you’ll get to enjoy the peace of mind of knowing that your loved ones will be well taken care of financially. You can also share your knowledge and insights with your children and grandchildren to help instill strong financial habits that can help them keep the family legacy strong for the next generation.	Generational wealth refers to assets passed down from one generation to the next. Building generational wealth can provide long-term financial security and opportunities for your children, grandchildren, and beyond. Generational wealth is about more than just financial resources, according to Taylor Kovar, certified financial planner (CFP) and CEO of Kovar Wealth Management in Lufkin, Texas. “Its value extends beyond the monetary aspect—it’s also about imparting enduring family values and wisdom, creating a legacy that benefits and shapes the lives of future generations,” he says. Learn more about why generational wealth is important, how to lay the foundations to build wealth for your family, and how to ensure that your legacy is passed on in the most efficient way. Key Takeaways Generational wealth refers to passing down assets from one generation to the next.Before you can build generational wealth, start creating a strong financial foundation by prioritizing savings, growing an emergency fund, and thinking through future plans.Generational wealth can provide long-term financial security and open up opportunities for your children and beyond.Strategies for building generational wealth include investing in education, financial markets, and real estate, and creating and preserving assets.Maximizing tax benefits and avoiding debt are crucial for building generational wealth. The Importance of Building Generational Wealth Achieving financial success takes a lot of hard work, sacrifice, and planning. Not only can it help you enjoy things in your lifetime, but it can also help your heirs reap the benefits of your legacy and enjoy a financially secure lifestyle after you’re gone. Think of it as a wealth snowball. For example, generational wealth paves the way for enhanced educational opportunities and, consequently, greater earning potential for your kids, according to Kovar. And then they can continue building upon that foundation for their kids (your grandkids). The Challenges of Building Generational Wealth Building generational wealth is not an easy undertaking, but it’s especially challenging if you grow up in poverty or face systemic barriers. Unfortunately, that has been the experience of many marginalized groups in this country. For instance, in 2019, the median wealth of White families was 6.5 times that of Black families, 5.5 times that of Hispanic families, and 2.7 times that of Asian and other families, according to the Congressional Budget Office. Another key finding in the report: Black and Hispanic families each owned about 24 cents for every $1 of white family wealth, on average, as of the second quarter of 2023. Contributing to this racial wealth gap is the fact that Black Americans are less likely to own a home, which is one of the major ways that people pass on wealth. The underlying reason for this is, in part, systemic discriminatory practices in home selling, home lending, and appraisals that have been well documented in recent decades. Black Americans and other marginalized groups have also historically had less access to banking and financial services and lower credit scores, which has locked them out of various investment opportunities. If building generational wealth is a goal of yours, there are a few financial moves you can make that can help you achieve this goal. Build a Strong Financial Foundation Building generational wealth is as much about setting a strong example as it is about making the right financial decisions. You can model the building blocks of healthy personal finances to your family, which includes the following best practices. Prioritize Savings “It’s not how much you make, but how much you keep. That’s the key to accumulate savings and wealth,” says Jason “JB” Beckett, founder of Beckett Financial Group in West Columbia, South Carolina. Many people fall into the trap of saying they’ll save what’s left over at the end of the month but never end up getting around to it, or they spend beyond their means. A better approach is to create a budget to control your spending so that you have guaranteed funds available to save, and set up an automatic payment to yourself each month. Here’s how to get started: Pick a percentage or dollar amount that you are able to allocate toward savings goals after your expenses are covered. If you have more than one savings goal, create separate accounts for each one. Consider a high-yield savings account that earns interest on top of your contributions. Set up automatic payments to each savings account and watch them grow. For longer-term savings goals, you might consider putting money in certificate of deposit (CD) accounts for a guaranteed return. Build an Emergency Fund One of the most important tools for building generational wealth is making sure that you have financial security in case of an emergency or loss of income. That’s where an emergency fund comes in. Oftentimes, not having an emergency fund is what leads people into debt or causes them to cash out retirement accounts, which not only incurs penalties but also comes with a big opportunity cost. Ultimately, you want to end up with enough money saved to cover a few months’ worth of expenses, but that will take some time to build up. In the interim, focus on making regular, automated contributions, and save more aggressively if you find ways to trim expenses or develop new income streams. Most important is that you avoid the temptation to withdraw money from the account—it must be reserved for true emergencies. Involve Kids in Money Conversations One often-overlooked aspect of building a strong financial foundation is involving your family, and children specifically, in the conversation. This way, they can understand financial basics from a young age, alongside you. Kevin M. Curley II, CFP and financial advisor at Global Wealth Advisors in Dallas, Texas, recommends including children in the family finances from a young age through fun and games. “Play Monopoly and teach them poker at the kitchen table,” Curley says. “Consider giving them an allowance and discuss how they plan to spend it. Later, let them invest a small amount in their favorite video game designer or cosmetics manufacturer and track wins and losses together.” Invest in Education Once you’ve made some progress on your emergency fund, you can allocate some of your discretionary income toward other big financial goals. A popular one is to save for your children’s education. If you’re aiming to build generational wealth, you can think of college savings for your kids as an investment in their future earning power. That’s because degree attainment is directly correlated with an increase in lifetime earnings—in the millions, as a study by the Georgetown University Center on Education and the Workforce found. According to the study, someone with a high school diploma can expect to earn $1.3 million over a lifetime; a bachelor’s degree holder will earn $2.3 million; a master’s degree can lead to $2.7 million in lifetime earnings; and a professional degree holder can earn $3.6 million. Note Of course, the costs of education are continuing to rise, and it may not be the best option for everyone. It’s best to take a comprehensive look at your financial situation and life goals before deciding to invest in education. Consider opening a 529 plan, which is a tax-advantaged account that is tax-free when used for eligible educational expenses. Invest in Financial Markets To build wealth in a meaningful way, the sooner you get started, the better. “Starting early and consistently saving, even in smaller amounts, can lead to significant growth over time, thanks to the power of compound interest,” Kovar says. While investing in the stock market comes with some risk, if you diversify your investments across stocks, bonds, and other assets, you can balance risk with growth potential. One popular strategy for beginners is to invest in index funds, which is a collection of many stocks designed to mimic the performance of major market indexes like the S&P 500. The key to investing in the stock market is to think of it in the long term by riding out the downturns since, historically, it usually bounces back. Invest in Real Estate Another popular investment avenue to explore is real estate, thanks to its potential rental income and appreciation in property value. Plus, it’s a strong investment to pass on to your next of kin. “Exploring various property types, from residential to commercial, can diversify your real estate portfolio,” Kovar says. If you’re not ready for that level of investment or don’t want the commitment of running a property, Beckett suggests looking into real estate investment trusts (REITs). Create and Preserve Assets Building wealth is just step one in creating generational wealth. The next part is making sure that your assets are protected so that they remain available to pass on to future generations. You also want your heirs to be able to retain as much of their inheritance (if relevant) as possible, which is why tax implications come into play. To ensure your children are protected and set up in the best possible way financially, consider the following actions. Build an Estate Plan As your assets grow and become more complex, working with financial professionals and attorneys on estate planning is the smart move. Some considerations include: Creating a business that you can pass down Considering life insurance. “Life insurance is one of the most tax-efficient vehicles to pass on wealth,” Beckett says. Making sure other insurance needs are met. Make sure you’re covered in case of a catastrophic event involving your home, car, or a medical event. If not, one incident or lawsuit could wipe out your savings. Maximize Tax Benefits A number of tax-efficient investing strategies and vehicles can help you retain a greater share of your returns. Some strategies include: Tax-deferred accounts: Traditional individual retirement accounts (IRAs) and 401(k) plans are tax-deferred, offering you an upfront tax break as you invest. You pay taxes when you withdraw your money in retirement. Tax-exempt accounts: Roth IRAs and Roth 401(k)s are tax-exempt when you withdraw, since contributions are made with after-tax dollars. Health Savings Accounts (HSAs): You contribute tax-free and enjoy tax-free growth. Then, if used for eligible medical expenses, money comes out tax-free, too. Work with a tax accountant or financial advisor to learn what strategies are best for you, and ultimately shield the most money from taxes as possible. Avoid Debt and Financial Pitfalls Living within your means and having a healthy emergency fund are the two best ways to avoid unnecessary, high-interest debt like high credit card balances. Those types of borrowing costs can prevent you from making progress on your savings and wealth-building goals. If you do have some debt to contend with, prioritize paying your highest-interest accounts, while still maintaining your contributions to your emergency fund and retirement accounts (though it’s OK to scale back temporarily). Try to use any windfalls of money such as tax returns or monetary gifts to pay off large chunks when those opportunities become available. How to Pass Down Generational Wealth The last aspect of generational wealth is making sure it goes where you want it to go. This involves getting your wishes documented legally. At a very basic level, you can start with a will. But as finances get more complex, you’ll want to go beyond that, according to Curley. Beckett recommends setting up a trust. “A trust can be efficient for bypassing probate if it’s set up properly,” he says. “And it’s private. If it’s in a trust, it’s not public record.” Once you have your affairs in order, keep the lines of communication open with your family, letting them know your plans and how to access your documents. This is beneficial on the off chance that a sudden emergency happens and your family needs to take over the financial plans. How Can I Start Building Generational Wealth If I Have Limited Financial Resources? Take it one small step at a time. Create a budget that allows you to allocate money toward savings each month. Make lifestyle choices that help fuel your financial goals. And invest in your retirement as early as possible to give it time to grow. What Are Some Tax-Efficient Strategies for Maximizing Generational Wealth? There are many tax-efficient strategies that you may consider adopting, such as investing in tax-deferred accounts or Health Savings Accounts. The route you choose to go will depend on your own personal financial situation, so you may want to work with a tax professional or financial advisor. Plus, these individuals can help you stay current with any new tax rules as they are established. How Can I Protect My Assets and Ensure They Are Passed Down to Future Generations? Making sure you’re properly insured (through home, auto, and life insurance) and working with an estate planner are the two best ways to protect your assets. In addition, be sure you at least have a will, and consider establishing a trust. The Bottom Line If you’re a first-generation wealth builder, committing to taking those first steps of saving money, building an emergency fund, and starting to invest for the long term and following through with consistency will eventually pay off. Though it might take some sacrifice upfront, building generational wealth has both short- and long-term benefits that make it worth the effort. In your lifetime, you’ll get to enjoy the peace of mind of knowing that your loved ones will be well taken care of financially. You can also share your knowledge and insights with your children and grandchildren to help instill strong financial habits that can help them keep the family legacy strong for the next generation.	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https://www.investopedia.com/terms/h/head-shoulders.asp	What Is a Head and Shoulders Chart Pattern in Technical Analysis?	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><span class="heading-toc" id="toc-what-is-the-head-and-shoulders-pattern"></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 Head and Shoulders Pattern? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A head and shoulders pattern is used in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/technicalanalysis.asp">technical analysis</a>. It is a specific chart formation that predicts a bullish-to-bearish trend reversal. The pattern appears as a baseline with three peaks, where the outside two are close in height, and the middle is highest. </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 head and shoulders pattern forms when a stock's price rises to a peak and then declines back to the base of the prior up-move. Then, the price rises above the previous peak to form the "head" and then declines back to the original base. Finally, the stock price peaks again at about the level of the first peak of the formation before falling back 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_5-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_6-0"> The head and shoulders pattern is considered one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_7-0"></div> <div class="comp mntl-sc-block finance-sc-block-callout mntl-block" id="mntl-sc-block_8-0"><div class="comp mntl-sc-block mntl-sc-block-callout mntl-block theme-whatyouneedtoknow" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_9-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block" id="mntl-sc-block-callout-heading_1-0">Key Takeaways</h3> <div class="comp mntl-sc-block-callout-body mntl-text-block" id="mntl-sc-block-callout-body_1-0"><ul><li>A head and shoulders pattern is a technical indicator with a chart pattern of three peaks, where the outer two are close in height, and the middle is the highest.</li><li>A head and shoulders pattern—considered one of the most reliable trend reversal patterns—is a chart formation that predicts a bullish-to-bearish trend reversal.</li><li>An inverse head and shoulders pattern predicts a bearish-to-bullish trend.</li><li>The neckline rests at the support or resistance lines, depending on the pattern direction.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-image mntl-sc-block-universal-image mntl-sc-block-image--no-theme no-theme mntl-sc-block-image inline-image figure-landscape figure-high-res" id="mntl-sc-block_10-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:66.6%;"> <img alt="Head and Shoulders Pattern" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/F1ZLsjzVB67INrJ_mj0Ghytr9Mw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/F1ZLsjzVB67INrJ_mj0Ghytr9Mw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg" data-srcset="https://www.investopedia.com/thmb/2YE-0nQejkis3mUtAkyT0XEgmIs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg 750w" data-tracking-container="true" height="1000" id="mntl-sc-block-image_1-0" width="1500"/> <noscript> <img alt="Head and Shoulders Pattern" class="img--noscript universal-image__image" height="1000" sizes="750px" src="https://www.investopedia.com/thmb/F1ZLsjzVB67INrJ_mj0Ghytr9Mw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg" srcset="https://www.investopedia.com/thmb/2YE-0nQejkis3mUtAkyT0XEgmIs=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg 750w" width="1500"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_1-0"> <span class="figure-article-caption-owner"><p>Investopedia / Jiaqi Zhou</p></span> </figcaption></figure> <span class="heading-toc" id="toc-understanding-the-head-and-shoulders-pattern"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_11-0"> <span class="mntl-sc-block-heading__text"> Understanding the Head and Shoulders Pattern </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_12-0"> A head and shoulders pattern has four components: </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_13-0"></div> <ol class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> <li>After long bullish trends, the price rises to a peak and subsequently declines to form a trough.</li><li>The price rises again to form a second high substantially above the initial peak and declines again.</li><li>The price rises a third time, but only to the first peak level, before declining again.</li><li>The neckline, drawn at the two troughs or peaks (inverse).<span class="ql-inline-citation" data-cite="1"></span></li> </ol> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_15-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_16-0"> The first and third peaks are the shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/neckline.asp">neckline</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_17-0"></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_18-0"> <div class="figure-media"> <div class="img-placeholder" style="padding-bottom:88.8%;"> <img alt="Image" class="lazyload universal-image__image" data-click-tracked="true" data-expand="300" data-hi-res-src="https://www.investopedia.com/thmb/-06wyWh1tc1Vz9t7j-DIYyZM_0c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg" data-img-lightbox="true" data-sizes="750px" data-src="https://www.investopedia.com/thmb/-06wyWh1tc1Vz9t7j-DIYyZM_0c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg" data-srcset="https://www.investopedia.com/thmb/ev5qRNNP3cHu028DKFwWFCvMr4E=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg 750w" data-tracking-container="true" height="3960" id="mntl-sc-block-image_2-0" width="4455"/> <noscript> <img alt="Image" class="img--noscript universal-image__image" height="3960" sizes="750px" src="https://www.investopedia.com/thmb/-06wyWh1tc1Vz9t7j-DIYyZM_0c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg" srcset="https://www.investopedia.com/thmb/ev5qRNNP3cHu028DKFwWFCvMr4E=/750x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg 750w" width="4455"/> </noscript> </div> </div> <figcaption class="comp mntl-figure-caption type--mouse figure-caption figure-article-caption" id="mntl-figure-caption_2-0"> <span class="figure-article-caption-owner">Image by Sabrina Jiang © Investopedia 2020</span> </figcaption></figure> <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"> Inverse Head and Shoulders </span> </h3> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The opposite of a head and shoulders chart is the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/inverseheadandshoulders.asp">inverse head and shoulders</a>, also called a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/price-action.asp">price action</a> of a security meets the following characteristics: </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>The price falls to a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trough.asp">trough</a>, then rises</li> <li>The price falls below the former trough, then rises again</li> <li>The price falls again but not as far as the second trough</li> <li>Once the final trough is made, the price heads upward toward the resistance (the neckline) found near the top of the previous troughs.</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-note" data-tracking-container="true" data-tracking-id="mntl-sc-block-callout" id="mntl-sc-block_25-0"><h3 class="comp mntl-sc-block-callout-heading mntl-text-block 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 inverse head and shoulders pattern is also a reliable indicator, signaling that a downward trend is about to reverse into an upward trend.<span class="ql-inline-citation" data-cite="1"></span> In this case, the stock's price reaches three consecutive lows, separated by temporary rallies.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_26-0"> Of these, the second trough is the lowest (the head), and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed, and prices are likely to keep rallying upward. </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-what-does-the-head-and-shoulders-pattern-tell-you"></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"> What Does the Head and Shoulders Pattern Tell You? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_29-0"> The head and shoulders pattern <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/technical/121201.asp">indicates</a> that a reversal is possible.<span class="ql-inline-citation" data-cite="1"></span> Traders believe that three sets of peaks and troughs, with a larger peak in the middle, means a stock's price will begin falling. The neckline represents the point at which bearish traders start selling. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_30-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_31-0"> The pattern also indicates that the new downward trend will likely continue until the right shoulder is broken—where prices move higher than the prices at the right peak.<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-advantages-and-disadvantages-of-the-head-and-shoulders-pattern"></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"> Advantages and Disadvantages of the Head and Shoulders Pattern </span> </h2> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_34-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_35-0"> <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>Experienced traders identify it easily</p></li> <li><p>Defined profit and risk</p></li> <li><p>Big market movements can be profited from</p></li> <li><p>Can be used in all markets</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>Novice traders may miss it</p></li> <li><p>Large stop loss distances possible</p></li> <li><p>Unfavorable risk-to-reward possible</p></li> </ul> </div> </div></div> <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"> Advantages Explained </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_38-0"> <li><strong>Experienced traders identify it easily</strong>: The pattern is very recognizable to an experienced trader.</li><li><strong>Defined profit and risk</strong>: Short and long entry levels and stop distance can be clearly defined with confirmation openings and closings.</li><li><strong>Big market movements can be profited from</strong>: The timeframe for a head and shoulders pattern is fairly long, so a market can move significantly from entry to close price.</li><li><strong>Can be used in all markets</strong>: The pattern can be used in forex and stock trading.</li> </ul> <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>While traders agree that the pattern is a reliable indicator, there is no guarantee that the trend will reverse as indicated.</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"> Disadvantages Explained </span> </h3> <ul class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_43-0"> <li><strong>Novice traders might miss it</strong>: The head and shoulders pattern may not present with a flat neckline; it may be skewed, which can throw off new traders.</li><li><strong>Large stop loss distances possible</strong>: Large downward movement over long timeframes can result in a large stop distance.</li><li><strong>Neckline can appear to move</strong>: If the price pulls back, the neckline might be retested, confusing some traders.</li> </ul> <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-does-a-head-and-shoulders-pattern-tell-you"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Does a Head and Shoulders Pattern Tell You?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns.</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-how-reliable-is-a-head-and-shoulders-pattern"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Reliable Is a Head and Shoulders Pattern?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference between the high and low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but it does provide a method of trading the markets based on logical price movements.</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-can-head-and-shoulders-turn-bullish"></span> <h2 class="mntl-sc-block-questionandanswer__question">Can Head and Shoulders Turn Bullish?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>An inverse head and shoulders, also called a "head and shoulders bottom," is similar to the standard head and shoulders pattern but inverted, with the head and shoulders top used to predict reversals in downtrends. It is a bearish-to-bullish indicator.</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-opposite-of-a-head-and-shoulders-pattern"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Opposite of a Head and Shoulders Pattern?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>The inverse head and shoulders pattern is the opposite of the head and shoulders, indicating a reversal from a bearish trend to a bullish trend.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_52-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_53-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> The head and shoulders is a pattern used by traders to identify price reversals. A bearish head and shouders has three peaks, with the middle one reaching higher than the other two. It indicates a reversal of an upward trend. </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"> A bullish head and shoulders has three troughs, with the middle one reaching lower than the other two. It indicates a reversal of a downward trend. </p></div>	## What Is the Head and Shoulders Pattern? A head and shoulders pattern is used in [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp). It is a specific chart formation that predicts a bullish-to-bearish trend reversal. The pattern appears as a baseline with three peaks, where the outside two are close in height, and the middle is highest. The head and shoulders pattern forms when a stock's price rises to a peak and then declines back to the base of the prior up-move. Then, the price rises above the previous peak to form the "head" and then declines back to the original base. Finally, the stock price peaks again at about the level of the first peak of the formation before falling back down. The head and shoulders pattern is considered one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end. ### Key Takeaways * A head and shoulders pattern is a technical indicator with a chart pattern of three peaks, where the outer two are close in height, and the middle is the highest. * A head and shoulders pattern—considered one of the most reliable trend reversal patterns—is a chart formation that predicts a bullish-to-bearish trend reversal. * An inverse head and shoulders pattern predicts a bearish-to-bullish trend. * The neckline rests at the support or resistance lines, depending on the pattern direction. ![Head and Shoulders Pattern]() ![Head and Shoulders Pattern](https://www.investopedia.com/thmb/F1ZLsjzVB67INrJ_mj0Ghytr9Mw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/head-shoulders-FINAL-08d3bb8f573d4898a371dcf3371b0ecb.jpg) Investopedia / Jiaqi Zhou ## Understanding the Head and Shoulders Pattern A head and shoulders pattern has four components: 1. After long bullish trends, the price rises to a peak and subsequently declines to form a trough. 2. The price rises again to form a second high substantially above the initial peak and declines again. 3. The price rises a third time, but only to the first peak level, before declining again. 4. The neckline, drawn at the two troughs or peaks (inverse). The first and third peaks are the shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the [neckline](https://www.investopedia.com/terms/n/neckline.asp). ![Image]() ![Image](https://www.investopedia.com/thmb/-06wyWh1tc1Vz9t7j-DIYyZM_0c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Head_And_Shoulders_Pattern_Sep_2020-01-4c225a762427464699e42461088c1e86.jpg) Image by Sabrina Jiang © Investopedia 2020 ### Inverse Head and Shoulders The opposite of a head and shoulders chart is the [inverse head and shoulders](https://www.investopedia.com/terms/i/inverseheadandshoulders.asp), also called a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the [price action](https://www.investopedia.com/terms/p/price-action.asp) of a security meets the following characteristics: * The price falls to a [trough](https://www.investopedia.com/terms/t/trough.asp), then rises * The price falls below the former trough, then rises again * The price falls again but not as far as the second trough * Once the final trough is made, the price heads upward toward the resistance (the neckline) found near the top of the previous troughs. ### An inverse head and shoulders pattern is also a reliable indicator, signaling that a downward trend is about to reverse into an upward trend. In this case, the stock's price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head), and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed, and prices are likely to keep rallying upward. ## What Does the Head and Shoulders Pattern Tell You? The head and shoulders pattern [indicates](https://www.investopedia.com/articles/technical/121201.asp) that a reversal is possible. Traders believe that three sets of peaks and troughs, with a larger peak in the middle, means a stock's price will begin falling. The neckline represents the point at which bearish traders start selling. The pattern also indicates that the new downward trend will likely continue until the right shoulder is broken—where prices move higher than the prices at the right peak. ## Advantages and Disadvantages of the Head and Shoulders Pattern Advantages * Experienced traders identify it easily * Defined profit and risk * Big market movements can be profited from * Can be used in all markets Disadvantages * Novice traders may miss it * Large stop loss distances possible * Unfavorable risk-to-reward possible ### Advantages Explained * Experienced traders identify it easily: The pattern is very recognizable to an experienced trader. * Defined profit and risk: Short and long entry levels and stop distance can be clearly defined with confirmation openings and closings. * Big market movements can be profited from: The timeframe for a head and shoulders pattern is fairly long, so a market can move significantly from entry to close price. * Can be used in all markets: The pattern can be used in forex and stock trading. ### While traders agree that the pattern is a reliable indicator, there is no guarantee that the trend will reverse as indicated. ### Disadvantages Explained * Novice traders might miss it: The head and shoulders pattern may not present with a flat neckline; it may be skewed, which can throw off new traders. * Large stop loss distances possible: Large downward movement over long timeframes can result in a large stop distance. * Neckline can appear to move: If the price pulls back, the neckline might be retested, confusing some traders. ## What Does a Head and Shoulders Pattern Tell You? The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns. ## How Reliable Is a Head and Shoulders Pattern? The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference between the high and low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but it does provide a method of trading the markets based on logical price movements. ## Can Head and Shoulders Turn Bullish? An inverse head and shoulders, also called a "head and shoulders bottom," is similar to the standard head and shoulders pattern but inverted, with the head and shoulders top used to predict reversals in downtrends. It is a bearish-to-bullish indicator. ## What Is the Opposite of a Head and Shoulders Pattern? The inverse head and shoulders pattern is the opposite of the head and shoulders, indicating a reversal from a bearish trend to a bullish trend. ## The Bottom Line The head and shoulders is a pattern used by traders to identify price reversals. A bearish head and shouders has three peaks, with the middle one reaching higher than the other two. It indicates a reversal of an upward trend. A bullish head and shoulders has three troughs, with the middle one reaching lower than the other two. It indicates a reversal of a downward trend.	What Is the Head and Shoulders Pattern? A head and shoulders pattern is used in technical analysis. It is a specific chart formation that predicts a bullish-to-bearish trend reversal. The pattern appears as a baseline with three peaks, where the outside two are close in height, and the middle is highest. The head and shoulders pattern forms when a stock's price rises to a peak and then declines back to the base of the prior up-move. Then, the price rises above the previous peak to form the "head" and then declines back to the original base. Finally, the stock price peaks again at about the level of the first peak of the formation before falling back down. The head and shoulders pattern is considered one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end. Key Takeaways A head and shoulders pattern is a technical indicator with a chart pattern of three peaks, where the outer two are close in height, and the middle is the highest.A head and shoulders pattern—considered one of the most reliable trend reversal patterns—is a chart formation that predicts a bullish-to-bearish trend reversal.An inverse head and shoulders pattern predicts a bearish-to-bullish trend.The neckline rests at the support or resistance lines, depending on the pattern direction. Investopedia / Jiaqi Zhou Understanding the Head and Shoulders Pattern A head and shoulders pattern has four components: After long bullish trends, the price rises to a peak and subsequently declines to form a trough.The price rises again to form a second high substantially above the initial peak and declines again.The price rises a third time, but only to the first peak level, before declining again.The neckline, drawn at the two troughs or peaks (inverse). The first and third peaks are the shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the neckline. Image by Sabrina Jiang © Investopedia 2020 Inverse Head and Shoulders The opposite of a head and shoulders chart is the inverse head and shoulders, also called a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to predict reversals in downtrends. This pattern is identified when the price action of a security meets the following characteristics: The price falls to a trough, then rises The price falls below the former trough, then rises again The price falls again but not as far as the second trough Once the final trough is made, the price heads upward toward the resistance (the neckline) found near the top of the previous troughs. An inverse head and shoulders pattern is also a reliable indicator, signaling that a downward trend is about to reverse into an upward trend. In this case, the stock's price reaches three consecutive lows, separated by temporary rallies. Of these, the second trough is the lowest (the head), and the first and third are slightly shallower (the shoulders). The final rally after the third dip signals that the bearish trend has reversed, and prices are likely to keep rallying upward. What Does the Head and Shoulders Pattern Tell You? The head and shoulders pattern indicates that a reversal is possible. Traders believe that three sets of peaks and troughs, with a larger peak in the middle, means a stock's price will begin falling. The neckline represents the point at which bearish traders start selling. The pattern also indicates that the new downward trend will likely continue until the right shoulder is broken—where prices move higher than the prices at the right peak. Advantages and Disadvantages of the Head and Shoulders Pattern Advantages Experienced traders identify it easily Defined profit and risk Big market movements can be profited from Can be used in all markets Disadvantages Novice traders may miss it Large stop loss distances possible Unfavorable risk-to-reward possible Advantages Explained Experienced traders identify it easily: The pattern is very recognizable to an experienced trader.Defined profit and risk: Short and long entry levels and stop distance can be clearly defined with confirmation openings and closings.Big market movements can be profited from: The timeframe for a head and shoulders pattern is fairly long, so a market can move significantly from entry to close price.Can be used in all markets: The pattern can be used in forex and stock trading. While traders agree that the pattern is a reliable indicator, there is no guarantee that the trend will reverse as indicated. Disadvantages Explained Novice traders might miss it: The head and shoulders pattern may not present with a flat neckline; it may be skewed, which can throw off new traders.Large stop loss distances possible: Large downward movement over long timeframes can result in a large stop distance.Neckline can appear to move: If the price pulls back, the neckline might be retested, confusing some traders. What Does a Head and Shoulders Pattern Tell You? The head and shoulders chart is said to depict a bullish-to-bearish trend reversal and signals that an upward trend is nearing its end. Investors consider it to be one of the most reliable trend reversal patterns. How Reliable Is a Head and Shoulders Pattern? The most common entry point is a breakout of the neckline, with a stop above (market top) or below (market bottom) the right shoulder. The profit target is the difference between the high and low with the pattern added (market bottom) or subtracted (market top) from the breakout price. The system is not perfect, but it does provide a method of trading the markets based on logical price movements. Can Head and Shoulders Turn Bullish? An inverse head and shoulders, also called a "head and shoulders bottom," is similar to the standard head and shoulders pattern but inverted, with the head and shoulders top used to predict reversals in downtrends. It is a bearish-to-bullish indicator. What Is the Opposite of a Head and Shoulders Pattern? The inverse head and shoulders pattern is the opposite of the head and shoulders, indicating a reversal from a bearish trend to a bullish trend. The Bottom Line The head and shoulders is a pattern used by traders to identify price reversals. A bearish head and shouders has three peaks, with the middle one reaching higher than the other two. It indicates a reversal of an upward trend. A bullish head and shoulders has three troughs, with the middle one reaching lower than the other two. It indicates a reversal of a downward trend.	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https://www.investopedia.com/terms/b/bouncedcheck.asp	Bounced Check: Definition, What Happens Next, Fees & Penalties	<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-bounced-check"></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 Bounced Check? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> A bounced check is slang for a check that cannot be processed because the account holder has <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/n/nsf.asp">non-sufficient funds (NSF)</a> available for use. Banks return, or “bounce,” these checks, also known as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rubbercheck.asp">rubber checks</a>, rather than honor them, and banks charge the check writers NSF fees. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> Passing <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/bad-check.asp">bad checks</a> can be illegal, and the crime can range from a misdemeanor to a felony, depending on the amount of the check and whether the activity involved crossing state lines.<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_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 bounced check occurs when the writer of the check has insufficient funds available to fulfill the payment amount on the check to the payee.</li><li>When a check bounces, it is not honored by the depositor’s bank and may result in overdraft fees and banking restrictions.</li><li>Additional penalties for bouncing checks may include negative credit score marks, refusal of merchants to accept your checks, and potentially legal trouble.</li><li>Banks often offer overdraft protection to prevent inadvertent check bouncing.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-a-bounced-check"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_8-0"> <span class="mntl-sc-block-heading__text"> Understanding a Bounced Check </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_9-0"> Many times, bad checks are written inadvertently by people who simply are unaware that their bank balances are too low. To avoid bouncing checks, some consumers use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/o/overdraft.asp">overdraft</a> protection or attach a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit</a> to their checking accounts. </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 bounced check may result in overdraft fees, restrictions on writing additional checks, and negative impacts to 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>. Writing too many bounced checks may also prevent you from paying merchants by check in the future. Many merchants use a verification system called TeleCheck to help them determine if a customer’s check is good. If this system connects the check you’ve just presented for payment to a history of unpaid checks, the merchant will decline your check and ask you for a different form of payment.<span class="ql-inline-citation" data-cite="3"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_12-0"></div> <span class="heading-toc" id="toc-are-there-fees-for-bounced-checks"></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"> Are There Fees for Bounced Checks? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_14-0"> When there are insufficient funds in an account, and a bank decides to bounce a check, it charges the account holder an NSF fee. If the bank accepts the check, but it makes the account negative, the bank charges an overdraft fee. If the account stays negative, the bank may charge an extended overdraft fee. </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"> Different banks charge different fees for bounced checks and overdrafts, but as of 2022, the average overdraft fee was $29.80.<span class="ql-inline-citation" data-cite="1"></span> Banks usually assess this fee on drafts worth $24, and these drafts include checks as well as electronic payments and some debit card transactions. </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-what-happens-when-a-check-bounces"></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"> What Happens When a Check Bounces? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_19-0"> Bank fees are just one part of bouncing a check. In many cases, the payee also assesses a charge. For example, if someone writes a check to the grocery store and the check bounces, the grocery store may reserve the right to redeposit the check along with requiring the writer to pay them a bounced-check fee. </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 other cases, if a check bounces, the payee reports the issue to <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/112515/does-netspend-report-credit-bureaus.asp">debit bureaus</a> such as <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/what-to-know-and-do-if-you-re-listed-in-chexsystems-5179535">ChexSystems</a>, which collects financial data on savings and checking accounts. Negative reports with organizations like ChexSystems can make it hard for consumers to open <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/checkingaccount.asp">checking</a> and <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/savingsaccount.asp">savings accounts</a> in the future.<span class="ql-inline-citation" data-cite="4"></span> In some cases, businesses collect a list of customers who have bounced checks and ban them from writing checks at that facility again. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_22-0"></div> <span class="heading-toc" id="toc-how-to-avoid-bounced-checks"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_23-0"> <span class="mntl-sc-block-heading__text"> How to Avoid Bounced Checks </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> Consumers can reduce the number of bounced checks they write by tracking their bank balances more carefully, by using an ironclad system of recording every single debit and deposit on a check register as soon as it occurs, or by keeping close tabs on their checking account by using <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>. </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"> Consumers can also fund a savings account and link it to their checking account to cover overdrafts. Alternatively, consumers may opt to write fewer checks or use <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cash.asp">cash</a>, <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/d/debitcard.asp">debit cards</a>, and immediate online payments such as <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/mobile-wallet.asp">mobile wallets</a>, <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/paypal.asp">PayPal</a>, or the like for discretionary spending. </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-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_28-0"><span class="heading-toc" id="toc-how-serious-is-a-bounced-check"></span> <h2 class="mntl-sc-block-questionandanswer__question">How serious is a bounced check?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>If you write a check for an amount that you had insufficient funds to cover, your bank will most likely charge you a non-sufficient funds (NSF) fee as well as potentially an overdraft fee. The business to which you wrote the bounced check may also levy a charge against you for the lack of payment. <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/ask/answers/081414/how-does-bouncing-check-affect-my-credit-score.asp">Other consequences</a> of a bounced check include businesses refusing to accept your checks, a reduction of your credit score, and possibly even legal trouble.<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_29-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_30-0"><span class="heading-toc" id="toc-how-long-does-it-take-for-a-check-to-bounce"></span> <h2 class="mntl-sc-block-questionandanswer__question">How long does it take for a check to bounce?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Generally speaking, a check for an amount greater than $225 won’t clear until two or more business days after it’s deposited at a bank.<span class="ql-inline-citation" data-cite="6"></span> In the same vein, it typically takes at least two business days for a bad check to bounce.</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-will-my-bank-notify-me-if-a-check-bounces"></span> <h2 class="mntl-sc-block-questionandanswer__question">Will my bank notify me if a check bounces?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Banks aren’t required to notify an account holder when a check they signed bounces due to non-sufficient funds. However, some banks may offer options for customers to enroll in/sign up for in order to be notified of overdrafts.<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_33-0"></div> <span class="heading-toc" id="toc-the-bottom-line"></span><h2 class="comp mntl-sc-block finance-sc-block-heading mntl-sc-block-heading" id="mntl-sc-block_34-0"> <span class="mntl-sc-block-heading__text"> The Bottom Line </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_35-0"> From costly fees to hampering your ability to open new checking and savings accounts, bounced checks can have serious consequences. Fortunately, through preparation and diligence, they can be avoided. If you’re concerned about accidentally writing a bad check, consider signing up for overdraft protection through your bank and/or linking a savings account to your checking account. </p></div>	## What Is a Bounced Check? A bounced check is slang for a check that cannot be processed because the account holder has [non-sufficient funds (NSF)](https://www.investopedia.com/terms/n/nsf.asp) available for use. Banks return, or “bounce,” these checks, also known as [rubber checks](https://www.investopedia.com/terms/r/rubbercheck.asp), rather than honor them, and banks charge the check writers NSF fees. Passing [bad checks](https://www.investopedia.com/terms/b/bad-check.asp) can be illegal, and the crime can range from a misdemeanor to a felony, depending on the amount of the check and whether the activity involved crossing state lines. ### Key Takeaways * A bounced check occurs when the writer of the check has insufficient funds available to fulfill the payment amount on the check to the payee. * When a check bounces, it is not honored by the depositor’s bank and may result in overdraft fees and banking restrictions. * Additional penalties for bouncing checks may include negative credit score marks, refusal of merchants to accept your checks, and potentially legal trouble. * Banks often offer overdraft protection to prevent inadvertent check bouncing. ## Understanding a Bounced Check Many times, bad checks are written inadvertently by people who simply are unaware that their bank balances are too low. To avoid bouncing checks, some consumers use [overdraft](https://www.investopedia.com/terms/o/overdraft.asp) protection or attach a [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp) to their checking accounts. A bounced check may result in overdraft fees, restrictions on writing additional checks, and negative impacts to your [credit score](https://www.investopedia.com/terms/c/credit_score.asp). Writing too many bounced checks may also prevent you from paying merchants by check in the future. Many merchants use a verification system called TeleCheck to help them determine if a customer’s check is good. If this system connects the check you’ve just presented for payment to a history of unpaid checks, the merchant will decline your check and ask you for a different form of payment. ## Are There Fees for Bounced Checks? When there are insufficient funds in an account, and a bank decides to bounce a check, it charges the account holder an NSF fee. If the bank accepts the check, but it makes the account negative, the bank charges an overdraft fee. If the account stays negative, the bank may charge an extended overdraft fee. Different banks charge different fees for bounced checks and overdrafts, but as of 2022, the average overdraft fee was $29.80. Banks usually assess this fee on drafts worth $24, and these drafts include checks as well as electronic payments and some debit card transactions. ## What Happens When a Check Bounces? Bank fees are just one part of bouncing a check. In many cases, the payee also assesses a charge. For example, if someone writes a check to the grocery store and the check bounces, the grocery store may reserve the right to redeposit the check along with requiring the writer to pay them a bounced-check fee. In other cases, if a check bounces, the payee reports the issue to [debit bureaus](https://www.investopedia.com/ask/answers/112515/does-netspend-report-credit-bureaus.asp) such as [ChexSystems](https://www.investopedia.com/what-to-know-and-do-if-you-re-listed-in-chexsystems-5179535), which collects financial data on savings and checking accounts. Negative reports with organizations like ChexSystems can make it hard for consumers to open [checking](https://www.investopedia.com/terms/c/checkingaccount.asp) and [savings accounts](https://www.investopedia.com/terms/s/savingsaccount.asp) in the future. In some cases, businesses collect a list of customers who have bounced checks and ban them from writing checks at that facility again. ## How to Avoid Bounced Checks Consumers can reduce the number of bounced checks they write by tracking their bank balances more carefully, by using an ironclad system of recording every single debit and deposit on a check register as soon as it occurs, or by keeping close tabs on their checking account by using [online banking](https://www.investopedia.com/terms/o/onlinebanking.asp). Consumers can also fund a savings account and link it to their checking account to cover overdrafts. Alternatively, consumers may opt to write fewer checks or use [cash](https://www.investopedia.com/terms/c/cash.asp), [debit cards](https://www.investopedia.com/terms/d/debitcard.asp), and immediate online payments such as [mobile wallets](https://www.investopedia.com/terms/m/mobile-wallet.asp), [PayPal](https://www.investopedia.com/terms/p/paypal.asp), or the like for discretionary spending. ## How serious is a bounced check? If you write a check for an amount that you had insufficient funds to cover, your bank will most likely charge you a non-sufficient funds (NSF) fee as well as potentially an overdraft fee. The business to which you wrote the bounced check may also levy a charge against you for the lack of payment. [Other consequences](https://www.investopedia.com/ask/answers/081414/how-does-bouncing-check-affect-my-credit-score.asp) of a bounced check include businesses refusing to accept your checks, a reduction of your credit score, and possibly even legal trouble. ## How long does it take for a check to bounce? Generally speaking, a check for an amount greater than $225 won’t clear until two or more business days after it’s deposited at a bank. In the same vein, it typically takes at least two business days for a bad check to bounce. ## Will my bank notify me if a check bounces? Banks aren’t required to notify an account holder when a check they signed bounces due to non-sufficient funds. However, some banks may offer options for customers to enroll in/sign up for in order to be notified of overdrafts. ## The Bottom Line From costly fees to hampering your ability to open new checking and savings accounts, bounced checks can have serious consequences. Fortunately, through preparation and diligence, they can be avoided. If you’re concerned about accidentally writing a bad check, consider signing up for overdraft protection through your bank and/or linking a savings account to your checking account.	What Is a Bounced Check? A bounced check is slang for a check that cannot be processed because the account holder has non-sufficient funds (NSF) available for use. Banks return, or “bounce,” these checks, also known as rubber checks, rather than honor them, and banks charge the check writers NSF fees. Passing bad checks can be illegal, and the crime can range from a misdemeanor to a felony, depending on the amount of the check and whether the activity involved crossing state lines. Key Takeaways A bounced check occurs when the writer of the check has insufficient funds available to fulfill the payment amount on the check to the payee.When a check bounces, it is not honored by the depositor’s bank and may result in overdraft fees and banking restrictions.Additional penalties for bouncing checks may include negative credit score marks, refusal of merchants to accept your checks, and potentially legal trouble.Banks often offer overdraft protection to prevent inadvertent check bouncing. Understanding a Bounced Check Many times, bad checks are written inadvertently by people who simply are unaware that their bank balances are too low. To avoid bouncing checks, some consumers use overdraft protection or attach a line of credit to their checking accounts. A bounced check may result in overdraft fees, restrictions on writing additional checks, and negative impacts to your credit score. Writing too many bounced checks may also prevent you from paying merchants by check in the future. Many merchants use a verification system called TeleCheck to help them determine if a customer’s check is good. If this system connects the check you’ve just presented for payment to a history of unpaid checks, the merchant will decline your check and ask you for a different form of payment. Are There Fees for Bounced Checks? When there are insufficient funds in an account, and a bank decides to bounce a check, it charges the account holder an NSF fee. If the bank accepts the check, but it makes the account negative, the bank charges an overdraft fee. If the account stays negative, the bank may charge an extended overdraft fee. Different banks charge different fees for bounced checks and overdrafts, but as of 2022, the average overdraft fee was $29.80. Banks usually assess this fee on drafts worth $24, and these drafts include checks as well as electronic payments and some debit card transactions. What Happens When a Check Bounces? Bank fees are just one part of bouncing a check. In many cases, the payee also assesses a charge. For example, if someone writes a check to the grocery store and the check bounces, the grocery store may reserve the right to redeposit the check along with requiring the writer to pay them a bounced-check fee. In other cases, if a check bounces, the payee reports the issue to debit bureaus such as ChexSystems, which collects financial data on savings and checking accounts. Negative reports with organizations like ChexSystems can make it hard for consumers to open checking and savings accounts in the future. In some cases, businesses collect a list of customers who have bounced checks and ban them from writing checks at that facility again. How to Avoid Bounced Checks Consumers can reduce the number of bounced checks they write by tracking their bank balances more carefully, by using an ironclad system of recording every single debit and deposit on a check register as soon as it occurs, or by keeping close tabs on their checking account by using online banking. Consumers can also fund a savings account and link it to their checking account to cover overdrafts. Alternatively, consumers may opt to write fewer checks or use cash, debit cards, and immediate online payments such as mobile wallets, PayPal, or the like for discretionary spending. How serious is a bounced check? If you write a check for an amount that you had insufficient funds to cover, your bank will most likely charge you a non-sufficient funds (NSF) fee as well as potentially an overdraft fee. The business to which you wrote the bounced check may also levy a charge against you for the lack of payment. Other consequences of a bounced check include businesses refusing to accept your checks, a reduction of your credit score, and possibly even legal trouble. How long does it take for a check to bounce? Generally speaking, a check for an amount greater than $225 won’t clear until two or more business days after it’s deposited at a bank. In the same vein, it typically takes at least two business days for a bad check to bounce. Will my bank notify me if a check bounces? Banks aren’t required to notify an account holder when a check they signed bounces due to non-sufficient funds. However, some banks may offer options for customers to enroll in/sign up for in order to be notified of overdrafts. The Bottom Line From costly fees to hampering your ability to open new checking and savings accounts, bounced checks can have serious consequences. Fortunately, through preparation and diligence, they can be avoided. If you’re concerned about accidentally writing a bad check, consider signing up for overdraft protection through your bank and/or linking a savings account to your checking account.	[ [ "non-sufficient funds (NSF)", "https://www.investopedia.com/terms/n/nsf.asp" ], [ "rubber checks", "https://www.investopedia.com/terms/r/rubbercheck.asp" ], [ "bad checks", "https://www.investopedia.com/terms/b/bad-check.asp" ], [ "overdraft", "https://www.investopedia.com/terms/o/overdraft.asp" ], [ "line of credit", "https://www.investopedia.com/terms/l/lineofcredit.asp" ], [ "credit score", "https://www.investopedia.com/terms/c/credit_score.asp" ], [ "debit bureaus", "https://www.investopedia.com/ask/answers/112515/does-netspend-report-credit-bureaus.asp" ], [ "ChexSystems", "https://www.investopedia.com/what-to-know-and-do-if-you-re-listed-in-chexsystems-5179535" ], [ "checking", "https://www.investopedia.com/terms/c/checkingaccount.asp" ], [ "savings accounts", "https://www.investopedia.com/terms/s/savingsaccount.asp" ], [ "online banking", "https://www.investopedia.com/terms/o/onlinebanking.asp" ], [ "cash", "https://www.investopedia.com/terms/c/cash.asp" ], [ "debit cards", "https://www.investopedia.com/terms/d/debitcard.asp" ], [ "mobile wallets", "https://www.investopedia.com/terms/m/mobile-wallet.asp" ], [ "PayPal", "https://www.investopedia.com/terms/p/paypal.asp" ], [ "Other consequences", "https://www.investopedia.com/ask/answers/081414/how-does-bouncing-check-affect-my-credit-score.asp" ] ]
https://www.investopedia.com/7-alternatives-personal-loan-7567417	7 Alternatives to a Personal Loan	<div class="comp mntl-sc-page mntl-block article-body-content" data-bind-scroll-on-start="true" data-sc-ad-label-height="0" data-sc-ad-track-spacing="90" data-sc-breakpoint="50em" data-sc-content-positions="[300, 1, 1, 1250, 1, 1, 1, 1]" data-sc-load-immediate="2" data-sc-max-track-height="600" data-sc-min-track-height="250" data-sc-sticky-offset="80" id="mntl-sc-page_1-0"><p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_1-0"> Personal loans can be used for a number of purposes, including emergencies and large purchases. However, depending on your financial situation, a personal loan might not be a good fit. </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 not sure that a personal loan is the right fit for you, there are alternatives. Let’s take a look at seven alternatives to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/personal-loan-5076027">personal loans</a> and provide information that can help you figure out what might work best for you depending on your circumstances, such as whether you have <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-personal-loans-for-bad-credit-4774349">bad credit</a> or need funding fast. </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 might be too expensive or might not be a good fit, so a borrower might need alternatives.</li><li>Some alternatives can be easier to manage than personal loans, in addition to providing faster funding.</li><li>Consider the pros and cons of personal loan alternatives before making your decision.</li></ul></div></div></div> <figure class="comp mntl-sc-block finance-sc-block-table mntl-sc-block-table js-table-scroll" id="mntl-sc-block_7-0"> <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">7 Personal Loan Alternatives</th> </tr> </thead> <tbody data-check="-1"> <tr> <td> </td> <td><b>Description of Alternative</b></td> <td><b>Who It’s Best for</b></td> </tr> <tr> <td><b>1. Credit Card</b></td> <td>Line of credit, accessed by card, that offers access to funds on a rolling basis. You may get a promotional rate if you have good credit.</td> <td>Someone who wants to borrow at need and who can pay off the balance before interest is charged.</td> </tr> <tr> <td><b>2. Line of Credit</b></td> <td>Provides access to funds on a rolling basis, up to a limit. However, you often get access to higher limits than with a credit card.</td> <td>Those who need access to a higher limit or want a bigger lump sum at a lower rate of interest.</td> </tr> <tr> <td><b>3. Peer-to-Peer (P2P) Loan</b></td> <td>Investors fund the loan rather than a single lender. The borrower might need to wait until the loan is fully funded to access the capital.</td> <td>Someone having trouble qualifying for a traditional loan and who can wait extra time to receive the money.</td> </tr> <tr> <td><b>4. Home Equity Loan or Home Equity Line of Credit (HELOC)</b></td> <td>Access to funds based on the equity you have built in your home. Can be a lump sum or a rolling line of credit.</td> <td>Those who have equity built up in their homes and want a lower rate, and who are likely to avoid foreclosure.</td> </tr> <tr> <td><b>5. Payday Loan</b></td> <td>Loan offered based on your upcoming payday. Usually short-term with a high interest rate.</td> <td>A person who needs money quickly and temporarily and is likely to repay the loan within a few weeks.</td> </tr> <tr> <td><b>6. Retirement Loan</b></td> <td>Borrow the money from a retirement account instead of from a traditional lender. Rates are usually lower.</td> <td>Someone who expects to be in a job for an extended period and can repay the loan within five years.</td> </tr> <tr> <td><b>7. Salary Advance</b></td> <td>Receive a portion of your next salary payment in advance, usually in agreement with your employer.</td> <td>A borrower who has an employer that offers this option at a low cost or even for no cost.</td> </tr> </tbody> </table> </div></figure> <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-1-credit-card"></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"> 1. Credit Card </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_10-0"> A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-credit-cards-4801582">credit card</a> functions as a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lineofcredit.asp">line of credit</a>. Normally, you have a <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit_limit.asp">credit limit</a> and rolling access to your credit line. As you make payments, you “free up” room on your credit card for additional purchases. </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"> With this <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/revolvingcredit.asp">revolving line of credit</a>, you only borrow as you need the money. You have the option to pay off your balance each month, or you can pay down your balance over time, depending on your situation. </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 important to note, though, that when you carry a balance from month to month, you’ll pay an interest fee. Depending on your credit situation, this fee can be higher than what you would pay with a personal loan. However, if you can pay down your balance regularly, you’ll be less likely to need to worry about <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/interest.asp">interest</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"> Credit cards also offer access to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/cashadvance.asp">cash advances</a>. So, if you need cash rather than simply paying for items with your credit card, it’s possible to receive an advance based on how much available credit you have. However, there is usually an additional fee associated with a cash advance, and some credit cards charge a higher rate of interest. </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"> Finally, for those with good credit, it’s possible to get a promotional <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> that can be as low as 0%. If you qualify for a 0% <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/apr.asp">annual percentage rate (APR)</a> on a credit card for up to 24 months, you might be able to get a better deal than you would with a personal loan. As long as you can pay off your balance before the end of the introductory period, a credit card might be a better fit for your finances. </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-comparisonlist mntl-block" id="mntl-sc-block_20-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_21-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Credit Cards</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>You might be eligible for a 0% APR for a set period of time.</p></li> <li><p>Potential to earn rewards and cash back, depending on the credit card.</p></li> <li><p>Depending on the credit card, you might be able to take advantage of purchase and fraud protection.</p></li> <li><p>Avoid paying interest if you pay off your balance each month.</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>Interest rates are generally higher with credit cards than with personal loans.</p></li> <li><p>If you don’t have a plan to pay off your balance, you could end up overwhelmed by debt.</p></li> <li><p>Late payments and other issues can lead to the cancellation of your introductory APR.</p></li> <li><p>Some credit cards add all the interest you would have paid during the promotional period if you don’t pay off the amount during the introductory period.</p></li> </ul> </div> </div></div> <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-2-personal-line-of-credit"></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"> 2. Personal Line of Credit </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_24-0"> If you have a personal line of credit, it functions similarly to a credit card. You might even have a card to access your <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/credit.asp">credit</a>. However, a personal line of credit is usually connected to your bank, and you might need to connect it to a checking or savings account. </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"> As with a credit card, your money is available on a revolving basis, and you can borrow (and repay) as needed. However, you usually have a lower interest rate than with a credit card, and might even have a lower interest rate than with a personal loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_27-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_28-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_29-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Personal Line of Credit</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>Easily access funds as needed, rather than trying to decide on how much you need for a lump sum.</p></li> <li><p>Have a smooth cash flow and handle emergencies without applying for a new loan each time.</p></li> <li><p>Use the funds for more flexible purposes than personal loans.</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>You might be subject to an ongoing fee to keep your line of credit operational.</p></li> <li><p>There’s a potential to spend more than you can afford when you have a personal line of credit.</p></li> <li><p>It can be difficult to qualify without good credit.</p></li> </ul> </div> </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-3-peer-to-peer-p2p-loan"></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"> 3. Peer-to-Peer (P2P) Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_32-0"> A <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">peer-to-peer (P2P) loan</a> is usually offered through a collection of investors rather than just one lending institution. You might go to a website, express your funding need, and then multiple investors will decide how much they will put toward your funding need. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_33-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_34-0"> If you can’t qualify with a traditional lender, you might be able to get funding through a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/peertopeer-p2p-service.asp">P2P platform</a>. Investors might be willing to take a chance on you, even with poor credit, for the potential for higher returns in the form of a higher interest rate. </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"> However, it can take longer to have your loan funded, and you might not get the total amount you ask for. This can set you back as you attempt to access the money you need. </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-comparisonlist mntl-block" id="mntl-sc-block_38-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_39-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Peer-to-Peer Loans</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>You may be able to get a loan, even with poor credit, when a traditional lender won’t provide the funds.</p></li> <li><p>Once the loan is approved, you might be able to get the money quickly.</p></li> <li><p>Depending on the platform, you might be able to avoid some late fees.</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>Not every platform guarantees your loan will be funded, so if you don’t get enough backers, you might not get the money you need.</p></li> <li><p>Origination fees can be high, up to 8% of your loan amount.</p></li> <li><p>While funding can be fast once you’re approved, the approval process can take days or even weeks.</p></li> </ul> </div> </div></div> <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-4-home-equity-loan-or-home-equity-line-of-credit-heloc"></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"> 4. Home Equity Loan or Home Equity Line of Credit (HELOC) </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_42-0"> If you own your home and have built up <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 it</a>, you might be able to borrow against that equity for what you need. A <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/h/homeequityloan.asp">home equity loan</a> is usually a <a class="pseudoStyle" data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/l/lumpsumdistribution.asp">lump sum</a>, and if you want to borrow again, you need to submit a new loan application. On the other hand, a <a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/mortgage/heloc/">home equity line of credit (HELOC)</a> operates similarly to a personal line of credit in that you can access what you need as you need it and only pay interest on what you use.<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_43-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_44-0"> Depending on the situation, you might have to go through a <a class="pseudoStyle" data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/articles/pf/12/home-appraisals.asp">home appraisal</a> to determine the size of your loan or line of credit. It might take longer to get approved for a home equity loan or a HELOC than with a personal loan due to the paperwork. However, many lenders offer lower rates on a home equity loan or a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-heloc-loans-7508725">HELOC</a> than they do for a personal loan. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_45-0"></div> <div class="comp mntl-sc-block finance-sc-block-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">Pros and Cons of a Home Equity Loan or a HELOC</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>Funds can be used for almost anything, including education costs.</p></li> <li><p>You might be able to access a higher amount, depending on the equity you have built up.</p></li> <li><p>Interest rates are generally lower than with personal loans.</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>You’re at risk of foreclosure if you can’t make payments.</p></li> <li><p>There are usually closing costs and other fees associated with a home equity loan or a HELOC.</p></li> <li><p>It can take weeks to go through the process and receive your funding.</p></li> </ul> </div> </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-5-payday-loan"></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"> 5. Payday Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_50-0"> <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 notorious for high interest rates and fees. However, for those who need fast funding and can potentially pay off their debt in a couple of weeks, they might provide immediate relief in case of an emergency. </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"> Generally, to access payday lending, you need to have a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/checkingaccount.asp">checking account</a> and be able to show that you receive regular pay from a stable job. Payday lenders are often willing to extend the term of your loan, but you usually need to pay a fee. As a result, payday loans can potentially result in you being stuck in a cycle of high-interest debt. Payday lending is particularly predatory to low-income communities, domestic violence survivors, and other vulnerable groups.<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_53-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_54-0"> For the most part, these loans are best avoided. However, if you are experiencing a very temporary cash crunch and can repay the loan without extending, they can be acceptable in a pinch. </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-comparisonlist mntl-block" id="mntl-sc-block_56-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_57-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Payday Loans</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>Payday loans are often available to those with poor credit.</p></li> <li><p>You often receive approval quickly and can get funding as early as the next business day.</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>Interest rates and fees are very high.</p></li> <li><p>It’s easy to renew payday loans (pay a fee), so borrowers can quickly get trapped in debt.</p></li> </ul> </div> </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-6-retirement-loan"></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"> 6. Retirement Loan </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_60-0"> It’s possible to borrow against your retirement account as long as your employer allows this type of program. With a retirement loan, you can take money from your account with the understanding that you will make regular payments, with interest, back into your account. You usually have five years to repay your retirement loan.<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_61-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_62-0"> Understand, though, that if you leave your job before the loan is repaid, you will need to pay off the balance within 60 days. Otherwise, the remainder will be considered an early withdrawal, subject to penalties and taxes.<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_63-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_64-0"> A retirement loan can make sense for someone who wants to repay themselves and who reasonably expects to remain in their job for five years. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_65-0"></div> <div class="comp mntl-sc-block finance-sc-block-comparisonlist mntl-block" id="mntl-sc-block_66-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_67-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Retirement Loans</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>Possible to get a loan, even with bad credit.</p></li> <li><p>Interest paid on the loan is returned to your retirement account, rather than going to a lender.</p></li> <li><p>It’s possible to receive money quickly, depending on the employer’s policies.</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>Your loan balance becomes due if you leave your job or are laid off.</p></li> <li><p>There are often limits on borrowing, and you might not have access to the full amount you need.</p></li> <li><p>Borrowers miss time in the market, resulting in an opportunity cost for the future.</p></li> </ul> </div> </div></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-7-salary-advance"></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"> 7. Salary Advance </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_70-0"> Rather than getting a payday loan or borrowing from your retirement account, you might be able to receive a portion of your paycheck early. However, these programs depend on your employer’s policies. Some employers offer these programs as an advance program or allow you to talk to the human resources department on a case-by-case basis. </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"> Depending on the program, you might repay the advance a little at a time or all at once. There might also be administrative fees and other costs. However, <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/employee-loan-8413364">some programs don’t cost anything</a> and can be a good alternative to a payday loan. </p> <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-comparisonlist mntl-block" id="mntl-sc-block_74-0"><div class="comp mntl-sc-block mntl-sc-block-comparisonlist" id="mntl-sc-block_75-0"> <h3 class="mntl-sc-block__comparison-list-heading mntl-sc-block-comparisonlist__comparison-list-heading">Pros and Cons of Salary Advances</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>Fast way to get the money you need, especially for emergencies.</p></li> <li><p>You might be able to access these programs even with a low credit score or no credit history.</p></li> <li><p>Some programs come without fees or interest costs.</p></li> <li><p>You might be able to access the advance via an easy-to-use app.</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>Future paychecks can be lower since you’ll be making payments on the advance.</p></li> <li><p>Some programs come with limited uses, such as medical bills.</p></li> <li><p>Depending on the situation and program, you might have to let your boss know details about your finances.</p></li> <li><p>Some programs come with administrative fees and other costs.</p></li> </ul> </div> </div></div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_76-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_77-0"><span class="heading-toc" id="toc-what-is-the-most-popular-alternative-to-a-personal-loan"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Is the Most Popular Alternative to a Personal Loan?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Without any concrete data, it’s difficult to determine what is the most popular alternative to a personal loan. However, credit cards are perhaps the most widely used option that can serve as an alternative source of funding. Not everyone who acquires a credit card does so as an alternative to a personal loan, though.</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-how-can-you-increase-your-chances-of-personal-loan-approval"></span> <h2 class="mntl-sc-block-questionandanswer__question">How Can You Increase Your Chances of Personal Loan Approval?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>You’re more likely to get approved for a personal loan if you have good credit and can show a stable income. Lenders want to see that you’re likely to repay the loan, and that you have the means to make payments.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_80-0"></div> <div class="comp mntl-sc-block finance-sc-block-questionandanswer mntl-sc-block-questionandanswer" id="mntl-sc-block_81-0"><span class="heading-toc" id="toc-what-type-of-loan-is-the-easiest-to-get"></span> <h2 class="mntl-sc-block-questionandanswer__question">What Type of Loan Is the Easiest to Get?</h2> <div class="mntl-sc-block-questionandanswer__answer"><p>Whether a loan is easy to get depends on a number of factors, including your credit and income situation. For those with good credit and income, a personal loan is relatively easy to get. If you have poor credit, it might be easier to get a payday loan or a cash advance. Home equity loans or HELOCs can be easy to get for those with a lot of equity built up in their homes.</p></div> </div> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_82-0"></div> <span class="heading-toc" id="toc-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_83-0"> <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_84-0"> 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.<br/> </p> <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-iframe mntl-sc-block-iframe mntl-block" id="mntl-sc-block_86-0"><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_87-0"></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_88-0"> <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_89-0"> Personal loans can offer flexible funding options, but they aren’t always available for everyone. If you don’t qualify for a personal loan, or if you don’t feel like the personal loan meets your circumstances, you can get an alternative, such as a credit card, a HELOC, or even a salary advance. </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_90-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_91-0"> Carefully consider your situation and your funding needs as you determine the best way to get your funding. </p></div>	Personal loans can be used for a number of purposes, including emergencies and large purchases. However, depending on your financial situation, a personal loan might not be a good fit. If you’re not sure that a personal loan is the right fit for you, there are alternatives. Let’s take a look at seven alternatives to [personal loans](https://www.investopedia.com/personal-loan-5076027) and provide information that can help you figure out what might work best for you depending on your circumstances, such as whether you have [bad credit](https://www.investopedia.com/best-personal-loans-for-bad-credit-4774349) or need funding fast. ### Key Takeaways * Personal loans might be too expensive or might not be a good fit, so a borrower might need alternatives. * Some alternatives can be easier to manage than personal loans, in addition to providing faster funding. * Consider the pros and cons of personal loan alternatives before making your decision. \| 7 Personal Loan Alternatives \| \| \| \| --- \| --- \| --- \| \| \| Description of Alternative \| Who It’s Best for \| \| 1. Credit Card \| Line of credit, accessed by card, that offers access to funds on a rolling basis. You may get a promotional rate if you have good credit. \| Someone who wants to borrow at need and who can pay off the balance before interest is charged. \| \| 2. Line of Credit \| Provides access to funds on a rolling basis, up to a limit. However, you often get access to higher limits than with a credit card. \| Those who need access to a higher limit or want a bigger lump sum at a lower rate of interest. \| \| 3. Peer-to-Peer (P2P) Loan \| Investors fund the loan rather than a single lender. The borrower might need to wait until the loan is fully funded to access the capital. \| Someone having trouble qualifying for a traditional loan and who can wait extra time to receive the money. \| \| 4. Home Equity Loan or Home Equity Line of Credit (HELOC) \| Access to funds based on the equity you have built in your home. Can be a lump sum or a rolling line of credit. \| Those who have equity built up in their homes and want a lower rate, and who are likely to avoid foreclosure. \| \| 5. Payday Loan \| Loan offered based on your upcoming payday. Usually short-term with a high interest rate. \| A person who needs money quickly and temporarily and is likely to repay the loan within a few weeks. \| \| 6. Retirement Loan \| Borrow the money from a retirement account instead of from a traditional lender. Rates are usually lower. \| Someone who expects to be in a job for an extended period and can repay the loan within five years. \| \| 7. Salary Advance \| Receive a portion of your next salary payment in advance, usually in agreement with your employer. \| A borrower who has an employer that offers this option at a low cost or even for no cost. \| ## 1. Credit Card A [credit card](https://www.investopedia.com/best-credit-cards-4801582) functions as a [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp). Normally, you have a [credit limit](https://www.investopedia.com/terms/c/credit_limit.asp) and rolling access to your credit line. As you make payments, you “free up” room on your credit card for additional purchases. With this [revolving line of credit](https://www.investopedia.com/terms/r/revolvingcredit.asp), you only borrow as you need the money. You have the option to pay off your balance each month, or you can pay down your balance over time, depending on your situation. It’s important to note, though, that when you carry a balance from month to month, you’ll pay an interest fee. Depending on your credit situation, this fee can be higher than what you would pay with a personal loan. However, if you can pay down your balance regularly, you’ll be less likely to need to worry about [interest](https://www.investopedia.com/terms/i/interest.asp). Credit cards also offer access to [cash advances](https://www.investopedia.com/terms/c/cashadvance.asp). So, if you need cash rather than simply paying for items with your credit card, it’s possible to receive an advance based on how much available credit you have. However, there is usually an additional fee associated with a cash advance, and some credit cards charge a higher rate of interest. Finally, for those with good credit, it’s possible to get a promotional [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) that can be as low as 0%. If you qualify for a 0% [annual percentage rate (APR)](https://www.investopedia.com/terms/a/apr.asp) on a credit card for up to 24 months, you might be able to get a better deal than you would with a personal loan. As long as you can pay off your balance before the end of the introductory period, a credit card might be a better fit for your finances. ### Pros and Cons of Credit Cards Pros * You might be eligible for a 0% APR for a set period of time. * Potential to earn rewards and cash back, depending on the credit card. * Depending on the credit card, you might be able to take advantage of purchase and fraud protection. * Avoid paying interest if you pay off your balance each month. Cons * Interest rates are generally higher with credit cards than with personal loans. * If you don’t have a plan to pay off your balance, you could end up overwhelmed by debt. * Late payments and other issues can lead to the cancellation of your introductory APR. * Some credit cards add all the interest you would have paid during the promotional period if you don’t pay off the amount during the introductory period. ## 2. Personal Line of Credit If you have a personal line of credit, it functions similarly to a credit card. You might even have a card to access your [credit](https://www.investopedia.com/terms/c/credit.asp). However, a personal line of credit is usually connected to your bank, and you might need to connect it to a checking or savings account. As with a credit card, your money is available on a revolving basis, and you can borrow (and repay) as needed. However, you usually have a lower interest rate than with a credit card, and might even have a lower interest rate than with a personal loan. ### Pros and Cons of Personal Line of Credit Pros * Easily access funds as needed, rather than trying to decide on how much you need for a lump sum. * Have a smooth cash flow and handle emergencies without applying for a new loan each time. * Use the funds for more flexible purposes than personal loans. Cons * You might be subject to an ongoing fee to keep your line of credit operational. * There’s a potential to spend more than you can afford when you have a personal line of credit. * It can be difficult to qualify without good credit. ## 3. Peer-to-Peer (P2P) Loan A [peer-to-peer (P2P) loan](https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp) is usually offered through a collection of investors rather than just one lending institution. You might go to a website, express your funding need, and then multiple investors will decide how much they will put toward your funding need. If you can’t qualify with a traditional lender, you might be able to get funding through a [P2P platform](https://www.investopedia.com/terms/p/peertopeer-p2p-service.asp). Investors might be willing to take a chance on you, even with poor credit, for the potential for higher returns in the form of a higher interest rate. However, it can take longer to have your loan funded, and you might not get the total amount you ask for. This can set you back as you attempt to access the money you need. ### Pros and Cons of Peer-to-Peer Loans Pros * You may be able to get a loan, even with poor credit, when a traditional lender won’t provide the funds. * Once the loan is approved, you might be able to get the money quickly. * Depending on the platform, you might be able to avoid some late fees. Cons * Not every platform guarantees your loan will be funded, so if you don’t get enough backers, you might not get the money you need. * Origination fees can be high, up to 8% of your loan amount. * While funding can be fast once you’re approved, the approval process can take days or even weeks. ## 4. Home Equity Loan or Home Equity Line of Credit (HELOC) If you own your home and have built up [equity in it](https://www.investopedia.com/terms/h/home_equity.asp), you might be able to borrow against that equity for what you need. A [home equity loan](https://www.investopedia.com/terms/h/homeequityloan.asp) is usually a [lump sum](https://www.investopedia.com/terms/l/lumpsumdistribution.asp), and if you want to borrow again, you need to submit a new loan application. On the other hand, a [home equity line of credit (HELOC)](https://www.investopedia.com/mortgage/heloc/) operates similarly to a personal line of credit in that you can access what you need as you need it and only pay interest on what you use. Depending on the situation, you might have to go through a [home appraisal](https://www.investopedia.com/articles/pf/12/home-appraisals.asp) to determine the size of your loan or line of credit. It might take longer to get approved for a home equity loan or a HELOC than with a personal loan due to the paperwork. However, many lenders offer lower rates on a home equity loan or a [HELOC](https://www.investopedia.com/best-heloc-loans-7508725) than they do for a personal loan. ### Pros and Cons of a Home Equity Loan or a HELOC Pros * Funds can be used for almost anything, including education costs. * You might be able to access a higher amount, depending on the equity you have built up. * Interest rates are generally lower than with personal loans. Cons * You’re at risk of foreclosure if you can’t make payments. * There are usually closing costs and other fees associated with a home equity loan or a HELOC. * It can take weeks to go through the process and receive your funding. ## 5. Payday Loan [Payday loans](https://www.investopedia.com/terms/p/payday-loans.asp) are notorious for high interest rates and fees. However, for those who need fast funding and can potentially pay off their debt in a couple of weeks, they might provide immediate relief in case of an emergency. Generally, to access payday lending, you need to have a [checking account](https://www.investopedia.com/terms/c/checkingaccount.asp) and be able to show that you receive regular pay from a stable job. Payday lenders are often willing to extend the term of your loan, but you usually need to pay a fee. As a result, payday loans can potentially result in you being stuck in a cycle of high-interest debt. Payday lending is particularly predatory to low-income communities, domestic violence survivors, and other vulnerable groups. For the most part, these loans are best avoided. However, if you are experiencing a very temporary cash crunch and can repay the loan without extending, they can be acceptable in a pinch. ### Pros and Cons of Payday Loans Pros * Payday loans are often available to those with poor credit. * You often receive approval quickly and can get funding as early as the next business day. Cons * Interest rates and fees are very high. * It’s easy to renew payday loans (pay a fee), so borrowers can quickly get trapped in debt. ## 6. Retirement Loan It’s possible to borrow against your retirement account as long as your employer allows this type of program. With a retirement loan, you can take money from your account with the understanding that you will make regular payments, with interest, back into your account. You usually have five years to repay your retirement loan. Understand, though, that if you leave your job before the loan is repaid, you will need to pay off the balance within 60 days. Otherwise, the remainder will be considered an early withdrawal, subject to penalties and taxes. A retirement loan can make sense for someone who wants to repay themselves and who reasonably expects to remain in their job for five years. ### Pros and Cons of Retirement Loans Pros * Possible to get a loan, even with bad credit. * Interest paid on the loan is returned to your retirement account, rather than going to a lender. * It’s possible to receive money quickly, depending on the employer’s policies. Cons * Your loan balance becomes due if you leave your job or are laid off. * There are often limits on borrowing, and you might not have access to the full amount you need. * Borrowers miss time in the market, resulting in an opportunity cost for the future. ## 7. Salary Advance Rather than getting a payday loan or borrowing from your retirement account, you might be able to receive a portion of your paycheck early. However, these programs depend on your employer’s policies. Some employers offer these programs as an advance program or allow you to talk to the human resources department on a case-by-case basis. Depending on the program, you might repay the advance a little at a time or all at once. There might also be administrative fees and other costs. However, [some programs don’t cost anything](https://www.investopedia.com/employee-loan-8413364) and can be a good alternative to a payday loan. ### Pros and Cons of Salary Advances Pros * Fast way to get the money you need, especially for emergencies. * You might be able to access these programs even with a low credit score or no credit history. * Some programs come without fees or interest costs. * You might be able to access the advance via an easy-to-use app. Cons * Future paychecks can be lower since you’ll be making payments on the advance. * Some programs come with limited uses, such as medical bills. * Depending on the situation and program, you might have to let your boss know details about your finances. * Some programs come with administrative fees and other costs. ## What Is the Most Popular Alternative to a Personal Loan? Without any concrete data, it’s difficult to determine what is the most popular alternative to a personal loan. However, credit cards are perhaps the most widely used option that can serve as an alternative source of funding. Not everyone who acquires a credit card does so as an alternative to a personal loan, though. ## How Can You Increase Your Chances of Personal Loan Approval? You’re more likely to get approved for a personal loan if you have good credit and can show a stable income. Lenders want to see that you’re likely to repay the loan, and that you have the means to make payments. ## What Type of Loan Is the Easiest to Get? Whether a loan is easy to get depends on a number of factors, including your credit and income situation. For those with good credit and income, a personal loan is relatively easy to get. If you have poor credit, it might be easier to get a payday loan or a cash advance. Home equity loans or HELOCs can be easy to get for those with a lot of equity built up in their homes. ## 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. ## The Bottom Line Personal loans can offer flexible funding options, but they aren’t always available for everyone. If you don’t qualify for a personal loan, or if you don’t feel like the personal loan meets your circumstances, you can get an alternative, such as a credit card, a HELOC, or even a salary advance. Carefully consider your situation and your funding needs as you determine the best way to get your funding.	Personal loans can be used for a number of purposes, including emergencies and large purchases. However, depending on your financial situation, a personal loan might not be a good fit. If you’re not sure that a personal loan is the right fit for you, there are alternatives. Let’s take a look at seven alternatives to personal loans and provide information that can help you figure out what might work best for you depending on your circumstances, such as whether you have bad credit or need funding fast. Key Takeaways Personal loans might be too expensive or might not be a good fit, so a borrower might need alternatives.Some alternatives can be easier to manage than personal loans, in addition to providing faster funding.Consider the pros and cons of personal loan alternatives before making your decision. 7 Personal Loan Alternatives Description of Alternative Who It’s Best for 1. Credit Card Line of credit, accessed by card, that offers access to funds on a rolling basis. You may get a promotional rate if you have good credit. Someone who wants to borrow at need and who can pay off the balance before interest is charged. 2. Line of Credit Provides access to funds on a rolling basis, up to a limit. However, you often get access to higher limits than with a credit card. Those who need access to a higher limit or want a bigger lump sum at a lower rate of interest. 3. Peer-to-Peer (P2P) Loan Investors fund the loan rather than a single lender. The borrower might need to wait until the loan is fully funded to access the capital. Someone having trouble qualifying for a traditional loan and who can wait extra time to receive the money. 4. Home Equity Loan or Home Equity Line of Credit (HELOC) Access to funds based on the equity you have built in your home. Can be a lump sum or a rolling line of credit. Those who have equity built up in their homes and want a lower rate, and who are likely to avoid foreclosure. 5. Payday Loan Loan offered based on your upcoming payday. Usually short-term with a high interest rate. A person who needs money quickly and temporarily and is likely to repay the loan within a few weeks. 6. Retirement Loan Borrow the money from a retirement account instead of from a traditional lender. Rates are usually lower. Someone who expects to be in a job for an extended period and can repay the loan within five years. 7. Salary Advance Receive a portion of your next salary payment in advance, usually in agreement with your employer. A borrower who has an employer that offers this option at a low cost or even for no cost. 1. Credit Card A credit card functions as a line of credit. Normally, you have a credit limit and rolling access to your credit line. As you make payments, you “free up” room on your credit card for additional purchases. With this revolving line of credit, you only borrow as you need the money. You have the option to pay off your balance each month, or you can pay down your balance over time, depending on your situation. It’s important to note, though, that when you carry a balance from month to month, you’ll pay an interest fee. Depending on your credit situation, this fee can be higher than what you would pay with a personal loan. However, if you can pay down your balance regularly, you’ll be less likely to need to worry about interest. Credit cards also offer access to cash advances. So, if you need cash rather than simply paying for items with your credit card, it’s possible to receive an advance based on how much available credit you have. However, there is usually an additional fee associated with a cash advance, and some credit cards charge a higher rate of interest. Finally, for those with good credit, it’s possible to get a promotional interest rate that can be as low as 0%. If you qualify for a 0% annual percentage rate (APR) on a credit card for up to 24 months, you might be able to get a better deal than you would with a personal loan. As long as you can pay off your balance before the end of the introductory period, a credit card might be a better fit for your finances. Pros and Cons of Credit Cards Pros You might be eligible for a 0% APR for a set period of time. Potential to earn rewards and cash back, depending on the credit card. Depending on the credit card, you might be able to take advantage of purchase and fraud protection. Avoid paying interest if you pay off your balance each month. Cons Interest rates are generally higher with credit cards than with personal loans. If you don’t have a plan to pay off your balance, you could end up overwhelmed by debt. Late payments and other issues can lead to the cancellation of your introductory APR. Some credit cards add all the interest you would have paid during the promotional period if you don’t pay off the amount during the introductory period. 2. Personal Line of Credit If you have a personal line of credit, it functions similarly to a credit card. You might even have a card to access your credit. However, a personal line of credit is usually connected to your bank, and you might need to connect it to a checking or savings account. As with a credit card, your money is available on a revolving basis, and you can borrow (and repay) as needed. However, you usually have a lower interest rate than with a credit card, and might even have a lower interest rate than with a personal loan. Pros and Cons of Personal Line of Credit Pros Easily access funds as needed, rather than trying to decide on how much you need for a lump sum. Have a smooth cash flow and handle emergencies without applying for a new loan each time. Use the funds for more flexible purposes than personal loans. Cons You might be subject to an ongoing fee to keep your line of credit operational. There’s a potential to spend more than you can afford when you have a personal line of credit. It can be difficult to qualify without good credit. 3. Peer-to-Peer (P2P) Loan A peer-to-peer (P2P) loan is usually offered through a collection of investors rather than just one lending institution. You might go to a website, express your funding need, and then multiple investors will decide how much they will put toward your funding need. If you can’t qualify with a traditional lender, you might be able to get funding through a P2P platform. Investors might be willing to take a chance on you, even with poor credit, for the potential for higher returns in the form of a higher interest rate. However, it can take longer to have your loan funded, and you might not get the total amount you ask for. This can set you back as you attempt to access the money you need. Pros and Cons of Peer-to-Peer Loans Pros You may be able to get a loan, even with poor credit, when a traditional lender won’t provide the funds. Once the loan is approved, you might be able to get the money quickly. Depending on the platform, you might be able to avoid some late fees. Cons Not every platform guarantees your loan will be funded, so if you don’t get enough backers, you might not get the money you need. Origination fees can be high, up to 8% of your loan amount. While funding can be fast once you’re approved, the approval process can take days or even weeks. 4. Home Equity Loan or Home Equity Line of Credit (HELOC) If you own your home and have built up equity in it, you might be able to borrow against that equity for what you need. A home equity loan is usually a lump sum, and if you want to borrow again, you need to submit a new loan application. On the other hand, a home equity line of credit (HELOC) operates similarly to a personal line of credit in that you can access what you need as you need it and only pay interest on what you use. Depending on the situation, you might have to go through a home appraisal to determine the size of your loan or line of credit. It might take longer to get approved for a home equity loan or a HELOC than with a personal loan due to the paperwork. However, many lenders offer lower rates on a home equity loan or a HELOC than they do for a personal loan. Pros and Cons of a Home Equity Loan or a HELOC Pros Funds can be used for almost anything, including education costs. You might be able to access a higher amount, depending on the equity you have built up. Interest rates are generally lower than with personal loans. Cons You’re at risk of foreclosure if you can’t make payments. There are usually closing costs and other fees associated with a home equity loan or a HELOC. It can take weeks to go through the process and receive your funding. 5. Payday Loan Payday loans are notorious for high interest rates and fees. However, for those who need fast funding and can potentially pay off their debt in a couple of weeks, they might provide immediate relief in case of an emergency. Generally, to access payday lending, you need to have a checking account and be able to show that you receive regular pay from a stable job. Payday lenders are often willing to extend the term of your loan, but you usually need to pay a fee. As a result, payday loans can potentially result in you being stuck in a cycle of high-interest debt. Payday lending is particularly predatory to low-income communities, domestic violence survivors, and other vulnerable groups. For the most part, these loans are best avoided. However, if you are experiencing a very temporary cash crunch and can repay the loan without extending, they can be acceptable in a pinch. Pros and Cons of Payday Loans Pros Payday loans are often available to those with poor credit. You often receive approval quickly and can get funding as early as the next business day. Cons Interest rates and fees are very high. It’s easy to renew payday loans (pay a fee), so borrowers can quickly get trapped in debt. 6. Retirement Loan It’s possible to borrow against your retirement account as long as your employer allows this type of program. With a retirement loan, you can take money from your account with the understanding that you will make regular payments, with interest, back into your account. You usually have five years to repay your retirement loan. Understand, though, that if you leave your job before the loan is repaid, you will need to pay off the balance within 60 days. Otherwise, the remainder will be considered an early withdrawal, subject to penalties and taxes. A retirement loan can make sense for someone who wants to repay themselves and who reasonably expects to remain in their job for five years. Pros and Cons of Retirement Loans Pros Possible to get a loan, even with bad credit. Interest paid on the loan is returned to your retirement account, rather than going to a lender. It’s possible to receive money quickly, depending on the employer’s policies. Cons Your loan balance becomes due if you leave your job or are laid off. There are often limits on borrowing, and you might not have access to the full amount you need. Borrowers miss time in the market, resulting in an opportunity cost for the future. 7. Salary Advance Rather than getting a payday loan or borrowing from your retirement account, you might be able to receive a portion of your paycheck early. However, these programs depend on your employer’s policies. Some employers offer these programs as an advance program or allow you to talk to the human resources department on a case-by-case basis. Depending on the program, you might repay the advance a little at a time or all at once. There might also be administrative fees and other costs. However, some programs don’t cost anything and can be a good alternative to a payday loan. Pros and Cons of Salary Advances Pros Fast way to get the money you need, especially for emergencies. You might be able to access these programs even with a low credit score or no credit history. Some programs come without fees or interest costs. You might be able to access the advance via an easy-to-use app. Cons Future paychecks can be lower since you’ll be making payments on the advance. Some programs come with limited uses, such as medical bills. Depending on the situation and program, you might have to let your boss know details about your finances. Some programs come with administrative fees and other costs. What Is the Most Popular Alternative to a Personal Loan? Without any concrete data, it’s difficult to determine what is the most popular alternative to a personal loan. However, credit cards are perhaps the most widely used option that can serve as an alternative source of funding. Not everyone who acquires a credit card does so as an alternative to a personal loan, though. How Can You Increase Your Chances of Personal Loan Approval? You’re more likely to get approved for a personal loan if you have good credit and can show a stable income. Lenders want to see that you’re likely to repay the loan, and that you have the means to make payments. What Type of Loan Is the Easiest to Get? Whether a loan is easy to get depends on a number of factors, including your credit and income situation. For those with good credit and income, a personal loan is relatively easy to get. If you have poor credit, it might be easier to get a payday loan or a cash advance. Home equity loans or HELOCs can be easy to get for those with a lot of equity built up in their homes. 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 Personal loans can offer flexible funding options, but they aren’t always available for everyone. If you don’t qualify for a personal loan, or if you don’t feel like the personal loan meets your circumstances, you can get an alternative, such as a credit card, a HELOC, or even a salary advance. Carefully consider your situation and your funding needs as you determine the best way to get your funding.	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https://www.investopedia.com/direct-indexing-5205141	What Is Direct Indexing? How It Works, Benefits, and Downsides	<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-direct-indexing"></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 Direct Indexing? </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_2-0"> Direct indexing is an approach to <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index-investing.asp">index investing</a> that involves buying the individual stocks that make up an index, in the same weights as the index.<span class="ql-inline-citation" data-cite="14"></span> This is in contrast to buying an <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/indexfund.asp">index mutual fund</a> or <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/index-etf.asp">index exchange-traded fund</a> (index ETF) that tracks the index.<span class="ql-inline-citation" data-cite="15"></span> </p> <div class="comp mntl-sc-block mntl-sc-block-adslot mntl-block" id="mntl-sc-block_3-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_4-0"> In the past, buying all of the stocks needed to replicate an index, especially a large index such as the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/sp500.asp">S&P 500</a>, required dozens to hundreds of transactions, which quickly could become overly expensive in terms of commissions and fees. However, with the advent of zero-commission stock trading on several <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/best-online-brokers-4587872">online brokerage platforms</a>, this concern has largely gone away. </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"> Still, because direct indexing requires an investor to know exactly how many shares of each index component to buy, and to reweight accordingly from time to time (especially when the makeup of an index changes), several financial companies now offer automated direct indexing services for individual investors.<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_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>Direct indexing is an index investing strategy that involves directly purchasing the components of an index at the appropriate weights.</li><li>Direct indexing can provide greater autonomy, control, and tax advantages to certain investors over owning an index mutual fund or an index exchange-traded fund (index ETF).</li><li>Once reserved for wealthy investors, the rise of zero-commission trading and fractional shares has made direct investing available to many smaller investors.</li><li>Because it can still be time-consuming to build an index one stock at a time, many brokers have begun offering direct indexing services to their customers.</li></ul></div></div></div> <span class="heading-toc" id="toc-understanding-direct-indexing"></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 Direct Indexing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_11-0"> Until recently, direct indexing made sense only for large investors and typically would be more costly to implement and maintain than owning an index fund. As stock trading fees have dropped to effectively zero, index investors are increasingly interested in taking some control and autonomy in their portfolios, self-replicating indexes that were previously only practical and cost-effective via index mutual funds or index ETFs. Additionally, with the increasing ubiquity of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/f/fractionalshare.asp">fractional shares</a>, it is easier than ever to replicate even a large index with modest sums of investible 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"> Aside from greater autonomy, direct indexing is at risk of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/trackingerror.asp">tracking error</a>, or the differences in returns experienced by an index fund compared to its benchmark index. Tracking error can erode net returns and arises from the fact that many index mutual funds and index ETFs do not own the exact index, but rather approximate it to reduce their own costs. Even if a fund fully replicates an index, management fees, taxes, and <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/r/rebalancing.asp">rebalancing</a> timing, among other factors, can cause a mismatch. With direct indexing, even though every stock is held at the appropriate weight, there are other factors that could expose portfolio to tracking errors.<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> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_15-0"> That said, direct indexing also allows investors to modify their portfolio relative to the index weightings to slightly overweight or underweight certain holdings or sectors, creating what is known as a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/t/tiltfund.asp">tilt</a>. For example, an investor may tilt their portfolio by holding 2% more tech stocks than the index and 2% fewer utilities stocks. This concept is the idea behind so-called <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/s/smart-beta.asp">smart beta</a> investing. Direct indexing allows investors to be more nimble and take control of such a strategy. </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-passive-index-investing"></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"> Passive Index Investing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_18-0"> Since Vanguard introduced the first mutual fund at the start of 1976, index investing as a whole has grown to accumulate more than $1.1 trillion in assets as of 2024, and it is often heralded as the best or optimal investment strategy for most long-term investors.<span class="ql-inline-citation" data-cite="16"></span><span class="ql-inline-citation" data-cite="2"></span> The idea behind index investing is that markets, in general and over longtime horizons, are largely <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/m/marketefficiency.asp">efficient</a>, so there is no systematic way to “beat the market” and earn excess returns on a regular basis. Thus, owning an index provides a representative and well-diversified portfolio. Indeed, several studies show that most <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/a/activemanagement.asp">actively managed</a> investment strategies fail to consistently beat their benchmark, especially after taking into account fees and taxes.<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_19-0"></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_20-0"> The easiest and most cost-effective way for investors to engage in a <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/p/passivemanagement.asp">passive</a> indexing strategy has traditionally been to buy shares of a <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/b/broad-basedindex.asp">broad-based index</a> mutual fund or index ETF. These funds’ managers seek to replicate the benchmark index that the fund tracks (such as the S&P 500 index) by owning the <a data-component="link" data-ordinal="3" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/c/constituent.asp">component shares</a> of the index in the same weights as the index itself. Since an index’s composition does not change often, these funds are able to charge quite low management fees, which have been also been decreasing steadily over the years. For example, as of 2024, the Schwab U.S. Broad Market ETF (<a data-component="link" data-ordinal="4" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=schb">SCHB</a>), the iShares Core S&P 500 ETF (<a data-component="link" data-ordinal="5" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ivv">IVV</a>), and the Vanguard S&P 500 ETF (<a data-component="link" data-ordinal="6" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=voo">VOO</a>) all have an annual <a data-component="link" data-ordinal="7" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/e/expenseratio.asp">expense ratio</a> of just 0.03%.<span class="ql-inline-citation" data-cite="18"></span><span class="ql-inline-citation" data-cite="17"></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_21-0"></div> <span class="heading-toc" id="toc-practical-considerations-for-direct-indexing"></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"> Practical Considerations for Direct Indexing </span> </h2> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_23-0"> While direct indexing may sound alluring, given the autonomy and tracking error benefits that it can hold over index funds, it does have some drawbacks. First of all, it can be quite time-consuming to identify all the stocks in an index and compute how many shares you must own given the amount of money that you will be investing. For the S&P 500, for example, you will have to buy 500 different stocks, placing 500 individual orders to fully replicate the index. Even if this comes at practically zero cost in commissions, taking the time to place those orders sequentially can take a long time, which means that some index components will rise or fall in the interim as the index is being constructed piecemeal. Some stocks may also be quite <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/terms/i/illiquid.asp">illiquid</a>, meaning that a small investor may not be able to buy them at favorable prices all the 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-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>When it is time to sell the index portfolio, the same concerns that arose when purchasing the index will once again emerge.</p></div></div></div> <p class="comp mntl-sc-block finance-sc-block-html mntl-sc-block-html" id="mntl-sc-block_27-0"> As a result, several financial firms have started to provide direct indexing services to their customers, effectively automating the process and greatly reducing those concerns. Indeed, the likes of Vanguard, BlackRock (<a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk">BLK</a>), and Morgan Stanley (<a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" href="https://www.investopedia.com/markets/quote?tvwidgetsymbol=ms">MS</a>) now all provide direct indexing for their clients for a modest fee (which may be larger than owning an index fund).<span class="ql-inline-citation" data-cite="11"></span><span class="ql-inline-citation" data-cite="19"></span><span class="ql-inline-citation" data-cite="12"></span> Investors who want autonomy and control over their index portfolios, or who can gain tax advantages from direct indexing, may prefer this route.<br/> </p></div>	## What Is Direct Indexing? Direct indexing is an approach to [index investing](https://www.investopedia.com/terms/i/index-investing.asp) that involves buying the individual stocks that make up an index, in the same weights as the index. This is in contrast to buying an [index mutual fund](https://www.investopedia.com/terms/i/indexfund.asp) or [index exchange-traded fund](https://www.investopedia.com/terms/i/index-etf.asp) (index ETF) that tracks the index. In the past, buying all of the stocks needed to replicate an index, especially a large index such as the [S&P 500](https://www.investopedia.com/terms/s/sp500.asp), required dozens to hundreds of transactions, which quickly could become overly expensive in terms of commissions and fees. However, with the advent of zero-commission stock trading on several [online brokerage platforms](https://www.investopedia.com/best-online-brokers-4587872), this concern has largely gone away. Still, because direct indexing requires an investor to know exactly how many shares of each index component to buy, and to reweight accordingly from time to time (especially when the makeup of an index changes), several financial companies now offer automated direct indexing services for individual investors. ### Key Takeaways * Direct indexing is an index investing strategy that involves directly purchasing the components of an index at the appropriate weights. * Direct indexing can provide greater autonomy, control, and tax advantages to certain investors over owning an index mutual fund or an index exchange-traded fund (index ETF). * Once reserved for wealthy investors, the rise of zero-commission trading and fractional shares has made direct investing available to many smaller investors. * Because it can still be time-consuming to build an index one stock at a time, many brokers have begun offering direct indexing services to their customers. ## Understanding Direct Indexing Until recently, direct indexing made sense only for large investors and typically would be more costly to implement and maintain than owning an index fund. As stock trading fees have dropped to effectively zero, index investors are increasingly interested in taking some control and autonomy in their portfolios, self-replicating indexes that were previously only practical and cost-effective via index mutual funds or index ETFs. Additionally, with the increasing ubiquity of [fractional shares](https://www.investopedia.com/terms/f/fractionalshare.asp), it is easier than ever to replicate even a large index with modest sums of investible funds. Aside from greater autonomy, direct indexing is at risk of [tracking error](https://www.investopedia.com/terms/t/trackingerror.asp), or the differences in returns experienced by an index fund compared to its benchmark index. Tracking error can erode net returns and arises from the fact that many index mutual funds and index ETFs do not own the exact index, but rather approximate it to reduce their own costs. Even if a fund fully replicates an index, management fees, taxes, and [rebalancing](https://www.investopedia.com/terms/r/rebalancing.asp) timing, among other factors, can cause a mismatch. With direct indexing, even though every stock is held at the appropriate weight, there are other factors that could expose portfolio to tracking errors. That said, direct indexing also allows investors to modify their portfolio relative to the index weightings to slightly overweight or underweight certain holdings or sectors, creating what is known as a [tilt](https://www.investopedia.com/terms/t/tiltfund.asp). For example, an investor may tilt their portfolio by holding 2% more tech stocks than the index and 2% fewer utilities stocks. This concept is the idea behind so-called [smart beta](https://www.investopedia.com/terms/s/smart-beta.asp) investing. Direct indexing allows investors to be more nimble and take control of such a strategy. ## Passive Index Investing Since Vanguard introduced the first mutual fund at the start of 1976, index investing as a whole has grown to accumulate more than $1.1 trillion in assets as of 2024, and it is often heralded as the best or optimal investment strategy for most long-term investors. The idea behind index investing is that markets, in general and over longtime horizons, are largely [efficient](https://www.investopedia.com/terms/m/marketefficiency.asp), so there is no systematic way to “beat the market” and earn excess returns on a regular basis. Thus, owning an index provides a representative and well-diversified portfolio. Indeed, several studies show that most [actively managed](https://www.investopedia.com/terms/a/activemanagement.asp) investment strategies fail to consistently beat their benchmark, especially after taking into account fees and taxes. The easiest and most cost-effective way for investors to engage in a [passive](https://www.investopedia.com/terms/p/passivemanagement.asp) indexing strategy has traditionally been to buy shares of a [broad-based index](https://www.investopedia.com/terms/b/broad-basedindex.asp) mutual fund or index ETF. These funds’ managers seek to replicate the benchmark index that the fund tracks (such as the S&P 500 index) by owning the [component shares](https://www.investopedia.com/terms/c/constituent.asp) of the index in the same weights as the index itself. Since an index’s composition does not change often, these funds are able to charge quite low management fees, which have been also been decreasing steadily over the years. For example, as of 2024, the Schwab U.S. Broad Market ETF ([SCHB](https://www.investopedia.com/markets/quote?tvwidgetsymbol=schb)), the iShares Core S&P 500 ETF ([IVV](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ivv)), and the Vanguard S&P 500 ETF ([VOO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=voo)) all have an annual [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of just 0.03%. ## Practical Considerations for Direct Indexing While direct indexing may sound alluring, given the autonomy and tracking error benefits that it can hold over index funds, it does have some drawbacks. First of all, it can be quite time-consuming to identify all the stocks in an index and compute how many shares you must own given the amount of money that you will be investing. For the S&P 500, for example, you will have to buy 500 different stocks, placing 500 individual orders to fully replicate the index. Even if this comes at practically zero cost in commissions, taking the time to place those orders sequentially can take a long time, which means that some index components will rise or fall in the interim as the index is being constructed piecemeal. Some stocks may also be quite [illiquid](https://www.investopedia.com/terms/i/illiquid.asp), meaning that a small investor may not be able to buy them at favorable prices all the time. ### When it is time to sell the index portfolio, the same concerns that arose when purchasing the index will once again emerge. As a result, several financial firms have started to provide direct indexing services to their customers, effectively automating the process and greatly reducing those concerns. Indeed, the likes of Vanguard, BlackRock ([BLK](https://www.investopedia.com/markets/quote?tvwidgetsymbol=blk)), and Morgan Stanley ([MS](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ms)) now all provide direct indexing for their clients for a modest fee (which may be larger than owning an index fund). Investors who want autonomy and control over their index portfolios, or who can gain tax advantages from direct indexing, may prefer this route.	What Is Direct Indexing? Direct indexing is an approach to index investing that involves buying the individual stocks that make up an index, in the same weights as the index. This is in contrast to buying an index mutual fund or index exchange-traded fund (index ETF) that tracks the index. In the past, buying all of the stocks needed to replicate an index, especially a large index such as the S&P 500, required dozens to hundreds of transactions, which quickly could become overly expensive in terms of commissions and fees. However, with the advent of zero-commission stock trading on several online brokerage platforms, this concern has largely gone away. Still, because direct indexing requires an investor to know exactly how many shares of each index component to buy, and to reweight accordingly from time to time (especially when the makeup of an index changes), several financial companies now offer automated direct indexing services for individual investors. Key Takeaways Direct indexing is an index investing strategy that involves directly purchasing the components of an index at the appropriate weights.Direct indexing can provide greater autonomy, control, and tax advantages to certain investors over owning an index mutual fund or an index exchange-traded fund (index ETF).Once reserved for wealthy investors, the rise of zero-commission trading and fractional shares has made direct investing available to many smaller investors.Because it can still be time-consuming to build an index one stock at a time, many brokers have begun offering direct indexing services to their customers. Understanding Direct Indexing Until recently, direct indexing made sense only for large investors and typically would be more costly to implement and maintain than owning an index fund. As stock trading fees have dropped to effectively zero, index investors are increasingly interested in taking some control and autonomy in their portfolios, self-replicating indexes that were previously only practical and cost-effective via index mutual funds or index ETFs. Additionally, with the increasing ubiquity of fractional shares, it is easier than ever to replicate even a large index with modest sums of investible funds. Aside from greater autonomy, direct indexing is at risk of tracking error, or the differences in returns experienced by an index fund compared to its benchmark index. Tracking error can erode net returns and arises from the fact that many index mutual funds and index ETFs do not own the exact index, but rather approximate it to reduce their own costs. Even if a fund fully replicates an index, management fees, taxes, and rebalancing timing, among other factors, can cause a mismatch. With direct indexing, even though every stock is held at the appropriate weight, there are other factors that could expose portfolio to tracking errors. That said, direct indexing also allows investors to modify their portfolio relative to the index weightings to slightly overweight or underweight certain holdings or sectors, creating what is known as a tilt. For example, an investor may tilt their portfolio by holding 2% more tech stocks than the index and 2% fewer utilities stocks. This concept is the idea behind so-called smart beta investing. Direct indexing allows investors to be more nimble and take control of such a strategy. Passive Index Investing Since Vanguard introduced the first mutual fund at the start of 1976, index investing as a whole has grown to accumulate more than $1.1 trillion in assets as of 2024, and it is often heralded as the best or optimal investment strategy for most long-term investors. The idea behind index investing is that markets, in general and over longtime horizons, are largely efficient, so there is no systematic way to “beat the market” and earn excess returns on a regular basis. Thus, owning an index provides a representative and well-diversified portfolio. Indeed, several studies show that most actively managed investment strategies fail to consistently beat their benchmark, especially after taking into account fees and taxes. The easiest and most cost-effective way for investors to engage in a passive indexing strategy has traditionally been to buy shares of a broad-based index mutual fund or index ETF. These funds’ managers seek to replicate the benchmark index that the fund tracks (such as the S&P 500 index) by owning the component shares of the index in the same weights as the index itself. Since an index’s composition does not change often, these funds are able to charge quite low management fees, which have been also been decreasing steadily over the years. For example, as of 2024, the Schwab U.S. Broad Market ETF (SCHB), the iShares Core S&P 500 ETF (IVV), and the Vanguard S&P 500 ETF (VOO) all have an annual expense ratio of just 0.03%. Practical Considerations for Direct Indexing While direct indexing may sound alluring, given the autonomy and tracking error benefits that it can hold over index funds, it does have some drawbacks. First of all, it can be quite time-consuming to identify all the stocks in an index and compute how many shares you must own given the amount of money that you will be investing. For the S&P 500, for example, you will have to buy 500 different stocks, placing 500 individual orders to fully replicate the index. Even if this comes at practically zero cost in commissions, taking the time to place those orders sequentially can take a long time, which means that some index components will rise or fall in the interim as the index is being constructed piecemeal. Some stocks may also be quite illiquid, meaning that a small investor may not be able to buy them at favorable prices all the time. When it is time to sell the index portfolio, the same concerns that arose when purchasing the index will once again emerge. As a result, several financial firms have started to provide direct indexing services to their customers, effectively automating the process and greatly reducing those concerns. Indeed, the likes of Vanguard, BlackRock (BLK), and Morgan Stanley (MS) now all provide direct indexing for their clients for a modest fee (which may be larger than owning an index fund). Investors who want autonomy and control over their index portfolios, or who can gain tax advantages from direct indexing, may prefer this route.	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